In 1999, my first job out of college was at Lyte, a tech startup that spent $30 million in 30 months. I was the fifth employee to join the company. It failed, teaching me some of the most valuable lessons I’ve learned throughout my career.
Lyte was no normal startup. My fellow team members included a half dozen former public company leaders: COO of the GAP (when the GAP was king), the president of Coach, the CEO of a public Real Estate Investment Trust (‘REIT’), and the president of J. Crew.
We bought half of the production company that was responsible for making hit movies including Being John Malkovich, Babel, Eternal Sunshine of the Spotless Mind, and most recently, The Revenant; managing Snoop Dogg and Tiffani Amber Thiessen; and housing a roster of well-known directors including David Fincher, Michael Bay, and Spike Jonze.
At our peak, we had 20 employees, 10 senior executives, and 100 consultants. We built an entire “bricks-and-clicks” store for $1.46 million in a warehouse because we didn’t want to debut the wrong first digital store. Back then, we had to buy all the hardware and build a data center before launching, which ended up costing $5.4 million. To give some context, today, this would cost 20 cents an hour.
AT&T valued the company at $80M pre-product. After spending our initial $30 million, the company never generated any sales… $0 in revenue.
It was a tech bubble and here’s what I learned:
Indians, not chiefs:
The 1990s were a different era. People weren’t sure that young entrepreneurs could run a company without the supervision of older, more experienced professionals. A CEO in their 30s? Even that was crazy. The idea of a 20-something being able to create and run a successful company seemed unfathomable until, well, Mark Zuckerberg. In 1999, most executives thought if all these tech companies run by kids could go public for huge valuations, imagine what a startup could be worth if it was run by experienced professionals in their 40s and 50s. With that thought in mind, my organization got way too top heavy way too fast. Senior executives hired their friends and peers with decades of experience at rather large price tags. These senior executives delegated everything because that is what they’d been doing for the past 20 years. It didn’t work when there were two chiefs to every one indian.
Don’t hire consultants:
For every one employee we had five consultants. We had consultants for hardware procurement, system integration (IBM), web design (Razorfish), branding (Toth), logistics, store design, media, recruiters, public relations – basically anything you could think of. We even had consultants as “process managers”, who were tasked with managing all of the other consultants.
The more consultants you have, the less successful you will be. I like to call it the Consultant Success Index. Consultants are inversely correlated with your success.
Plan less, do more:
It is obvious to me now, but back then I didn’t know how little value there is in business planning. Theory never holds up to execution. Corporate company culture, as I know it, is to spend a lot of time in meetings, discussing, and planning the work. Startup culture is about spending all your time actually doing the work, and only a couple minutes each day planning.
The shorter your business plan, the better. One page is better than two. One paragraph even better. One sentence is ideal.
Distance = disturbance:
Don’t even think about having more than one office. Because we hired so many executives, we ended up with offices in NY, DC, and LA. Big mistake. Company culture comes from frequent interaction and collaboration, which is impossible unless you are in the same place. Get close. One office is key and a one-room office is perfect.
Don’t start working on phase 2 until phase 1 is (really) working:
At Lyte, we spent a lot of time on big plans — to roll out stores in every major city in America, to produce content for a 24-hour 365-day media cycle, to build a national supply chain…all before launching our proof-of-concept website store. If you start on phase 2 without having phase 1 completed, your execution will never follow your expectations. Many people get too far ahead of themselves too early in the process. The foundation needs to be laid in order to have a first or second floor on a house – and it’s the same with a business. Your brain thinks linearly, but the world is nonlinear. The only thing worth planning for is the downside. Otherwise, forget about the long-term and make things happen now.
Better to have no one than the wrong person:
It’s scary to have things that need to be done and know you don’t have the resources to actually do them, but having the wrong person on the team is far more detrimental. The comfort it brings you to just have someone doing a job is a false sense of security. If the work is critical and no one can do it, it’s worth it to spend your time finding the right person who can.
Culture clash – big business vs. startups:
The key cultural values of big companies are about managing routine and risk. No company can grow unless it scales and scaling is about repeating a success… in other words creating a routine. Each person’s job in a big company is to manage a cog in the routine or manage the people managing the cogs. In a big company, the number one (perhaps unwritten) rule is “thou shalt not threaten the multibillion dollar corporate money-making machine”. With scale, there is massive operating leverage with even just a 1% improvement.
Startup culture is quite literally the opposite. You have no business, so you must keep changing your product or process until you find one. Change is the constant.
The psychology of a former big corporate employee is about managing and leveraging the routine. The greatest risk is the wrong change. The psychology of an entrepreneur is about driving change. The greatest risk is not finding the right change.
This, in short, is why entrepreneurs make terrible public executives and public executives make terrible entrepreneurs.
Make the sale, then build the product:
In 1999, we spent $30 million building the product. Big mistake as we learned very quickly that the market dictates the product. So fake it before you make it.
In the last tech bubble, most companies spent a fortune making the product and ended up failing pre-revenue. Today, we see tech companies spending a fortune on marketing and ending up pre-profits. Neither is ideal, but clearly pre-profit is preferable to pre-product. Progress.
Sell the hype, don’t buy it:
In both tech bubbles, people jumped on the bandwagon because they thought they would get rich fast. People bought the hype. Then, it turned out the hype was overblown.
True entrepreneurs sell the hype, they don’t buy it. They know that every dollar spent should be carefully scrutinized and every optimistic prediction should be questioned. If you are an entrepreneur and you don’t yet feel paranoid about every dollar you spend and every promise people make to you, you’ll soon learn. The hard lessons of building a company will teach you.
Don’t feel big timed:
Many people have impressive track records, banking millions or billions building companies and know everyone who is anyone. They will tell you how much they can do for you and caution how scary it would be if they instead compete with you.
It’s all talk and no action. All hail the people actually doing the work. If someone is trying to convince you of their value, you should already be skeptical because they must need you, not the other way around. Once you are successful, you will learn that there is a lot of luck, timing, and team in building a business.
Don’t believe the hype of the big timers. Ask them to perform and work with them if they do. No one should ever be above proving their worth.