Guest Speaker: What You Need to Succeed

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The right market: Preferably, it involves an absolute mob scene. Unless there is real market demand, you will fail. Why is Federal Express a success? Because people need things delivered overnight. Why is Google (NASDAQ:GOOG) a success? Because people need to find information on the Internet.

Try plugging your company into that construction and see if the resulting statement makes sense. Dean Kamen should have done that before investing so much in Segway. He is one of the most brilliant inventors of modern times, backed by a prestigious venture capitalist. But try saying, "People need an electric scooter to shoot them around town." Lacking genuine demand, the proposition just kind of lies there.

The great thing about retail is the ease of assessing your market. You see your customer every time you're in the store. There's one, trying to flag down a clerk for assistance. There's another, staring in frustration at some ambiguous signage in aisle seven. I've been telling entrepreneurs "Know your customer" so long that people must think I have it tattooed somewhere on my body. But it's still the most profound lesson in the business canon. You can tell when an idea derives from observing real people in real situations, as opposed to when it just dropped from the sky into someone's brain pan. I always get excited when an idea rings true. Then I go out and verify.

Take Lululemon. Before we invested there I dropped in at one of its stores on a Thursday afternoon. It was an absolute mob scene. Customers grabbing things off racks. Lines at the cash registers. The name wasn't even on display outside the store: It just had a logo. What does it say if people can't even see the name of a business and they're coming in in huge numbers?

The experience with Lululemon reminds me of a lesson I've had reinforced as a VC: Understand the customer but never assume that you are the customer. It is always dangerous to make business decisions based on your personal consumer needs. Entrepreneurs will say, "I started this business because I was trying to buy X or have X delivered a certain way and couldn't."

I started two companies out of just those types of frustrations: Zoots because I never found time to get my dry cleaning done, and Olly Shoes because I had trouble finding shoes at traditional stores that fit my kids. Still, I invested in tons of market research before starting them and have always asked for real customers' feedback rather than basing decisions on my own preferences. Working with a company like Lululemon is a great change for me because I have no consumer biases--I'm not a yoga guy. I did buy one of their sweatsuits, though, and I've got to say, it's the softest thing I've ever worn. And it wicks away the perspiration like that!

The right answers: Sometimes you need an outside perspective. One thing I like about my new position is the chance to be a fresh pair of eyes. When you're running a company, you live so much inside its problems that sometimes you can't see them clearly. I look at these businesses as an outsider, and I can tell what they need.

For example, one of my portfolio companies, Blue Tulip, is a gift store chain that specializes in unusual handmade cards and wrapping paper. It's based in New Jersey, and the founders told me they plan to expand up and down the Eastern Seaboard. My immediate thought: "That is one tough real estate market." So I advised them to hire a top-notch, high-level person to manage that, and helped them put one in place. In general, entrepreneurs wait too long before establishing professional management of real estate and technology--two functions that often cause the most trouble as you're scaling up.

I've also been working with companies on questions like where to locate stores and whether they should be franchises or company-owned. I've been helping Rec Room, a Chicago-based business that sells game-room furnishings like pool tables and bars, attract customers through a more entertaining retail environment. We're talking about holding parties and celebrity poker tournaments, and these stores are the ideal venue. And I'm advising Lululemon on expanding overseas, about which I've urged them to be cautious. Staples had a very rough time in Europe--it took years for us to succeed there. I've suggested that Lulu cement its presence in the U.S. and Canada first and then, when it does go global, it should do so as part of an alliance.

I look at businesses like these and think how lucky their leaders are. The early days of company building are so exciting: Happy endings are even more fun to anticipate when you don't know exactly what they'll be. Still, I don't envy these entrepreneurs. Time pressures these days are incredible, and I don't want to subject myself to that. I'm not tempted to get back into the founding game. Venture capitalism is the perfect third act for a guy like me. I get to apply all that I've learned. And I get to invest in people's dreams and help make them a reality.

Thomas Stemberg is a partner at Highland Capital Partners in Lexington, Massachusetts. He is the co-founder of office superstore Staples, where he was CEO for 16 years and chairman for three. He also founded the dry cleaning chain Zoots and Olly Shoes, a leading children's shoe retailer.

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