One of the most important things entrepreneurs must do is to construct a myth about themselves.
Creating such myths are essential, because entrepreneurs need them to convince investors, customers, and employees to wager on their ability to turn that burning vision into a fast-growing, profitable company that will make them better off.
On January 18, I met at Babson College with 12 students on a "Boston Learning Expedition" from France's top university, SciencesPo. I was asked what makes American entrepreneurs unique.
My response was that they seem to excel at making myths about themselves. However, they have varying levels of success at turning their myths into large, fast-growing, profitable companies. These entrepreneurs fall into three categories:
- Fake it until you fail. The first are the ones who fake it until they fail. Theranos's Elizabeth Holmes fits that category. She famously wore black turtlenecks and imitated other superficial Steve Jobs mannerisms, but turned out to be a fraud.
- Fake it until you build unprofitable products. Elon Musk is a good example of the second, faking it until he could build popular, money-losing products. Musk's Tesla has built products that customers love, but it's struggling to grow profitably.
- Fake it until you build a profitable, growing company. And the third--of which Steve Jobs is the most prominent example--fake it until they build profitable, fast-growing companies. When Jobs returned to Apple in 1997, he launched three category-busting products in a row: the iPod (MP3 players), the iPhone (cell phones), and the iPad (tablets). These three products helped Apple grow rapidly while earning high profits.
Unfortunately, there are no examples of the fourth category of founders, who build profitable, growing companies that sustain that performance after new CEOs take over.
To be sure, Apple enjoyed profitable growth under Jobs's successor, Tim Cook. However, Apple is forecasting that it will shrink 5 percent when it next reports financial results, and I question whether Cook can restore rapid revenue growth unless he invents a product like the ones Jobs launched.
Due to the plunge in technology stocks over the last six months, the noose is tightening around Type I and Type II CEOs. VCs are getting skittish after the 12 percent tumble in the Nasdaq since its August high, according to the Wall Street Journal.
The evidence of VC nervousness is piling up. The number of seed deals has declined 41 percent, from 1,500 in 2015 to 882 in the fourth quarter of 2018, according to the Journal. Electric-scooter startups Bird Rides and Lime were valued above $1 billion the last time they raised capital, but both "recently lowered their valuation goals in fundraising efforts," noted the Journal. And money-losing startups are cutting people. To wit, Elon Musk's SpaceX slashed about 600 jobs.
Type I and Type II startups need scalable business models--and soon. As I wrote in my soon-to-be-published book, Scaling Your Startup: Mastering the Four Stages From Idea to $10 Billion, this means that as it grows, a startup must get cash-flow positive by boosting efficiency in the way it markets, sells, and develops new products.
A case in point--among many in my new book--is JFrog, a maker of software that boosts the productivity of software developers, growing at over 500 percent, which I wrote about last October.
JFrog has what startups need: a scalable business model. How so? As CEO Shlomi Ben Haim told me, "JFrog became and stayed cash-flow positive in 2014 by building an efficient funnel [a marketing process to efficiently filter out all but potential customers eager to buy the product]. We did it with zero field sales people. It was all inbound leads converted to buyers by inside sales people. It works because developers don't like salespeople--they test our product, like it, and adopt it. Developers saw that we are solving their pain--our product became viral."
Type I and Type II startups are in danger. Like JFrog, they must build scalable business models so they can get the capital they need to sustain profitable growth.