Dropbox – The Power of a “Value Based” Startup

Drew Houston, CEO/Founder of Dropbox, gave an amazingly forthcoming presentation at the Startup Lessons Learned Conference chronicling his team’s path from idea to their current position as one of today’s hottest startups.

Because of the importance of protecting user data, they modified the “launch early, launch often” mantra to “learn early, learn often.”  And they aspired to gain the “best understanding of customers as early as possible.”

My favorite quote from Drew’s presentation highlighted the power of focusing on what is really important: “If you make a feature matrix of Dropbox versus all the other products out there, we’ll never come out in front.  We wanted to do a few things [really] well as opposed to a lot of things kind of well, presented in a way that’s confusing.”

Dropbox struggled to find effective paid marketing channels, but Drew states: “The one thing that saved us was that we put all of our effort into something that worked, that was an elegant solution.”  They then empowered extremely gratified users to spread the word about Dropbox.

The result: In 15 months, Dropbox attracted 4 million users.  In the last 30 days users have sent 2.8 million direct referral invites.  Watch the video, you’ll definitely learn something.  During my time with Dropbox, I learned how to build a sustainable startup (and business in general) the right way.


Watch live video from Startup Lessons Learned on Justin.tv

Steve Blank’s SLL Keynote – It’s a “Must Watch”


Watch live video from Startup Lessons Learned on Justin.tv

Some of my favorite quote are:

Role of the Entrepreneur

  • Your job as an entrepreneur in a startup is to search for a repeatable and scalable business model. When you find it, your job is to build a company around that business model.
  • Search for a business model rather than write a business plan. Biz model is how a company makes money.
  • Customer and agile development is how you search for a business model.
  • You fail if you stay a startup – goal is to become a large company.  Search is bringing order out of chaos, pivoting all the time.
  • Goal is not to becoming the world’s most fun startup. Goal is to become a valuable company.
  • No business plan survives first contact with the customer.

Differences Between Startups and Established Companies

  • Startups search and pivot; companies execute.
  • Very different skills needed to execute a business model compared to those needed to search for a business model.
  • Customer development = hypothesis testing, minimum feature sets and pivoting.  Product management is very different than customer development.
  • You need to brainwash and deprogram product managers if you want them to perform customer development.
  • Key startup numbers are not: balance sheet, income statements and cashflow.  They are cash, viral coefficient, customer acquisition cost, burn rate, average transaction size…

Want more Steve?  Check out his blog.

Early Detection is Key

Following the Startup Lessons Learned conference, I had the Founder/CEO of a startup tell me that she finally ran the Survey.io customer development survey. She was thrilled to discover that more than 40% of her users considered her product to be a “must have.” She had avoided running the survey earlier for fear of a disappointing number. But now that she has run it, she can confidently start planning the steps needed to scale her business (see Startup Pyramid post).

Her fear is common among many startup founders. We have so much invested in the vision (especially emotionally), that we dread an inconvenient truth standing in the way of our dream.

The fear reminds me of one of my personal life missions. Over the last five years I’ve strongly encouraged my friends to get physical exams – especially entrepreneurs consumed by their startups. I know how hard it is to make time.  At perhaps the most intense period of scaling LogMeIn I was putting off a routine physical exam. I felt healthy, so why worry? But I gave up half of a day anyway and finally got a complete checkup. It turned out that I had the very early stages of bladder cancer. A simple procedure removed the cancer and I haven’t had any signs since. But if I had waited just a few more months, my doctor explained that the prognosis would have been a lot scarier. If you haven’t had a physical exam recently, please make the time. It could save your life.

And on a much lighter note, if you haven’t run the customer development survey on Survey.io, just do it (it’s free). If too few people consider your product a “must have”, you’ll want to pivot/course correct as early as possible.

A Lean Start is Smart

Lean Vs Fat Startups
When I read Ben Horowitz’s article “The Case For The Fat Startup” http://bhorowitz.com/2010/03/17/the-case-for-the-fat-startup/ I expected to be in violent disagreement with most of it.  However, I was surprised to find myself mostly nodding in agreement.  Many of the moves he describes that led to the survival and success of Opsware/Loudcloud were similar to the ones I advocated as an executive in a post dotcom bubble public company (Uproar.com).  Cutting was important, but it was even more important to protect and build on the value that we had created.
So how can I find myself agreeing with Horowitz, when he seems to be such a vocal critic of Lean Startups?
Well first, he’s not against running leanly.   He simply suggests that lean shouldn’t be the end goal.  Instead, he claims startups should be focused on survival and market leadership – both of which benefit from more money.  However, his examples mostly center on companies that have significant traction.  Take Facebook, which he touts as a “fat startup” because they have raised over $700m.  The fact is that they didn’t start out fat; in their first year they only raised $500,000.
This mirrors my experience at multiple successful startups.   Most maintained a very low burn in the first year, investing funds carefully to create a valuable product.  Only after early users validated that it was a must-have product, did we start loosening the purse strings.  Speed of execution to fully capture the opportunity became the primary objective.  At this point, most of the companies were able to successfully attract additional financing (often very large rounds).
Perhaps the most important realization that I’ve made as a result of this debate is that: Lean Startup principles are most critical in the early stages of a startup before product/market fit.  If you have not created a “must-have product” your ability to attract future rounds of financing will be limited if not impossible.  Your best chance of survival is to create a must-have product on your first round of financing – with the overwhelming majority of funding going into R&D.  Once you have created a must-have product, it will be much easier to raise enough money to capture and lead the market.
Of course, this could be an argument for a big first round of financing.  I rarely advocate raising a small round if you can raise a big one.  But it’s important to recognize that the best VCs invest small before traction and big after traction.  They realize that overinvesting up front rarely improves a startup’s ability to create a must-have product.  If you are fortunate enough to raise a substantial round up front, you’ll need discipline not to spend in areas that aren’t essential to creating a must-have product.  If you have the right discipline, your only important risk of raising a big early round is limiting the potential for lucrative small early exits.  But more likely you won’t be able to raise a substantial round until you have created a must-have product.  Once you can prove an ability to scale cost-effective growth for this must-have product, smart VCs will be knocking down your door to invest as much as you can realistically absorb – and often more.

When I read Ben Horowitz’s article “The Case For The Fat Startup” I expected to be in violent disagreement with most of it.  So I was surprised to find myself mostly nodding in agreement.  Many of the moves he describes that led to the survival and success of Opsware/Loudcloud were similar to the ones I advocated as an executive in a post dotcom bubble public company (Uproar.com).  Cutting was important, but it was even more important to protect and build on the value that we had created.

So how can I find myself agreeing with Horowitz, when he seems to be such a vocal critic of Lean Startups?

Well first, he’s not against running leanly.   He simply suggests that lean shouldn’t be the end goal.  Instead, he recommends startups should be focused on survival and market leadership – both of which benefit from more money.  However, his examples mostly center on companies that have significant traction.  Take Facebook, which he touts as a “fat startup” because they have raised over $700m.  The fact is that they didn’t start out fat; in their first year they only raised $500,000.

This mirrors my experience at multiple successful startups.   Most maintained a very low burn in the first year, investing funds carefully to create a valuable product.  Only after early users validated that it was a must-have product, did we start loosening the purse strings.  Speed of execution to fully capture the opportunity became the primary objective.  At this point, most of the companies were able to successfully attract additional financing (often very large rounds).

Perhaps the most important realization that I’ve made as a result of this debate is that: Lean Startup principles are most critical in the early stages of a startup before product/market fit.  If you have not created a “must-have product” your ability to attract future rounds of financing will be limited if not impossible.  Your best chance of survival is to create a must-have product on your first round of financing – with the overwhelming majority of funding going into R&D.  Once you have created a must-have product, it will be much easier to raise enough money to capture and lead the market.

Of course, this could be an argument for a big first round of financing.  I rarely advocate raising a small round if you can raise a big one.  But it’s important to recognize that the best VCs invest small before traction and big after traction.  They realize that overinvesting up front rarely improves a startup’s ability to create a must-have product.  If you are fortunate enough to raise a substantial round up front, you’ll need discipline not to spend in areas that aren’t essential to creating a must-have product.  If you have the right discipline, your only important risk of raising a big early round is limiting the potential for lucrative small early exits.  But more likely you won’t be able to raise a substantial round until you have created a must-have product.  Once you can prove an ability to scale cost-effective growth for this must-have product, smart VCs will be knocking down your door to invest as much as you can realistically absorb – and often more.

Note: Eric Ries clears up some of the common mis-perceptions about lean startups in this post.