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One of my all-time favorite entrepreneurial authors is Guy Kawasaki. His book Art of the Start is on my list of recommendations for entrepreneurs everywhere. One of his ideas that really resonates with me is the importance of making meaning in your company.

Here is Guy Kawasaki talking on the topic as the video of the week:

For more videos, take a look at Guy Kawasaki’s talk on Stanford’s Entrepreneurship Corner.

Side note: one of my goals is to incorporate more videos into this blog, so look for them more regularly.

Recently I was reading about Liquid Web and their new CEO from Atlanta, Jim Geiger (founder of Cbeyond). Liquid Web is a well known web hosting company with over 400 employees and many thousands of customers. Now, when thinking about web hosting, it’s often viewed as a commodity and a low growth industry. Only, Liquid Web was on the Inc. 5000 last year with 79% three year growth. Founded in 1997, Liquid Web has well over $50 million in revenue (probably much higher) and shows the power of long-term compounded growth.

Here are a few thoughts on long-term compounded growth:

• Starting with $1 million in revenue, at the end of 20 years of 20% per year growth, the company would have over $38 million in revenue
• Recurring revenue businesses are among the easiest to grow every year because of the existing base of business to build from (that’s one of the reasons why Software-as-a-Service is so desirable)
• Ralph Roberts bought a little cable company with 1,200 subscribers in 1963 and now the company, Comcast, has 27.2 million subscribers and $68.8 billion in revenue last year (source)
• Many multi-generation family businesses with substantial scale are great examples of decades of compounded growth (see the Mittelstand model in Germany)
• Einstein has the famous quote: “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” (source)

Much like the Stanford marshmallow experiment, entrepreneurs that can delay gratification and continue to put more money back into the business to grow it faster, and do so for a long period of time, have the opportunity to build large companies due to the power of long-term compounded growth.

What else? What are some other thoughts on the power of long-term compounded growth?

When first-time entrepreneurs set out on a new startup, there’s a desire for immediate results and expectations for quick success. Only after a few set-backs – everything takes twice as long and costs twice as much – does reality start to take hold. Then, it feels like this thing is never going to make it, often called the trough of sorrow, where it even gets worse. Finally, things start to pick back up (hopefully!) and there’s nice steady growth.

Here’s what the first 24 months might look like:

• 6 months – Tons of conversations, administrative work, product exploration, and a few beta customers
• 6 months – Product and messaging refinement, more customers signed, and stronger focus (or, things aren’t working and you start back over from scratch a.k.a. the pivot)
• 6 months – Approaching product/market fit, more confidence, and more customers
• 6 months – Product/market fit and the start of a repeatable customer acquisition process

So, if everything goes well, the business will feel like it’s starting to hit its stride, albeit with modest revenues, after 24 months (see SaaStr on the 24 months timeframe as well). Even with more money and more team members, it still takes 24 months to really get the startup going.

What else? What are some more thoughts on the idea that it takes 24 months to get the startup going?

Several months ago I was giving a high profile, out-of-town VC a tour of the Atlanta Tech Village. As we walked around the rooftop patio, I asked about one of his investments I had read about previously and he said something that surprised me, “I don’t think the idea for [redacted] is that good, but I love the entrepreneur and invested just so I could invest in whatever company he does after this one.” Wow! This is an investor who has put many millions of dollars into a startup saying the idea is only OK but that’s it’s all about the belief in this person.

Naturally, I pressed further and asked about expected return on investment and how it compares to other investments. The expectation is still to make good money (e.g. a 10x), but that there’s no way it could be a 100x (or 1000x like Jeff Clavier’s Fitbit investment). So, disliking an idea while still believing it can generate good financial returns are not mutually exclusive. Regardless, a fundamental belief in the entrepreneur is the driving force.

The next time you hear of an investor saying ‘no’ because they’re not interested in the idea, remember that the entrepreneur is even more important. In fact, some investors bet on the entrepreneur regardless of the idea.

What else? What are some more thoughts on the idea of investing in an entrepreneur and disliking the idea?

One of the harder concepts for entrepreneurs to grok is that even when a startup has product/market fit, customers, employees, and investors, there’s almost no value to the business. Now, on paper, there’s a valuation the investors bought in at, so it feels like there’s value. But, unfortunately, there’s really very little value until the startup has some scale — say $5 million or $10 million in revenue. Similar to the idea that there’s no market for failed startup products, there’s almost no market for barely successful startups.

Here are a few reasons why scale is need for sale or acquisition of a startup:

• For any mid-to-large company that can afford to acquire the startup, the revenue needs to be meaningful, or the potential to be meaningful in a few years (e.g. at least 1-5% of the overall revenue)
• Financial buyers, as opposed to strategic acquirers, are looking to pay based on a multiple of profits, not revenue, and most startups aren’t profitable (financial buyers often pay 4-6x EBITDA, depending on the type of business)
• Transactions costs to acquire a company are high, especially with all the legal and accounting time as part of due diligence, adding considerable friction to the process of acquiring a startup
• Someone within the acquiring organization has to be a champion for the acquisition and stick their neck out — it’s safer to pay more and acquire a startup that’s more established with more revenue

Once there’s scale, many of the risks – customer adoption, value proposition, growth potential – are addressed and it’s more of an opportunity to take something that’s working and make it many times larger. Most mid-to-large companies aren’t interested in acquiring sub-scale startups.

What else? What are some more thoughts on the idea that scale is needed for sale?

Several years ago I was talking to an entrepreneur about his startup. When we got to the part about funding, he said that it was all bootstrapped. Each day he would work full-time on his company and then at night, to pay the bills, he would valet cars. Valeting cars is hard – constantly running back and forth, hoping the customer didn’t wait too long and will give a nice tip, and loss of a social life. Also, it’s something many people, especially engineers with college degrees, see as being beneath them. Only, to me, it showed how serious he was about being a full-time entrepreneur and doing whatever it takes to succeed.

The next time an entrepreneur laments not being able to work full-time on their startup due to funding, ask a few questions:

• What lifestyle sacrifices are you making to be an entrepreneur?
• What can you change so that you can be a full-time entrepreneur?
• What jobs can you do after hours to pay the bills (e.g. being an Uber driver or valeting cars)?
• What percentage of your savings are you willing to invest in the startup?

The initial stages – going from idea to product/market fit – are terribly difficult, and practically impossible as a part-time entrepreneur. Entrepreneurs that focus full-time on their startup have a much greater chance of success.

What else? What are some more thoughts on the idea that entrepreneurs need to figure out how to go full-time on their startup?