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The Business Of Venture Capital

The intense media attention and hype about startups, especially new tech businesses, lead visionary entrepreneurs into making poor decisions. A tech startup needs to build a business from the ground up and follow a well-defined business plan, rather than expecting success merely because the entrepreneur has a groundbreaking marketable idea and incredible tech talent. Any business can find itself deep in debt and the entrepreneur operating a failing business unless common business sense is applied. The main takeaway is to gain and retain customers by meeting their needs with each product iteration. In turn, revenues will increase, attracting continued capital investments. Startup founders must build on their strengths and overcome their weaknesses and not believe they are invincible.

Lessons For Growth Stage Venture Capital

• You can raise money from an investor by asking for help. It works in reverse too. Ask for money if you want an investor to help you with your business.
• Investors can control the strategies a startup implements because their focus is on protecting their investments. Resistance from the CEO can lead to investor extreme actions, like termination of the CEO.
• A need to pivot means the primary strategy failed, and that is okay as long as the pivot focuses on strengthening customer loyalty.
• Listen to people who have been through the same problems, i.e. mentors, advisors, friends, family, partners and employees. They help the startup founder stay grounded and learn the risks concerning things like keeping investors happy, new product development and growth.
• The Minimum Viable Product (MVP) model works best in new markets because people have lower expectations. It may not work so well with existing customers who have already developed higher expectations for the brand.
• Take care of existing customers and seek growth by iterating on the products customers like and that matter to them. Customer retention is important to long-term success.
• Developing multi-products that consume the company’s development time and energy can hurt the brand when they fail to meet customer expectations.
• Transparency is crucial to developing trust among all stakeholders - employees, customers and investors.
• Do not let arrogance drive decision-making because it can lead to poor choices that damage the company brand and cause serious financial problems.

Lost and Founder Book Summary 

The book Lost and Founder is a brutally honest description of the slings and arrows encountered along the journey of an early business idea to startup and growth. Fishkin started Moz which grew to generate $45 million in revenues but began experiencing serious problems, threatening business sustainability. Moz is a B2B software company that created products that clients use for search engine optimization (SEO). At its start, Moz was serving a new market and not disrupting one and was one of the first web subscription, self-service companies. For more on avoiding competition read Blue Ocean Strategy.

Fishkin took risks and faced real failure in his pursuit of success, similar to the innovators described in the book Chasing Cool. This story is about the lessons Fishkin learned over the 16 years he was CEO of Moz. It is a brutally honest book in which he describes his positive and negative feelings about various people he encountered while starting and building Moz and the ups and downs of a tech startup and his position as CEO.

Fishkin started Moz in 2004, and discovered over time that getting a startup operational requires investments, full commitment and effort. As the author describes his experience as CEO of Moz, he directly addresses the perils of raising venture capital. There is a lot of valuable information about putting venture capital deals together in the book Venture Deals. People frequently have the wrong idea about this type of funding and its many issues. Venture capitalists expect the company to reach certain targets and achieve continual development. They also expect the financial status to grow stronger and are not hesitant to make changes should they see their money at risk. This could be forcing the CEO to step down or forcing the company to change direction, which could be good or bad for the company. In other words, venture capitalists do not simply hand over money and stay out of the picture.

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Fishkin offers several unorthodox suggestions in his book. He talks about people who have acquired knowledge the startup entrepreneur needs. These are people who have earned “startup cheat codes” through experience. There is a struggle through a problem, an attempt to follow conventional wisdom until it does not work, mistakes made and eventually a solution that works. The cheat refers to listening to anyone who has been through this process. One of the most important lessons Fishkin learned was that it is dangerous to go alone. It is important to get advice from anyone who can contribute knowledge and wisdom learned through experience. Fishkin calls his book a long ”cheat code” because it is all about sharing his startup experience so other startup founders are realistic about business challenges. He is sharing his wins and losses as Warren Buffet did in the book The Life, Lessons & Rules for Success.

In this book is Fishkin’s perspective on how Moz achieved success. It is a warning to entrepreneurs who think being a technology innovator is enough to grow a successful startup. Like every business, startup founders must learn how to raise and spend capital, hire and fire employees, develop new products and end unsuccessful products. Making a poor decision in any of these areas can ruin the business. This is why the perspective of investors is always to protect their interests.

Startup success depends on meeting customer needs, and that can follow different routes. One strategy is to develop products or services that improve on what already exists in the market. It takes significant research to identify market gaps, and even then, there is no guarantee there will not be mistakes made. Too many startup founders refuse to acknowledge mistakes and push ahead with poor results, the path Fishkin followed eventually.

Fishkin spends considerable time discussing the risks that come with accepting venture capital. Once capital is accepted, investors will have the right to set expectations for setting targets and achieving growth. They want a fair return on investment and will act quickly when it appears their investment is at risk. The actions may include removing the CEO who started the company, even though that seems patently unfair. Venture capitalists are investing money that is usually raised from limited partners and want to triple their money within 10 years. Investors know the risks of investing and the high rate of startup failures. This makes them seem ruthless at times when they demand certain strategies be implemented over the founder’s objections.

A major theme throughout the book is the importance of transparency. How anyone interacts with others drives success or failure in today’s world, as the book Give and Take explores. This applies to startup founders and other organizational leaders. Startup founders might be tempted to hide problems like financial difficulties from employees. Fishkin advises this is not a good strategy because keeping critical information secret can lead to resentment when the truth is revealed. Transparency and honesty can become motivational factors, encouraging employees to meet challenges and overcome the weaknesses contributing to problems.

It is even important to be transparent with customers because they will eventually find out there are serious company problems. Be direct about the financial challenges, letting the company’s employees know. The likely result will be they will go the extra mile to reach targets. Trying to hide the truth is a misguided attempt to keep investors, employees and customers happy, but in the end will cause serious development and money problems. Fishkin chose to share the company’s financials, write about product struggles, describe failures in fundraising and reveal internal conversations about strategy. In the world of SEO, this was very unusual because tech startups were veiled in secrecy. More on the importance of transparency in the book The Great Game of Business.

There are lessons on leadership too. A startup founder is like any human and has strengths and weaknesses. A strength to develop is being aware of leadership and organizational weaknesses. Developing strong teams requires a willingness to let people express their concerns, fears and feelings. Empathetic leaders ensure the psychological needs of employees are met. They are not the kind of people described in the book The No A-hole Rule - egomaniacs and tyrants. In addition, diverse teams perform better because they bring a diversity of experiences, perspectives and insights. Diverse teams also can reflect the customer base which leads to more relevant marketing strategies, products and services. Something very supported in the book The Messy Middle.

A third element of developing strong teams is to provide clear paths for employees for career development which may or may not include becoming a manager. There are other ways to promote people through the assignment of responsibilities in a meritocratic promotion approach, like creating new roles with additional responsibilities at higher pay.

Concerning Minimum Viable Products (MVPs), Fishkin talks about the risks of pursuing quick gains. The risk is that increasing sales now can lead to problems over the long run. Quick gains or growth hacks, so to speak, do not work many times because the organizational focus is placed on rapid revenue increases rather than improving products for long-term sustainability through customer retention. It is another take on the principle of giving customers exactly what they want, as presented in the book Give ‘Em the Pickle.

MVPs are products with just enough features to attract early adopter customers, but the real risk is products that do not meet customer needs can lead to loss of customers and harm the brand. However, MVPs do offer insights into what customers are looking for in products and services, but presenting the new offerings to a smaller customer group is the best approach. More on MVPs in the book Lean Startup.

Take care of your current customers. That is the clear message. Ignoring current customers to pursue new funding and growth can lead to high customer loss. That is not the way to get ahead and forces the organization to invest in attracting new customers to make up for the revenue loss. Always remember that customers who have a bad experience become brand killers, telling everyone about their unhappy experience. Instead, make the brand impossible to resist like the book Fascinate explores.

Moz has six core values: transparency, authenticity, generosity, fun, empathy and exception. Based on these values, it was surprising to many people that Fishkin stepped down as CEO in 2014. Unfortunately, the company had experienced poor financial results in 2013 and had numerous other issues. Fishkin published a blog in which he eventually, shared that he had to quit as CEO because he had become arrogant in terms of insisting things be done his way. Like Jim Paul in the book What I Learned Losing a Million Dollars, Fishkin developed psychological hubris that led to bad decisions with severe consequences, plus he also suffered from depression. He was having trouble dealing with employee issues, conflict resolution and organizational development.

Fishkin admitted he had pursued new products like Moz Analytics that were riddled with problems, instead of focusing on improving products the customers liked. He did not listen to or learn from others. These are some of the same issues discussed in the book The Soul of a New Machine in which the go-for-broke stubborn approach in the technology industry leads to failure. One of the reasons Fishkin wrote the book is to tell the truth about what it takes to found a startup, attract continued investments and experience sustainable growth. He also wanted to let the world know that tech company founders are human and experience the same emotional and psychological issues as other people. This book is described as “painfully honest” because Fishkin does not hold anything back concerning his opinions of people and his failures. It is a good book for any startup founder in any industry to read.

About the Author Rand Fishkin

Rand Fishkin is considered an SEO guru. He developed an interest in the World Wide Web while in high school and attended the University of Washington in Seattle. He dropped out in 2000 before earning a degree when only two classes away from completing degree requirements. He started SEOmoz in 2004, a global software platform for blogs offering SEO insights. In 2011, While still leading SEOMoz, Fishkin co-founded Inbound.org, so marketers could share their knowledge and discuss experiences. Fishkin sold his share of Inbound.org to Hubspot (for no profit) in 2014, but continues to advise Inbound.org and its community.

Over the course of the years, SEOmoz went from being a blogging site to a consulting company and eventually a software business. Fishkin formally became CEO in 2007 and stepped down in 2014 after building the company to 130 plus employees and more than $14 million in revenue. He remained a contributor on marketing and product until 2018 and still sits on the Board of Directors as a large shareholder. In 2018, Fishkin founded SpartToro and serves as its CEO. This enterprise was started to create new ways for public relations professionals, marketers, entrepreneurs and product developers to access audience intelligence without surveys.

The book Lost and Founder was published in 2018. Before that, he co-wrote and published The Art of SEO and Inbound Marketing and SEO. He is on social media at LinkedIn, Facebook, Twitter and Instagram. Rand Fishkin also is known for his videos on SEO strategies found on Whiteboard Friday. He has been profiled in the Seattle Times, featured in the Puget Sound Business Journal’s 40 Under 40 and named to BusinessWeek’s 30 Under 30, in addition to articles about him appearing in hundreds of publications. Fishkin is a frequently invited speaker at conferences and other events.

Rand also has two amazing courses on SEO in Skillshare.

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