Last month, I announced that we were shutting down SmarterCloud, our cybersecurity startup.  I gave a few lessons learned, including that raising money from venture capitalists is a lagging indicator, not a leading one.  By the time you have raised the money, you have already accomplished quite a lot.

But I also want to expand on the topic of money in startups by developing a “framework” for how startups grow and maintain their competitive advantage.  I should just state this up front: MBAs love frameworks.  For example, right now I am taking a class from Marianne Bertrand entitled “The Firm and the Non-Market Environment” that tries to lay out the interactions between large companies and non-market forces like governments and NGOs.  In it, we use the framework of “Pluralism” to better understand why firms make the choices that they make. Basically, this means that when we are reading through a case study, we reference the basic framework to predict what will happen, and what the costs and benefits of those decisions are.

So, in the case of SmarterCloud, I wanted to develop a framework that explained why we failed to raise money.  As I mentioned, Amazon released a competitor in August that provided basic DLP for their platform, which caused multiple VCs to express hesitation at our prospects.  They kept asking, “Why aren’t you just building something and getting it out there?” To this I responded, “I need money to build a team to build the product.”  The discussion was circular, and ultimately, we missed the fundraise.

Why did these conversations fall flat and the fundraising process fail for us? Well, to explain that, I think the framework that is most applicable is what I would call the “Time Is (Not) Money”(tm) framework.  I always assumed that our limiting factor was money.  We needed money from venture capitalists to build the team to build the product.   Without that, we could not build a kickass product and dominate the market.  However, I was wrong.  We were playing in an existing market niche against massive companies that had their sights set on building adequate versions of what we wanted to build.  Since cybersecurity is mostly a game of incremental advancements, major technological breakthroughs rarely win the game.  It is a low-patent, highly-competitive, low-margin business.  Contrast this with biotechnology.  That is a high-patent, low-competition, ultra-high-margin business.  Scientific inventions fueled by massive R&D budgets are rewarded well in that industry.

So, when starting your startup, ask yourself an honest question: do I really need the money? If you need massive amounts of money, you should be converting that into a defensible moat.  This is why Uber needed massive amounts of money, because it essentially converted that liquid capital into “network capital” that allowed them to dominate specific regions through aggressive recruitment and promotion.  This is similar to a company like Oculus, which was developing new hardware and multiple patented inventions to leapfrog existing technology and create a whole new space.  Contrast that with a company like StitchFix.  On the podcast “How I Built This”, Katrina Lake details how she used manual methods (think Excel and Google Sheets) to bootstrap her first customers and get instant feedback.  At the time, home delivery kits were an extremely popular segment, and the race was on to be the “Blue Apron of X”.  So, she was racing against time and although raising money was a part of the journey, the focus had to be heads-down product development.

Unfortunately today I am announcing that we are shutting down SmarterCloud.  The decision was a long and painful one, but the team ultimately realized that we could not achieve our vision of being the leader in insider threat detection.  If you hit me up on LinkedIn or Twitter, I am always happy to dive into the myriad reasons this happened, but for this blog post I wanted to list the three key mistakes I made as an early-stage founder.  I also want to highlight that they are mistakes, as I think it is really important to admit failure and not spin this into “it was a learning experience and yay everything is cheery!”  As I’ve written before, there is way too much in terms of sunny materials on the Internet that paints everything optimistically.  Realism in entrepreneurship is sorely lacking.

Lesson #1: Do Not Validate Past the Close.  We had amazing success early on getting our message to resonate in the marketplace.  Through a series of customer interviews and the team’s prior industry experience, we realized there was a massive gap in the tooling available for insider threat detection on cloud infrastructure.  Lots of competitors existed to prevent insiders from leaking Salesforce or Google Drive data, but there was almost no one focusing on Amazon Web Services and Microsoft Azure.  By analyzing compute and storage log data, we could build an anomaly detection platform that highlighted “hey, this person is downloading data off of EC2 and that’s kind of fishy”.  Pretty straightforward concept, glaring market need.

Being an early stage startup, our approach was to raise the minimal amount of funds we would need to get 9-18 months worth of runway to pay ourselves and a few of our former security and data engineering buddies a bare bones salary, plus a WeWork office.  This strategy led us to entering awesome business competitions like the New Venture Challenge, which focus on telling a story of how your product will fit and scale in the marketplace.  Unfortunately, this led us to “validate past the close”.  As soon as large enterprises told us they were willing to pilot our product, our fingers should have hit the keyboards coding.  Unfortunately, we spent too much time after customer validation on message refinement and pitching.  If we had hit the keyboards coding, we could have gotten something for our customers to play around with and provide real field data feedback, which is invaluable.  By the time summer rolled around and we started coding, the 800-pound gorilla in the room had released a major competitor.  That valuable time lost was because we did not understand…

Lesson #2: Money is a Lagging Indicator, Not a Leading One.  This one is oft-repeated online, but easy to dismiss.  Successful founders who have raised unicorn-status funding say, “I can not wait to get back to building my product!” or “The company is about our customers, not our investors”.  Another way to put this is, “By the time you have raised money, you have already succeeded at that stage”.  We viewed capital too much as a goal in itself.  By raising money, we felt we could do more.  Get an office.  Hire our friends.  But what we did not realize was that the investment is a lagging indicator.  By the time a venture capitalist decides to invest, they have already made you grind it out for months, if not years.  Behind the overnight successes are journeys that took a decade or more.  Instead, companies should focus on…

Lesson #3: Build a Viable Product, Not Just a Minimal One.  The Internet Zeitgeist, along with a lot of modern concepts in Design Thinking and MBA entrepreneurship courses focus on the “minimum” portion of MVP, not the “viability” portion.  For example, people hoping to launch a phone app are encouraged to show people storyboards and pictures of how the app “would behave” rather than rushing to write code.  And, to be fair, that process helps weed out really poor ideas.  If you want to build the next Facebook, putting some diagrams in front of people may help you realize, “Jeez people already really like Facebook enough”.  But as soon as you get even a single person saying, “Yes I would buy what you have described/shown to me, where do I sign?”, start building.  The product has to be viable.  We had several schematics and detailed architecture diagrams of what our product would do, but little in the way of demonstrations.  In today’s world of freemium, it’s just really hard to get anyone to pay for schematics.

In fact, Eric Ries, founder of The Lean Startup movement was recently on an episode of Nick Moran’s venture capital podcast The Full Ratchet discussing this exact same concept.  When Ries did consulting for General Electric to help bring “the startup way” inside the corporate behemoth, he got resistance that if the company focused too much on the customer and their needs, they would miss opportunities to get real revenue.  He clarified.  He did not want GE to bring diagrams of a potential engine to customers to see if they wanted to use it.  Rather, he wanted to find some viable product that could be sold without spending months or years in the R&D phase.  So, the company found an existing engine that was completely functional, but could be used in a new application.  While research and development continued on improvements to specifically meet the needs of the new industry, GE was bringing in revenue and new customer insights based on actual field data.  But there was a viable engine being deployed! And that is the part of this story I feel is often overlooked.

As with most founders, I am extremely proud of my incredible team and the work we accomplished.  Since most of us were students throughout the experience, we are landing on our feet at new gigs across the country (I’ll have more to say on my next journey in the coming months).  There is still space for a bold vision on deterring cybersecurity threats in the enterprise, and lots of work to be done, so I look forward to seeing how our friends and competitors carry this sector forward.

In preparing for battle I have always found that plans are useless, but planning is indispensable.

– Dwight D. Eisenhower

Recently, I read an excellent analysis of the Amazon Whole Foods acquisition put out by Ben Thompson over at Stratechery. I’m linking it because it was one of the most detailed and well-thought out strategic analyses I’ve read in a long time.  While at Amazon I wasn’t in (or near) the retail division, so I can’t tell you if it’s accurate or not. Regardless, it helps the reader formulate questions about what is actually going on in the grocery sector.

My criticism of the piece though is that it all feels a little bit “too cute”. I mean, it almost makes too much sense.  This perfectly laid out plan of how Amazon is going to transform the grocery business: could Amazon really move 50,000 employees in their Amazon retail division in the exact same direction?

When I worked on the Amazon Echo, I remember writing a feature to ease the way we organized and transformed the voice data we collected.  It was basically a simple service to classify an individual piece of data as DEV/BETA/PROD based on the device it was coming from.  But here’s the thing: no one told me to build it.  There had been talks about doing some sort of similar service for a long time in the organization, but no one had prioritized or architected it at all.  It was basically a thought floating around the water cooler, and then I built it.

Although obviously not at the scale of the Whole Foods acquisition, my example shows that at large organizations, things just sometimes happen. Beyond a certain scale, it’s hard to understand every last thing that happens in a fast-moving firm.

Which brings me back to Stratechery’s analysis.  Amazon has done a lot of experimenting in groceries and instant delivery.  It’s clever to think that the Whole Foods acquisition is part of a perfect strategy to implement a multi-year plan to convert grocery shopping into a set of “primitives”.

But my view is that analysts are reading far too much into this.  Heider and Simmel showed nearly a century ago that humans very often see narrative where there is none. The simple explanation for big moves like this is that tech companies perform bold, extreme experiments in new industries they seek to understand and dominate.  Facebook followed a simple strategy of experimentation and delayed profitability with its massive WhatsApp acquisition (which is finally starting to bear fruit). In fact, the risk for Amazon seems fairly low here.  Whole Foods, at the close of last year, had more than $6 billion in mostly tangible assets and more than $5 billion in revenue.  That makes a $13.7 billion acquisition price seem extremely reasonable after comparable infinite-multiple tech acquisitions.

For entrepreneurs and leaders, I think the important lesson to realize is that culture matters an incredible amount. Corporate strategy is important to think about and, as General Eisenhower wrote, plans can be very useful.  But the most important plans a company can lay remain a unique and compelling company culture.  The reason I was able to build the service I did, and a passionate team of retail Amazonians were able to acquire Whole Foods, is because the Amazon Leadership Principles are so clearly defined and deeply imbued into the organization that employees feel confident moving quickly and boldly. The Amazon Leadership Principles are the 14 best-laid and most well-kept plans that Jeff Bezos has ever made. Perhaps one could argue that a defined, unique culture is an integral part of a good corporate strategy, but it’s more about planting seeds than harvesting fruits.