I recently spent 90 minutes with an entrepreneur who sold his last company for over $200 million. Since 2009, he’s been building his second start-up, which he hopes its value will top $1 billion, yielding him a $250 million IPO payday.
During that conversation, the entrepreneur provided valuable insights that he wants to keep private. I think the story is so compelling that what follows uses disguised names and details to get his four vital lessons to aspiring entrepreneurs.
Chase Lochridge was a commander in Britain’s MI6-- running operations behind enemy lines. After earning a BA in Economics from Oxford, he earned a PhD in artificial intelligence from Stanford. Lochridge then built a $300 million product line from scratch at Google.
In 2006, he started Hadoop Analysis, a big data analysis software company that Oracle acquired in 2008 for $240 million. In 2009, Lochridge left Oracle worked for three years with a team of advisors to launch SingleMind Technologies -- a database storage and analysis software that would cut by a factor of 10 the cost of storing, retrieving, and analyzing unstructured corporate data.
For its first year, Lochridge boot-strapped the development of SingleMind’s prototype and in August 2012, SingleMind raised $32 million from three top Silicon Valley’s venture capital firms-- leaving him with 25 percent of the company. And by the middle of 2013, SingleMind’s customers included four small and medium sized enterprises (SMEs) and a division of a huge pharmaceutical company.
Lochridge’s story offers four valuable lessons for aspiring entrepreneurs.
1. The beginning depends upon the end.
While impolite to discuss, people undertake start-up risks to get rich. And the size of the desired riches drives the start-up’s strategy.
Lochridge decided that taking SingleMind public gave him the best odds of hitting his number. He wanted to be in control of SingleMind’s path to a valuation above $1 billion and believed that pursuing an IPO beat getting acquired -- which would give an acquirer too much control over SingleMind’s destiny.
As Lochridge explained, “To hit my $250 million target at the IPO, SingleMind must reach at least $100 million in revenues, growth of 30 percent or more, and an IPO valuation over $1 billion.”
Reaching these goals requires SingleMind to pick the right product features and customers. “If I wanted SingleMind to be acquired by a big company like Oracle, I would design a product that would compete directly with Oracle at its biggest customers-- and I would find out what items are on its due diligence checklist and make sure SingleMind would fit. The big company would notice us right away and offer to buy us out,” said Lochridge.
“But to get big enough for an IPO, SingleMind must sell initially to SMEs that are not Oracle’s primary focus - and only later target Oracle’s biggest accounts - a more costly and time-consuming effort for us. SingleMind’s product’s features initially should suit SMEs but be easy to upgrade for big companies. IPO investors want predictable earnings - big customers help supply steady revenues.”
2. Maintain tight links between strategy and execution.
If a start-up does not meet its sales targets every board meeting, investors lose interest and leave the entrepreneur in the lurch when she needs the next round of financing.
To meet each critical milestone, a start-up’s people must operate within a well-thought-out structure of goals, action, measurement, and feedback.
As Lochridge explained, “Strategy starts with the mission - which in the case of SingleMind is to save corporate customers money and make them more effective, give cash to investors, and take care of employees. To achieve that mission, we need a high level plan, tactics, execution, and after-action review to assess whether to change our strategy.”
The aim of SingleMind’s strategic architecture is to make its stakeholders better off. “Our product should save customers money and help them adapt to the competition, our channel partners should understand the technology easily and make their margins in quick sales to their customers, and our shareholders and employees ought to benefit from our growth,” said Lochridge.
3. Hire carefully, train extensively, and let your talent improvise.
People and culture are crucial to getting start-up results. And an entrepreneur needs people who instinctively understand the start-up’s mission and strategy, improvise, and learn from their mistakes.
SingleMind follows this idea. “Most of our sale people can sell to SMEs and we are now adding elephant hunters who bring in customers like AT&T. The elephant hunters have spent a decade or more wining and dining big company executives. Since they can bag the elephants, I will attract them with SingleMind stock,” explained Lochridge.
Culture and competences are also essential. According to Lochridge, “We value getting results, following disciplined process, and acting fast. We hire people in our key functions - such as engineering, sales, marketing, and service - with the self-discipline to overcome physical discomfort, fears, ego and compulsions and do the right thing.”
4. Get inside the head of your business partners and evaluate varying scenarios.
Some unpredictable events can change your start-up’s mission and strategy. When they occur, a start-up CEO must cross the line between strategy and execution to analyze scenarios and develop contingency plans.
A possible big company partnership made Lochridge think about what motivated that company’s executives and how SingleMind should respond. “Before meeting that executive I Googled her to understand what would motivate her and how our product would affect her career and compensation,” said Lochridge.
Lochridge also evaluated scenarios. “If the company wants to integrate our product into its architecture, we could spend years discussing it; if the company wants to acquire us, I need to deal with a higher level executive; and if it distributes our product, it would accelerate SingleMind’s IPO.”
Follow these four principles to help you win the high stakes start-up game.