This article was published by PEHub on May 14, 2012
A few months ago, a budding entrepreneur pitched Ben and me on the patio of the Rosewood hotel. The pitch was tight and the young man had nearly every academic degree know to mankind (MSEE, MBA etc) from top schools. But when I turned to Ben after the pitch, he said "Nice guy, but too normal and overly educated." That one comment lead us to collaborate on this article
I recently invested in two companies whose founders either had little interest in school as students or who dropped out of grad school: MixRank and Influitive. Both management teams are driven, hard working and well prepared for the difficult road of creating a business from scratch.
It got my co-author Ben T. Smith IV and I thinking. We all know that Steve Jobs, Bill Gates and Mark Zuckerberg famously never finished college. But getting to know the founders of MixRank and Influitive suggested that there must be many more with a passing interest in school and perhaps for good reason. There must be a pattern.
With a bit of research, we found over 50 CEOs and founders of successful Silicon Valley companies and many times that running companies elsewhere. Carly Fiorina, for example, didn’t finish her J.D. Sergey Brin and Larry Page got their master’s, but dropped out of the Ph.D. program. Michael Dell dropped out of pre-med. Larry Ellison attended University of Illinois at Urbana-Champlain and University of Chicago, but didn’t graduate from either. Kevin Rose dropped out of University of Nevada Las Vegas, and the list goes on and on.
In 2001, Michael Spence received a Noble Prize in Economics for his work on information flows and market development. One of his most famous works was the Job Market Signaling Model, where he observed that employees signal their respective skills to employers by acquiring educational degrees. Employers pay higher wages to more educated employees because they know these employees have greater abilities and conclude it will cost less to teach them new skills than employees with lower abilities.
In other words, the education itself may or may not have value to the employer. What’s important to employers and what they are paying for is the signal that the students are sending about their intelligence and willingness to work hard.
What these employers look for in employees is the ability to succeed in a competitive and challenging environment. These are great qualities and we as investors are fans of graduates of good schools. But let’s take this one step further.
What many employers don’t look for in young professionals many investors demand of their CEOs: the ability to focus on what is really important, a predisposition for risk-taking and a healthy dose of irrationality. Can you imagine a bunch of somewhat irrational, laser-focused risk-takers in a corporate environment? You probably can’t.
For that reason, most entrepreneurs do not make good employees. In fact, when we look at our investments over the last 10 years, we find in our limited data set that investing in people who were great employees – especially ones with more than 5 years in corporate positions – frequently brings lower returns.
Here’s how entrepreneurs themselves think about it:
When we I asked MixRank co-founder Ilya Lichtenstein about his time in college, Ilya replied, “Yeah, I graduated from University of Wisconsin-Madison in 2010. I didn’t go to class much though, was too busy making money with affiliate marketing.” Fellow co-founder Scott Milliken says: “I didn’t spend any time in classes either. In my last semester at Berkeley, I was working 40 hours outside of school and taking 21 units. (I) attended 2 out of 5 of my classes. School wasn’t nearly as important to me as making money and getting professional experience.”
Influitive founder Mark Organ, who dropped out of a Ph.D. program, says, “quitting a Ph.D. program to go build a startup is a touch of madness. Trust me, I know. It was risky. But a founders’ sense of probabilities is different. He over weights the value of the big win, no matter how slim the odds are of achieving it. And it’s not about the money either, at least to me. We are only here on this earth a short time. We might as well take every opportunity to build something truly consequential before we turn to dust. It’s a way of achieving immortality.”
Running a startup is about making big decisions every day. There’s always a shortage of resources with too many opportunities to pursue and too many masters to serve, including customers, partners, investors, employees. Running a startup is all about making difficult trade-offs and being laser focused. But it also requires all-consuming passion to get through the tough times. It requires a slightly irrational power of conviction.
So what signals to an investor that a 20-something kid asking for a million dollars has what it takes? Perhaps it is dropping out of a really good school to pursue her passion and ambition. What struck us after we compiled the list was that successful dropouts came out of many schools, but three colleges dominated the list. They weren’t just good schools, they were great schools: Harvard, Stanford and MIT. Not only do they offer fantastic academics, but also have a deep culture of entrepreneurship and thought leadership.
So next time a Harvard dropout pitches you a social network de jour, take her seriously. Getting into Harvard is difficult. She dreamed about going there for a long time and worked hard to do it. The decision to drop out was agonizing. And yet, here she is. And we wouldn’t want to bet against her. Oh yeah, we both graduated, but don’t hold that against us.
(Victor Belfor (pictured top) is an entrepreneur and investor and currently runs strategic alliances at RingCentral, He graduated with an engineering degree from Kiev Polytechnic Institute and is pursuing his MBA at Wharton.. He can be found on Twitter @vbelfor. Ben T. Smith IV (pictured above) is CEO of ShopCo, a venture partner at Accelerator Ventures, and a serial entrepreneur and investor and the co-founder of MerchantCircle and Spoke. He is available on Twitter @bentsmithfour) He graduated from U.C. Davis in Engineering and Carnegie Mellon’s Tepper School with an MSIA.)
This article was co-written with Ben Smith and came out on PEHub March 5th, 20012.Here's the link http://www.pehub.com/138876/victor-belfor-ben-smith-we%E2%80%99ll-trade-100-employees-for-one-a-player/
As I re-read it, I wonder whether 2 key points we were trying to make really came through: 1. For a Start Up, NOT getting A players (regardless of position) is very dangerous. We need not only A executives but A doers in every capacity.
2. Obviously, it is important to look for competent, experienced and intellectually curious employees. But what sets A Players apart from the rest is Will and Humility. When hiring, we rarely explicitly focus on these two qualities. In fact, we often think that bragging etc is a positive trait. We tell people not to be shy about tooting their own horn. For certain positions (e.g. sales and marketing), humility is often considered a handicap! Also, Will is more than just passion. Will is specifically self-motivation / drive and track record of overcoming adversity. So when Interviewing / talking to references, we should to deliberately look for evidence of these qualities in addition to professional competence and cultural fit.
Below is the full text of the article:Victor Belfor, Ben Smith: We’ll Trade 100 Employees For One A-Player
Posted on: March 05, 2012
Mark Zuckerberg famously commented that a great engineer is worth a 100 average engineers (something every developer knows deep in her heart). He was talking about A-players, and in our opinion the worst thing any startup can do is accept less than the best and brightest.
Think of Jony Ive at Apple (Sir Jonathan as of December). Compare his impact to that of an average designer.
Supporting rapid growth at a company requires the rapid growth of human capital. New engineers and product managers come on board to build out a company’s product. Service and support staffs expand the customer base. Settling for B-players is the same as inviting mediocrity.
Entrepreneur turned Dallas Mavericks’ owner Mark Cuban once said a company should hire A-players in only core positions and pay market rates for anything non-core. We disagree. This may be true for a fully scaled company. But at the early stage, a company may not even realize what its true core is.
One good example of this is Groupon. Groupon started to focus on the daily-deal market, but when the company experienced early success, the space became very competitive. New competitor LivingSocial, even eBay and Amazon, offered daily deals. What separates Groupon from the pack and what has become its core competency is its powerful sales machine. This wasn’t anticipated at first. There should be no room in a company’s early development for B-players.
What is an A-Player?
In his book Good to Great, Jim Collins said the highest expression of leadership is the combination of humility and will. These are traits A-players possess. Their strength of will assures motivation. They never point fingers. The ball stops with them. A-players don’t need to be micro-managed or proactively motivated. They only need to be pointed in the right direction.
Humility is often overlooked and equally important. Humble people do not seek personal credit and gladly give it to those who deserve it. They don’t engage in politics. The simply have no interest. When they voice an opinion, whatever you may think of it, you can always be sure that it is what they believe. They have no ulterior personal motives. Humility assures that a company is not overrun with attention-seeking prima donnas.
Some of the best A-players you will hire have had a failure or two, but accomplished a lot and took risks as part of that failure. A-players aren’t always great leaders. But that doesn’t matter. You want humble people with the will to succeed not only as executives, but as your “doers.” Startups need not just A-level strategy and A-level vision, but A-level execution.
MerchantCircle found an A -player in an unlikely spot: working on his struggling startup and a political campaign in northwest Florida. He was not from Harvard. He was from the University of West Florida. He did not come in as a strategist; he was a support person. He was even told by someone he should go to a big company to learn how to be an A-player, whatever that means. He executed, he listened, he read, he analyzed, and most importantly he learned. Five years later he had risen to head of product for MerchantCircle and drove some of the company’s biggest innovations and in doing so helped set strategy. Ryan Osilla has now helped created Peixe Urbano, one of the fastest growing Internet companies in Brazil.
In Silicon Valley, the job market is very competitive and companies such as Facebook, Google and Zynga pay top dollar. So startups, such as MixRank, have to be clever to keep up. That means using company culture – bright, driven people working together on big things – to set themselves apart.
Last year after graduating from Y Combinator, MixRank co-founders Ilya Lichtenstein and Scott Milliken raised an angel round and set out to expand their team. At first they were unimpressed with the vast majority of the resumes. So they began to reach out into the community using Twitter, Hacker News, technical forums and open-source mailing lists to engage talented, passionate engineers. They wanted independent thinkers with a healthy disrespect for rigid rules and authority. What attracted the “right” candidates wasn’t the money, even though they offered market-based salaries and equity, but rather the vision and culture.
Good engineers like to work on difficult problems that keep them interested and engage their creativity, said Ilya. They are excited about the big data problems that MixRank is tackling and the opportunity to have a significant impact on the technical direction of the company.
Keeping A-Players Happy
In the 1980s, Benjamin Schneider developed the “attraction – selection – attrition” framework and the notion that organizations tend to become homogenous over time because they attract and select people who fit in. Those who don’t fit in tend to leave. The implication is that as long as a company has a somewhat homogenous group of A-players, it will remain a largely A-class organization.
But this is only part of the story. A-players need a pat on the back now and again. What’s interesting is that they only value pats on the back from other A-players. They don’t value the approval unless they respect and admire the person giving it. So developing a critical mass of A-players has an added benefit: the company tends to repel B-players and attract other A-players, reinforcing what it has built. Zappos employed this theory when it famously offered its employees $2,000 to quit under the assumption that A-players aren’t motivated by money and only B-players would take the deal.
The bottom line is this: B-players tend to be more vain and less secure. They want to be admired, regardless by whom, to make themselves feel superior. So B-players often attract other B-players and more commonly C-Players, who look up to them. In other words, A-players beget even more thoroughly A-companies and B-players eventually beget C companies.
A few things to consider:
§ A-players are not just from big name companies. They come from failed startups as well.
§ A-players don’t only come from the top schools. But they can learn just as quickly.
§ A-players are motivated by winning and being around other A-players.
§ A-players are not always the smartest, but they want to win and know that learning and execution are two of the key factors to making that happen.
§ A-players leave, but generally don’t want to. Find ways to keep them if they are aligned with your direction. If they are not aligned with the direction, they can kill you.
§ A-players are not always motivated by recognition and financial rewards, but give them both. Then other A-players will come.
By now, we’re sure you get the point. Don’t let down your hiring standards and your company will be better off for it.
(Victor Belfor (pictured top) is an entrepreneur and investor and currently runs strategic alliances at RingCentral. He can be found on Twitter @vbelfor. Ben T. Smith IV (pictured above) is a serial entrepreneur and investor and the co-founder of MerchantCircle and Spoke. He is available on Twitter @bentsmithfour)
In an article published last month by PEHub and co-authored with Ben Smith
, we argued that startups have an advantage in qualitative leaps, while BigCo's are better at incremental / proceduralized innovation.
Soon after the article came out, a reader sent me this article
from the Economist. In spite of it's provocative subtitle (Why large firms are often more inventive than small ones), the author actually echoes our conclusion. Here's a passage for the Economist:However, there are two objections to Mr Mandel’s argument. The first is that, although big companies often excel at incremental innovation (ie, adding more bells and whistles to existing products), they are less comfortable with disruptive innovation—the kind that changes the rules of the game. The big companies that the original Schumpeter celebrated often buried new ideas that threatened established business lines, as AT&T did with automatic dialling. Mr Mandel says it will take big companies to solve America’s most pressing problems in health care and education. But sometimes the best ideas start small, spread widely and then transform entire systems. Facebook began as a way for students at a single university to keep in touch. Now it has 800m users. Our article is below:
With all their resources and talent, why do big companies have trouble innovating? How can a Blekko exist when there is a Google? Or a Tapulous when there is an Electronic Arts?
Even more puzzling, why couldn’t Yahoo create Facebook with Yahoo 360 instead of losing out to a 20-year-old kid from Harvard? A lot of innovation comes from tiny teams with only $100,000 in the bank, or often a lot less. The reason is they don’t fear breaking the rules.
In reality, there’s a lot of innovation happening at big companies. But most of it is incremental. The focus is usually on process optimization and efficiency improvement. In order to support the rigid, crystalline structure of a large enterprise, lots of rules and procedures are implemented and enforced. These rules are “The Box.” The goal of most enterprise innovation is to get close to the edge of “The Box” without touching the lines – like a child drawing in a coloring book.
A startup innovator doesn’t care about rules. He doesn’t care about “The Box.” His motivation is to achieve something that has never been done. Most innovators we meet have an explicit goal of changing the world.
Another key reason why big companies aren’t good at qualitative innovation is a combination of legacy and Wall Street pressure. Most large companies do not grow very fast. Their current customer base is large, and, by comparison, the inflow of new customers is small. This imbalance creates a disincentive to introduce change and innovate. Customers often react negatively to change over the short term, and Wall Street punishes companies for taking risks.
Startups, on the other hand, are unencumbered. There’s no aversion to risk. There’s nothing to protect.
Victor (pictured above) has seen this at RingCentral. For years, the RingCentral team has pushed the envelope with cloud telephony in an old-fashioned, highly competitive telecom industry dominated by huge incumbents. It would have been easy for RingCentral to start looking over its shoulder, and then stumble and fall. But the company kept swimming upstream, winning one innovation award after another (including the prestigious World Economic Forum’s Technology Pioneer Award) and adding more loyal customers. Now, the company is enjoying industry-wide acceptance and many of the industry’s largest names have become valued partners and strategic investors.
Ben (pictured left) saw this same dynamic as he offered advice to the Tapulous and Mesmo teams competing against the major game studios. Tapulous, for example, built out a massive network of freemium users in the same gaming market that created billion dollar businesses with Harmonix Music Systems’ Rock Band and Activision’s Guitar Hero. Neither franchise was able to embrace the iPhone as the new gaming platform, or freemium as the new business model, the way Tapulous did.
Only a few big company executives and boards have the guts to resist the pressures from shareholders and Wall Street. One example of a company that did is Charles Schwab under then CEO David Pottruck. Pottruck’s big bet was to see the Internet as the future. In the late ‘90s, Schwab offered a discount brokerage service at $80 per trade and an e.Schwab platform with reduced service levels at $64 per trade. E*Trade wasn’t yet a strong competitor. That changed.
Pottruck’s bold decision was to face rising Internet competition head-on and offer all customers, online and off line, the same service levels and the same reduced price - $29.95 per trade. This bold innovation cost the company about $100 million in profit the first year, and Wall Street punished the decision. Shares dropped by about 40%. But Pottruck and Schwab were right and within nine months the stock recovered and reached new highs on massive customer growth. Some of its competitors’ product strategies were a year behind. Stories like this are few and far between.
The startup environment is different on a fundamental economic level, not just because founders are more motivated and focused, but because anytime a startup does something big, the upside is uncapped and the downside is pretty small. If a company fails, an investor loses a few million dollars. The team goes on to get new jobs.
Big companies can look at the same project with the same economics and lose a billion dollars in market cap. Netflix is an example. The risk paradigm is reversed. For any qualitative innovation, a big company has an uncapped downside and a finite upside.
That’s why startups do what they do. They have nothing to lose, only upside. It is why they are willing to change the world.
(Victor Belfor is an entrepreneur and investor and currently runs strategic alliances at RingCentral. He can be found on Twitter @vbelfor. Ben T. Smith IV is a serial entrepreneur and investor and the co-founder of MerchantCircle and Spoke. He is available on Twitter @bentsmithfour)