20. Rizwan Virk: Author of Startup Myths and Models

Hello, Book Thinkers family, and welcome to episode number 20 of our brand new podcast, Book Thinkers: Life-Changing Books. During each episode, I interview one of the world's top authors. And as a listener, you can expect to discover new books, new mentors, and new resources that you can use to achieve more and to live better. In this episode, I have the pleasure to interview the author Rizwan Virk. Riz is a lot of things. He's a successful entrepreneur, he's a video game pioneer, and he's a venture capitalist. But he's also the founder of the startup accelerator PlayLabs at MIT and a graduate of both MIT and Stanford. His books focus on entrepreneurship, artificial intelligence, and computer science, and today's conversation is focused on his newest book, Startup Myths and Models: What You Won't Learn in Business School. Now, I will say to everybody, I do have a degree from a business school, and I was very impressed because this book takes the glamorous view of entrepreneurship that's created today in the US and it breaks it down into certain myths that are debunked by Riz's book. So it was a very enjoyable experience for me and it was very educational. And we'll talk about a couple of those during today's conversation. So without further ado, please enjoy this amazing conversation with Riz Wanvirk. Riz, thank you so much for joining the Book Thinkers Life-Changing Books Podcast. For those in the audience that don't know who you are, can you tell everybody a little bit about yourself?

Sure. Well, first of all, thanks for having me on the podcast. You know, I'm— I started off as a computer programmer, went to MIT many years ago, and then started my first company in Boston, which was in the enterprise software space during the whole dot-com Web 1.0 world, and kind of went through a lot of the ups and downs of entrepreneurship, which I'm sure we'll be talking about. And after doing a lot of enterprise software startups, I moved to Silicon Valley. Just around the time of the, of the last financial crash, which was in 2008. And right around that same time, the iPhone was introduced and it was opened up to new apps. And so, you know, I got involved in video games and it turns out video games are countercyclical. In fact, it's one of the best performing industries right now during the current financial crisis. And, you know, back then I got involved in a company called Tapjoy, which provided a way for video game developers to get new users and to make money with their games. That went on to be worth hundreds of millions of dollars. And then I started a game called Tap Fish, which was the number one grossing game in the App Store a while ago now. We sold that to a big Japanese company, and for the past 10 years, I've been investing in a lot of startups in entertainment, interactive entertainment, but also enterprise software. bunch of other areas, virtual reality. I'm also an author. I wrote The Simulation Hypothesis, which was published last year, about the idea that we live inside a matrix-based reality. And then I started a startup accelerator at MIT called PlayLabs. And we basically, you know, went through different types of aspects of the startup journey. And I wrote this book, Startup Myths and Models, as a kind of a way to encapsulate all the lessons I've learned in 25 years of startups, and we used it as our textbook during the accelerator, and now Columbia Business School was kind enough to publish the book this year. The original subtitle was actually supposed to be What You Won't Learn at Stanford Business School, which is where I was in 2008 during the last financial crisis. We literally watched the stock market crash while we were in business school, but since Columbia was publishing it, they decided they didn't wanna put Stanford in the title. They didn't wanna knock Stanford as a fellow—

Business school. And in the book, right in the introduction, you say that you wrote this book because you wish you had access to the information that sits inside of these pages when you first started your business. So what is that experience like writing sort of your ideal book?

Yeah, you know, it took a while to write this book. I mean, oddly enough, I came up with the idea, the first part of the title, Startup Myths, right? And then there's the models. So I came up with the startup myths back at the end of my very first startup. So in 1997, it was like over 20 years ago.

Oh, wow.

And I started to think about all the things that I had thought were true about being an entrepreneur back in those days that turned out, not that they weren't true, they had kernels of truth to them, but they weren't the whole story. And I didn't understand the whole story until you actually go through it yourself. And so I've been kind of collecting these you know, ever since the '90s, uh, every time I come across a new one, uh, and certainly in Silicon Valley today, which is where I am, there's a lot of these rules of thumb floating around.

Mm-hmm.

Um, and I know we'll get into a bunch of those. Uh, and then later when I went to business school at Stanford, I realized that a lot of what they were teaching us applied to big companies and, and mature markets. And you'll see there's a little diagram on the COVID of the book that shows how startup markets evolve. And if— It's kind of hard to read in the video here, but anybody who goes through the phases will see that it starts off as a nascent market and ends at a mature market. And most of what we learn in business school is for a mature market. And they always forecast the future based upon the past. And I remember a class we had with one of our professors who literally wrote the textbook on decision modeling. I mean, he wrote our textbook, which was all about how to use Excel to create these complicated spreadsheets to figure out how to make a decision. And we would— Plug in numbers on the left and we would see results A, B, and C on the right. And then you would just look at the right and say, hey, this is the best one. A is better than B and better than C. And I remember raising my hand and said, well, what if you change the number on the left? He goes, well, that'll change all the numbers on the right. So, well, how do you know the right number to plug in? He goes, well, first you have to use history. And I said, well, that doesn't work in startups. And he said, well, then you have to use your gut. You know, he said, that's where you, where you get the big bucks as a manager or an entrepreneur. Uh, and, and it's true that a key part of entrepreneurship, there's an art, there's There's a sense of intuition. And so, you know, I wanted to come up with some models and frameworks, the kind we were taught in economics class and finance class. But like I said, that stuff doesn't really apply to the startup world. So, you know, I decided to come up with some, and I've collected some over the years. And that became the second half of the title. So Startup Myths, sort of misconceptions we have, and Models, which are ways to think about getting to the right answer, whatever that might be in your situation.

Well, I loved that little section in the book where you walked through that experience where you sort of raised your hand and asked that question because I have a business degree. And I felt very disconnected from my college experience because I was working sort of full-time at the same time. And I realized that there was so much more to be gained from real-world experience as compared to what I was learning in the classroom. And so you're still closely related. to the university experience. But at the same time, you're writing books like this that a wider audience can navigate with, like use as a tool to navigate the startup world with. And so I think that's really interesting. Now, before we go into some of the myths, Joseph Campbell, he seems like he's a big inspiration for you. Can you talk a little bit about Joseph Campbell?

Yeah, absolutely. So, you know, most people will have heard Joseph Campbell's name. He was actually a student of the famous psychologist Carl Jung, and he focused on this idea of archetypes, which are kind of standard personalities that appear throughout human history and mythology and stories. And Campbell took it a step further and he wrote a book called The Hero with a Thousand Faces, and he analyzed all of the adventure stories and mythology of many different cultures, and he realized that that many of them went through similar stages. Now, they weren't exactly the same, right, these different stories. Beowulf isn't the same as, as the Odyssey. But he found that the hero had to go through these stages. And these were stages like, you know, the call to adventure, refusal of the call, which is very typical. It was going out on the road of trials. There was typically a trip to the underworld, right, which in the case of the Odyssey meant literally going to the underworld of Hades, you know, where Odysseus goes. But in more modern myths, he found that this structure held, like in Lord of the Rings. I don't know if you're a fan of the Lord of the Rings, but in the very first book and the first movie, Fellowship of the Ring, they have to go through the Mines of Moria, and they lose their archetype mentor, who's Gandalf, right, during that process. And, you know, then there's usually a final battle, and then there's getting the treasure. And, and so, you know, I was a big fan of science fiction and fantasy going all the way back to the time I was a kid. And I found that this was an apt metaphor to use for the entrepreneur's journey. You know, it's like an adventure. No 2 adventures are the same. And like Bilbo Baggins said in The Hobbit, adventures can make you late for dinner. And anyone who's had a startup will realize that you may end up being late for dinner unexpectedly many, many nights. But also that the stages of the journey could be adopted. I mean, most of us get an idea, the call of adventure. We say, nah, that's kind of crazy. I don't think I want to quit my job, or I have a mortgage. So we refuse the call. And then something happens, whether it's another person wants to join us, or a customer, or an investor, or something happens, and we decide to cross that threshold and go into the adventure. And then we find ourselves, you know, with a product. And we thought the product was going to go great. But usually we— that's when we end up with what I call the road of trials. And this is where you find out that the product is not selling like you thought it would. And this happens to, you know, 90% of startups. And so then you have to figure out, how do I change this product, right?

Yes.

So you've probably seen that as well. How do I adapt it? And then usually there's a trip to the underworld where you have to face life and death, not necessarily your own death, but life and death of the startup, which can feel like the same thing when you've put your heart and soul for so many years into something. And then there's a treasure potentially at the end, and the treasure might be financial reward, gold, right? As you think about it, that's why they call it the Gold Rush out here. Every time people move to Silicon Valley, we're now seeing people leave a little bit because of the pandemic. They can be anywhere, they don't need to be here, but, you know, we saw subsequent waves of this in California. going all the way back to 1849, and it's still going on. I'm sure it'll be another 10 years, we'll have another gold rush. But the real treasure is not so much about the financial reward. It's— I believe it's about how you change as a person, right? Because not every entrepreneur, in fact, 90% will not lead to a successful financial outcome, right? And that's just the reality of starting a new business. But 100% of them, of the people who go on this journey, will end up changed. And I always found it interesting that in The Lord of the Rings, Tolkien chose to not end the story when Aragorn becomes the king and the Dark Lord is destroyed, but the hobbits had to go back to the Shire and they had to kind of clean up their homeland. And so it's about what happens after the journey. And, and, you know, Joseph Campbell talks about the treasure being a magic elixir that you can take back into ordinary reality. And so that's why I used the hero's journey as a metaphor and also a structure for the book. So the book is divided into the stages of the journey with the most common myths and misunderstandings that entrepreneurs often have and that I had and I sometimes still have, you know. So this isn't exclusively just for first-time entrepreneurs. It's kind of like Winston Churchill who said during World War II, you know, we won't make the same mistakes we made in World War I, we will make a whole different set of mistakes. That's possible too. Yeah.

Well, I love that point of view that the experience itself of becoming an entrepreneur and going through those different phases, that in and of itself has its own reward. And we actually just had Michael E. Gerber on the podcast who wrote The E-Myth Revisited. Oh yeah, he's a favorite author of mine going way back to the '90s.

I remember reading that book.

Yeah, that has been a multi-decade bestseller. You know, it's still the Bible for a lot of entrepreneurs. We don't get to see that second piece of the story. We just get to see the statistics in that, in that book right at the beginning that hook you in, that say like, you know, 80% of businesses fail within the first year, 95% fail within the first 5, whatever the math is. And so we don't really realize that a lot of that growth and experience leads to another business and another business. And every single time you go through that experience and every single time you pitch a product or service, you're becoming a little bit more bulletproof by fixing one of those things.

That's true. And, you know, that's something that I don't think is emphasized enough because we just hear about the successes, but we don't always know that, you know, it's kind of like the idea of the overnight sensation, right? Like Jim Carrey when he became a movie star with Ace Ventura: Pet Detective. It's like, where'd he come from? He came out of nowhere, right? Well, it turns out he's been kicking around Hollywood for 10, 20 years. Everybody knew him. He just hadn't achieved that level of success. You know, I grew up in Detroit, and Detroit was pretty much the center of the financial world back in like the '50s because the auto companies were the largest companies in the world at that point. And Henry Ford was really the guy who, you know, made Detroit the center of the auto industry. And what people don't know is before he started Ford Motor Company, he started the Ford Quadricycle Company, right? And he had capitalized it and raised money from investors and he lost their money and that didn't work out. And then later he started the Ford Motor Company. Ford Motor Company, which obviously did work out and spawned a whole new industry. And so, you know, that's the other thing that I wanted to emphasize in this book is that entrepreneurship goes through many waves and cycles going all the way back, you know, 100 years or more. But we often face very similar challenges which are based on these, the stages of the journey, and they change us hopefully for the better.

Yeah, I mean, the BookThinkers mobile application itself and BookThinkers as a company has gone through multiple iterations of that process. process already in the last couple of years. This second time around, we're much stronger. We've learned lessons. And so I definitely am an advocate and sort of a result of what you're talking about. Let's jump into a couple of these myths. So myth number 1, build a billion-dollar company. I'd love to have you talk a little bit about that and maybe why you chose that as the first myth to talk about in the book.

Sure. Well, you know, when I did my very first startup, there was a rule of thumb that venture capitalists would only invest in you if you could do 5 and, you know, 50 in 5. And what that meant was you had to show a business plan for how you're gonna get to $50 million in revenue in 5 years, because that would give them a 10x return, what they called a home run back then, on their investment. So if they invested in you at a $5 million valuation and you sold the company for $100 million because you made $50 million in revenue, there was a set of benchmarks. And slowly that changed over the years and particularly in Silicon Valley. And when I say Silicon Valley, you know, in the book I like to use the term startup land because it's not just about Silicon Valley. Just like Wall Street isn't physically just about the place called Wall Street in New York. In fact, a lot of the financial companies have moved from the physical Wall Street, right?

Mm-hmm.

They're in Brooklyn or they're in other places. And same thing here with Silicon Valley. I'm speaking about the whole startup ecosystems that have evolved. I mean, I know you're in the Boston area, which is where I started and was really where a lot of startups were born, but there's New York, LA within the US, Seattle. There's a lot of startup centers, and now internationally, they're all trying to replicate, you know, this idea of having a place of innovation. And so, you know, over the last decade, certainly, what's happened is there's this term called the unicorn, and a unicorn is a billion-dollar company, a company that's valued at a billion dollars or more that's still private and hasn't gone public. Now, the origins of that actually were in the last financial crisis when they changed all the rules for going public. So if you think back to the dot-com days, companies were going public left and right. In the last 10 years, companies don't go public until much later. In fact, Google and Facebook tried to avoid going public as long as possible. And part of the reason is there are just lots of required reporting requirements and things you have to do. And so what happened was companies were staying private for a lot longer and getting a lot more money. mature. But that term was actually defined by a classmate of mine from MIT named Aileen Lee. She used to be a partner at Kleiner Perkins. And, you know, at the time it was a rare creature, a unicorn, that was a company that got to a billion-dollar valuation but was still private. Today it's not so rare. I mean, there's hundreds of them here in Silicon Valley alone. But the problem is that everyone tosses this around as like, that's the goal. You know, you have to build a billion-dollar company. I Otherwise, no venture investor is gonna be interested in you. You have to be the next Uber. You have to be the next Facebook. You have to be the next Google or the next TikTok. And, you know, I find that that's kind of distracting. And it sends the wrong message about how companies get started and even how billion-dollar companies get started.

Mm-hmm.

And, you know, there was a line in the movie The Social Network, which was about the founding of Facebook, where Justin Timberlake plays Sean Parker, and he says the line, you know, $1 million isn't cool. You know what's cool is $1 billion, right? So everyone started to be focused on this financial outcome. But the reality is that I think entrepreneurs have to pursue something that's interesting to them, whether it looks like a billion-dollar market or not. And that's actually kind of important. And, and there's a model in the book called the startup market lifecycle. which is what's represented by the diagram, is that these markets go through stages. And in the nascent stage, nobody thinks it's a billion-dollar market. And in the growing stage, lots of VCs think it might be, so they start to jump in at that point. And then what happens is there's a, there's a unique phase in tech startups called super hot, where everybody's trying to jump in. And this happened in the web world, this happened in the mobile gaming world where I was involved, this happened with AI, with virtual reality. And what happens is too many people are trying to jump into that market. That's actually the wrong time to start a company in that market. Because most of those companies are going to fail and there's going to be a lot of consolidation going on. And then what happens is the market suddenly becomes mature, maturing, which means it's not quite mature yet, but there are market leaders. And then finally it becomes a mature market with multi-billion dollar companies that are already public. And suddenly things are different at that point. You're measured off of profits, your earnings, you know, price earnings ratios, all the stuff we learned in business school takes effect, but only at the very end. of that phase. And so, you know, I'll give you an example of a story. A friend of mine, a really close friend of mine in— at MIT, when we were in college, we used to have this program where we'd go to Japan for the summer. And he went to Japan one summer and he met another student from Stanford and his name was Jerry. And this was back in the early '90s and Jerry was showing him this little dinky startup idea he had. It was like this little thing called a web page, which had a couple of lists of other web things called websites, which nobody had heard of back in the day, right? Now, if you had asked any— anybody whether that was a billion-dollar company, they would have said no. Turns out that was Jerry Yang and the company was Yahoo, which started as a web directory. And so the key is to get in when the market is small, not when the market is big, right? So it's like the opposite. So if you are already in a multi-billion-dollar market, well, what's going to happen is that all the big guys are going to be going after it at this point, right? This is why startups exist, because big guys do spreadsheets and say that market is too small for us. We don't want to go after it, right? Uh, you know, I had mentioned I grew up in Detroit and I had a friend, uh, back in high school who ended up working for General Motors. And, you know, when hybrid cars became popular, uh, back in 2005 and the Prius came out and it was a bestseller and it was sold out, and he was in product planning at GM. And I said, hey, why don't you guys make a hybrid car? He goes, oh, we did the spreadsheet calculations and we realized it wasn't worth it. So GM didn't bother. And now we know GM actually had an electric car way back in the '90s, which they, you know, shut down. But big companies aren't visionary because they're pursuing big markets. Startups are visionary because they're pursuing small markets. Now, the trick is you don't want to go after a small market that's declining. You want to go after a small market that's gaining in awareness. and growing. There's a great South Park episode where the, you know, the guy decides he's gonna buy a Blockbuster Video and he gets a deal and he can buy it for only $10,000. And it's like the last Blockbuster Video out there and he thinks all these people are gonna come and rent videotapes and of course nobody does. Nobody shows up. And so you don't wanna be in a declining market, you wanna be in a small market that's ascending such that when that market becomes really big, if it becomes really big, then you'll be a leader. And And who knows, you may have actually built a billion-dollar company, but you shouldn't focus on that when you're first coming up with a startup idea, in my opinion. Yeah.

And you give so many other good examples of, you know, nowadays the standards in certain industries that at the time, you know, they were very small companies that served a very small market niche. And so I really love that lesson. And, oh yeah, I mean, the buzzword is definitely billion nowadays. So we can thank Timberlake for that one.

Yeah, absolutely. And, you know, sometimes when I see entrepreneurs who are too focused on that word, I mean, it's, you know, it's not that you shouldn't try to build a billion-dollar company, it's that you shouldn't try to build it now, right? You should try to build the best company for the small market you're going to attack. I remember one entrepreneur telling me the ideal market size is zero. I don't quite go that far. You don't want it to be zero. You want it to be bigger than zero but a lot less than a billion.

My goal is $0 in revenue this year.

That's how small.

That's funny. And then, and then myth number 2.

But if you think about it, if you think of the people who bought Bitcoin back in 2010, '11, when it was literally worth zero, right? Or the guy who, you know, turned down the pizza, right? They wanted to buy a pizza for what ended up being $1 million worth of Bitcoin, which at the time was worth zero. It wasn't exactly zero, so slightly above zero. Back at the time, man.

Yeah, I do remember that. There are some crazy stories like that, huh?

There's quite a bit out there. I mean, I actually started buying Bitcoin back in 2013, and, uh, you know, here in Mountain View, and I used to literally go to downtown Mountain View. There was a bank, and I used to pull out $100 from the cash machine, and I would literally hand it to a guy who would then, you know, give me 1 Bitcoin transferred onto my wallet. And that's how we did it back in the day. You know, that's when you want to get into a market, is when it's still inefficient It's still small. It's hobbyists, enthusiasts, you know, and part of the reason why is that there's this line and you'll see it if they see the picture on the COVID which is valuations, but there's a similar line called costs, right? And what happens is, like when I did Tapfish, there were only 10,000 to 25,000 apps in the App Store, in the iTunes app. Now that sounded like a lot to us. We were like, what the hell? 25,000 apps? How are we gonna get anybody to download our app? But we did, and it didn't cost us a lot of money. We were able to do it for $0.25 per download. And then every time somebody downloaded one of our apps, they told their friends and we got like a 5-to-1 organic ratio. What happened over the ensuing years is that the App Store has become a mature multi-billion-dollar market, right?

Mm-hmm.

There's literally over a million apps in the App Store. And if you were to go in and start a mobile game company today, you would need millions of dollars in marketing. We spent only $25,000 in marketing and we got 50 million downloads, right? Today you would need, you know, at least $5 million to get 5 million downloads, let alone 50 million. And so the market has matured and the costs go up. The same is true in the auto industry, right? So again, I keep bringing up this example as where I grew up, but I used to wonder why were there all these brands within GM called Oldsmobile, and Buick, why don't they just call them GM? And turns out these were all garage inventors, right?

Mm-hmm.

These guys started car companies back when you could do that. You could literally in a garage create a— create an automotive company. And that was the hot new thing. Today, you can't really do that without money. I mean, Elon Musk, he didn't start Tesla, but he got in very early and he spent like $190 million of his own money. So if you have $190 million, you can go into a mature market and disrupt that market. Otherwise, you want to go after something new. New and small.

Absolutely. Yeah, and that, that example of the 25 cents per install, you said in 2009, you know, you're not only competing against only a few apps, it doesn't cost a lot to develop the app, the game. And then only in 2012, you said it was a few dollars per install, there's a million apps, and you have extremely high development costs. So that's definitely—

Right, it really changed. So this is the cost of the product building a good product, and then there's the cost of marketing the product.

Yeah.

And both of those things go up. Not many people know this, but, uh, Pokémon GO, which was released in, I think, 2016, uh, by then I considered mobile gaming to be a mature market. It was a $30 billion market. Whereas when we started, a lot of the big guys were like, yeah, we'll release an app or 2 for 99 cents, but it's just this Mickey Mouse little thing, you know, it's not our main business. Now it is the biggest component of the video game industry, right? But what most people don't know about Pokémon Go is the company that released it, and it became the number one grossing app and did, you know, numbers well beyond what we ever did back in 2009, 2010. In a day, they probably made more than we used to make in a month. But what not many people know is they raised $30 million before releasing Pokémon Go, right? So, they spent a lot of time and money building up this geographical technology. And then licensing, you know, Pokémon Go, the brand and all of that stuff. So the cost to build things go up and the cost to market things go up as well.

Yeah, that— so many good reasons to get in while the market is small. Absolutely. And then let's, let's go to myth number 2. So founders start companies to make a lot of money. And this is an area that at BookThinkers we spent a lot of time thinking about and talking about in the early stages of the company because I had made some big mistakes. Uh, the first go-round in this area. So I'd love to have you talk a little bit about founder motivations and how they're actually pretty diverse.

Yeah, you know, that's something that I've realized over time is that different founders have different motivations. And, you know, it— I kind of started to think about it when I was doing a startup where one founder had a different motivation than the other founders. And I remember thinking, huh, why didn't we talk about this early on. And, you know, it was about goals. And then, then I started to notice it in my other startups. And I noticed another entrepreneur, really good entrepreneur. I mean, he's, he's done well, very well for himself, that whenever faced with a decision, he would always choose the decision that made him more money in the short term. And then one of my other partners would always choose the decision that would make the most money in the long term, but was very, very risky and might not happen. And so that's when I really started to to think this through and I realized that, you know, most teams of founders have different motivations within themselves. This is not a bad thing. This is actually a good thing. But it's important to notice what those motivations are. Even if you look at some very famous examples, right, like you look at Microsoft, right? You had Paul Allen and Bill Gates start it. Or if you looked at Apple, you know, I'm going way back now, and you looked at Steve Jobs and Steve Wozniak. First of all, they had very different skill sets, right? In each case, one was more of an engineer.

Uh-huh.

In the case of Apple, Steve Jobs was more of a product designer marketing kind of guy. But if you just look at what drove them, right? With Steve Jobs was more of a product visionary, right? He wanted to get to the future. He was— didn't really seem to be concerned about money per se, right? At one point when he got kicked out of Apple, he sold all his Apple stock, right? Which would be worth— I mean, not that, not that he did badly for himself, but, you know, you could just see that that wasn't his motivation. Whereas the technical guys tend to have different motivations. And so in the book, I draw up lists, buckets of motivations, and it's important for founders to at least understand what's your primary motivation and what's your secondary motivation. I mean, if you're just in it to make money, which happened like in the— whenever there's a craze, it's very common. I don't say that's a bad thing, right? I mean, when I got into mobile gaming, I was very passionate about mobile as a platform, but The games like Tap Fish were not games that I played. I wasn't a casual gamer. You know, I used to play, you know, casual games back when the Atari was around back in the day, and I liked more, you know, role-playing games, and we didn't even make those, right? But it was a market opportunity that we saw that, that was there, and so we decided to jump in. And so, you know, if you understand those, you can understand what drives a team to make decisions. And then the second part of that is expectations. You know, we had one partner once that wanted to build a really big company that sold for hundreds of millions of dollars because his first company had sold for like $50 million, which is pretty good, but in the VC world, it's considered, you know, a base hit, not a home run. And so he wanted to do a really big one and he talked about, you know, big hairy audacious goals, right?

Mm-hmm.

And the other 2 founders were myself and my brother and we had problems with our first company. We raised VC money and We ran into problems. I got kicked out as CEO. We ended up not making any money from that. We just wanted to build a small company and sell it for a couple million dollars. And we didn't find this out until after we had been running the company with him for a year or two, and that led to a founder breakup. And so having different expectations leads to a breakup between founding teams. A couple years ago, I visited 2 teams where the founders were breaking up, and it almost led to the death of the company. And I was like, what's going on? Didn't you guys know each other before? Like, in one case, they weren't even talking to each other, and I had to like sit them down and get, you know, be like kind of a moderator. And it turns out they were friends, you know, and that's when I realized, well, you know, starting a company with your friends is not a bad thing or a good thing. Like, I started a company with my brother and my best friend in college, but what often happens is when you're just friends, you don't know how well you work together. And you don't explore like the real underlying motivations. And so there's some worksheets in the book that you can kind of go through and say, if this happens, would you be happy? If you had to pivot out of, like in your case, Book Thinkers, right? I mean, you wouldn't want to pivot out and do an app that has nothing to do with books, right? Probably not, right? But some people wouldn't, some founders wouldn't care, right? And so just understanding, you know, one of my favorite questions I asked to an entrepreneur this week is, to a team of entrepreneurs and they had different answers. In one case I said, what if you guys raised $25 million in venture capital, you're in TechCrunch, you are like the toast of the town, and the whole thing gets to a very big valuation and you flame out and you end up not making any money? Would you be happier with that outcome or would you be happier to just sell the company for a couple million dollars and not get any venture capital and not really have anybody know who you are? One of the founders would have been happy with the second scenario, one of the founders would have been happy with the first scenario. So now you can see how that's gonna Divide decision-making. So it's important to understand. And so, you know, the myth founders start companies to make a lot of money isn't a myth. Like most myths, it has a kernel of truth, but that's not necessarily the primary motivation. It's important to understand what the primary motivation and expectations are.

I've seen this trip up a lot of people, and I've experienced it tripping up myself before. And so I think it's very, very important, like you're stressing in the book to have these conversations, to be open and transparent. And if you find yourself misaligned, then you need to work with each other to understand why that, why that happened in the first place. How are you going to move forward with the business? And yeah, you're right. Even misalignment can ruin a startup, even if it's doing really well. And so that's what you hate to see.

Yeah. And, you know, I tell the story of a company called GNIP, G-N-I-P. where the 2 founders started off trying to build middleware for different social networks. And, you know, at one point that wasn't working, so they decided to shift to the enterprise. One of the founders just said, well, I don't want to run a company that's selling— he was the CEO— like, I don't want to run a company that's selling to the enterprise, right? That's not why I started this. I like social networks and consumer stuff. And so he ended up leaving, and the other founder, who was the product guy or technology guy, he ended up having to take on the role of CEO. And it turned out to be a good thing in the end. The company succeeded and sold to Twitter for like $175 million a few years later. But you can see how, you know, that kind of misalignment will lead to a founder breakup. And so it's important to— if you know about it, then you can deal with it. But if you don't know about it till later, then it turns into a problem, you know.

Yeah, yeah, absolutely. Hey, Book Thinkers family, it is time for a quick word about our brand new mobile application, Book Thinkers Smart Retention. Now, we built this application because after polling our audience, we found that an astounding 94% of readers want to retain and implement more information from the books they love. Simply stated, many people are reading amazing books but are often failing to remember their biggest takeaways. It's a problem that I used to face. And our technology helps to bridge that gap. BookThinker's Smart Retention is one location that consolidates all of your biggest takeaways from the physical books, digital books, and audiobooks that you're reading. You could even throw your biggest takeaways from this podcast episode if you wanted to retain them. Once your information is in the app, you can access that information whenever you see fit. And for amazing books like the one that we're discussing today, you can actually turn on systematic reminders. And this is where it gets cool. Reminders reintroduce key information at specific time intervals that will help you maximize your retention of that information. This is called spaced repetition, and it's a technique that's used by the world's most effective learners. BookThinker Smart Retention is available today on both Android and iOS for $5 a month or $45 per year. We are committed to to helping you retain and implement more information from the books you love. And so to find more information about the app, simply search it on the App Store or Google Play Store, or you can go to www.bookthinkers.com and you'll see our mobile app tab. We display a ton of cool information there. Now back to the episode. All right, let's do one more myth and then we'll transition to a couple of other questions that I have. So in myth 4, you mentioned that a lot of entrepreneurs think that a great product and a big market are all that matters to potential investors, and that's not always the case. And so you're an investor, and I'd love to hear your take, you know, your take, number one, about that myth and why there is a kernel of truth sometimes but not all the time. And then also, what do you look for specifically?

Sure, yeah, and that's, you know, one of my favorite myths because it's It's not really a myth. It's true, right? You want to have a great product. I mean, that's kind of table stakes in a way. If you don't have a great product, you're just not going to be successful. But the myth is in the chapter on fundraising. And so, you know, it's raising funds and getting people to go with you on the journey. And how do you convince investors? And so a lot of entrepreneurs, all they do is they just talk about how great their product is and say, please invest in me because I got this great product. Right? Or they make the second mistake, which is this product is for everybody. It's such a huge market. Everybody needs this, which actually ties back to our very first myth, trying to build a billion-dollar company, right? And so investors, though, have a different priority typically on these things. And it's not that these things aren't important. So the market is actually probably the most important thing. But what's important is the stage of the market. Like, is this a market that the— that the investor believes is gonna be growing? And the reason why that's more important than the product is actually because the first product may not be the one that succeeds in the marketplace, right? And so I just told this example of the company called Gnip, G-N-I-P, which started in the social networking API space. Right? Their first product didn't work. A year later, they couldn't get a single social network to sign on to it. So it looked like it was a failure. But the market they were in, social networks, was just starting to explode. I mean, this was back in the early parts of this last decade, right? And you, you know, you had Facebook, Twitter, you still had MySpace, you had all these different guys cropping up. And turns out it was a good market. And so an astute team in a good market can actually pivot and create a second product, which is what they did. They created a product for enterprises to get access to that social network data, and enterprises were more than happy to pay for that data. And so this is why, you know, the market is more important than the product, and in many cases, the team is more important than the product. And when I say, you know, the team, uh, it, it's kind of hard to define exactly what that means. Right? Because as an investor, you know, I'm looking for a team that is sharp, but they all kind of are. And I interviewed a really well-known VC named Randy Komisar, who's at Kleiner Perkins, and, you know, he wrote some pretty famous books about VC investing. And so, but he said that he likes to meet a team multiple times, and he throws up objections to them. Not because the objections are that important, but he wants to see how they react and whether they learn from what he said or whether they just dismiss it. Nah, that's not important, right? And so he wants to see if they, you know, pull that information in. And I like to use this analogy of the middle way. Like there are some entrepreneurs who are too much of a pushover. Entrepreneur says, you know, Nick, you're doing this book thinkers thing. You should just get rid of that and do audiobooks, right? And the entrepreneur says, oh yes, Mr. Investor, if you'll invest in me, I'll do everything. I'll change my entire business, right? You don't want— that's one extreme. The other extreme is a team that says, okay, that's a stupid idea. I don't even want to listen to you, right? But you want an entrepreneur that has conviction about their idea, but they really understand their market and they're open to getting new feedback about the market, right? And so in this case, it might be, well, audiobooks are actually one of the areas that are expanding faster than any other part of the book industry. So is there an audiobook strategy that's worth, you know, incorporating into Book Thinkers or not, right? And that's the kind of thing that as an investor I would look for. Not that they have to do that, but are they taking the feedback seriously and they're considering it, the new data, and then they're using that data to make decisions moving forward. And so that's why the team is very important. Now sometimes there's an entrepreneur who— an investor I feature in the book, her name is Sarah Downey, and she wrote a great article about why investors say no and their founder-related reasons, you know. And one is, you know, one thing that's a kind of a red flag is if you've got a CEO and a president in a 2-person company. It's like, well, you know, why do you need a CEO and a president for a 2-person company, right? Is there a power struggle here? Is there something dynamic going on behind the scenes that you don't know about, or if one founder is dismissive of the other founder's opinions in a meeting with investors, well then how's that founder gonna be, you know, when the investors aren't even around? So there's lots of team dynamics. Sometimes an investor will say, you know, there's too much competition, but what they really mean is they don't really believe this team can take on the competition, right? But they're not gonna say, hey, I don't think you're good enough. They'll just say there's too much competition. is too hard, right?

Mm-hmm.

And so that's why the team actually is more important than the product in many ways. Now, this changes over time, right? So seed investing, there's what we call pre-seed investing now, there's seed rounds, there's Series A, B, and C, and you raise more money over time. And as you move forward, I remember telling this one entrepreneur years ago, it was an enterprise software company, and I said, well, you got to have some traction. You gotta have some, some beta sites, right? At least. He goes, ah, that's all bullshit. I don't need traction. I've got a patent, right? My product is so great and I just need one, one beta site and that's good enough and everybody will give me millions of dollars. And, you know, he wasn't able to raise millions of dollars and the company eventually failed. And the reason was he just couldn't show any traction, right? And so as the company moves from pre-seed to seed to Series A, the number of other people validating the idea, and the best way to validate an idea is to have customers paying for it or have lots and lots of users using it for free, but they use it every day. So those are the 2 ways to validate those. And so investors look for traction, and over time that becomes the most important thing. None of this stuff, other stuff matters in a Series B, right? It's just about what are the numbers and is it going up at that point, you know.

Well, I love it. I love having you expand on those, and a lot of those examples are in the book, so So there are— are there 19 myths in the book?

I think so, yeah. And then there's a whole series of bonus myths, which you can go to my website zenentrepreneur.com and download. And there's another 5 or 6 bonus myths that I couldn't fit into the book. And so I put them in this kind of free downloadable PDF on the website.

Well, for everybody listening, if you're interested in learning more about those myths, definitely get a copy of the book and then check out the bonus myths. Now let's Before we jump off, I want to shift the conversation over to startup accelerators. And there are a lot of entrepreneurs in the audience, but there are also some common listeners that aren't entrepreneurs. Maybe they're employees or they're intrapreneurs. But for people who aren't, they don't fully understand what an accelerator does. Can you talk a little bit about the concept of accelerators?

Sure. So, you know, accelerators started actually in 2005 in Cambridge, of all places, at least modern accelerators, with a company called Y Combinator. And it was started by a gentleman named Paul Graham. And so they ended up having a program almost like an academic program for a number of weeks. I think it was 12 weeks. And the idea was people who, who had a business concept or idea or were just starting would learn about how startups work and they would refine that idea. So it was almost like a An educational program, but there was an investment component. And so the accelerator typically will invest a little bit of money in the idea, giving the entrepreneur enough runway to basically try to validate the idea. And then at the end of the accelerator, there might be a demo day which has lots of other investors coming.

Mm-hmm.

And so, you know, it's almost— originally the idea was to take a half-baked or partially baked idea and turn it into a fully baked idea. And what's happened is accelerators have become very successful. I mean, they've kind of become the first part of the pipeline. So I mentioned pre-seed, seed, Series A. There was no such thing as pre-seed back in the day. When I started, we used to raise money from— the first money in the company was usually from what we jokingly called the 3 Fs: families, friends, and fools, right? Who were the angel investors, which is kind of what I do now. But the pre-seed investors— the accelerator has taken over that a lot, and oftentimes an accelerator will be the first amount of money. It could be a small amount of money, it could be $20K that an accelerator puts in. Some accelerators don't put in any money. Some accelerators, you know, put in more. What's happening now is it's changing. Some accelerators are starting to put in more money, invest at higher valuations, but really the goal of the accelerator is like when I did my very first company, I mean, we had no money. We literally had no money. We would go to the store and buy a laptop for a QA machine and return it within 30 days so that, you know, we could go back and buy another one. And so we had to get like $5,000 from my co-founder's parents, you know, to go to our first conference where we launched our first product. Luckily, the product was successful in that we were able to pay back the $5,000 right out of the You know, right out of the, the proceeds of what we sold floppy disks at the time. We sold enough right at the conference to do that. But, you know, so to have enough money to buy some equipment and do little things, but also to have mentorship. So usually accelerators, you know, there's a lot of them out there now. You know, there's PlayLabs we did at MIT for a couple of years. I'm actually taking a break from it right now. There's 500 Startups here in the Bay Area where I'm mentoring people. And now with this current COVID crisis, they're all going remote. So, you know, that was one of the obstacles to attending an accelerator was you had to move to the city to be there. And now since they're all virtual anyway, I think it opens up a whole new level of accelerators. But there's also many, many more out there now than there were before. And many universities have their own accelerator, at least one. You know, Berkeley has one, Stanford has the StartX accelerator, which is not quite within the university, but it's like just down the road, etc. And most universities have some type of accelerator programs.

And so you're taking a break from PlayLabs right now?

Yeah, so I took a break, you know, to focus on my writing. That's why I was able to get Simulation Hypotheses out last year and do Startup Myths and Models this year, and then kind of considering, you know, what I want to do next. Then I'm helping out different accelerators and mentoring startups.

Awesome. Well, the last— well, probably the second to last thing, the 4 quadrants of hiring. So we'll skip to something that I read in the middle of the book. I thought that was fascinating. And you said that it's a tool that was introduced to you, you wish you had it, you know, since day one. But I'd love to have you explain what the 4 quadrants of hiring is.

Sure. And, you know, I got it explained to me In my first startup, but it was years into the first startup after I had made many hiring mistakes. And then it took me, I'd say, another startup or 2 before I fully appreciated, you know, what that meant. And so the 4 quadrants of hiring is one of the tools or models introduced in the book as a way to think about, you know, whether to hire someone or whether to fire someone as well. So for new employees. And for existing employees. And so the way all these 4 quadrant models work is there's 2 axes, horizontal and a vertical axis. And if you have 2 axes, you naturally divide up into 4 quadrants. And in this case, one of the axes is experience, right? And so one of the myths, I think the myth that I introduced this model in the book, is hire the most experienced people you can find.

Mm-hmm.

And I used to think that was true. Like, I just hired the guy with the most experience. But then I found that wasn't always working. And sometimes the people with the least experience ended up being the best employees and the people with the most experience ended up being the worst employees and they ended up being people I had to fire. And so I was thinking about this because it was counterintuitive and, and, and that's when, you know, I got introduced to these 2 axes. So the one axis is experience and the other axis is called cultural fit. Now that's a little harder to to pin down. But by cultural fit, it means how well do they adapt to the environment of the company. Now, cultural fit doesn't mean, hey, do they hang out for, you know, beer on Fridays, right? That's kind of the superficial definition of cultural fit. What I mean by cultural fit is, do they have the right mindset? You know, are they willing to learn something new? Like in a startup, you can't say, you know, that's not my job. I want to do this other thing. Well, the customer needs this and we only got 5 employees. You're the only one who could do it. Or, I'm a sales guy, not a marketing guy. I don't want to do marketing. It's like, well, you're the only guy we have in sales and marketing. So therefore you have to do sales and marketing, right? And so people who have a lot of experience end up being a bad cultural fit. So if you think of these 4 quadrants, and the same applies, you know, to employees who are already working for you. You can replace experience with competency. How good are they? And so the upper right quadrant means that they have a great cultural fit and they have good experience. Now, those are people you want to hire, right? I mean, that's absolutely people you want to keep. In the lower left, somebody who has low experience and is not a great cultural fit. Well, that's kind of obvious. You don't want to hire that person, or if you have that person, you want to fire that person because Because they're not very good and they're causing you problems, right? But it's the other 2 quadrants that are always the most interesting in the 4 quadrants models. Like there's always 2 obvious quadrants and 2 non-obvious quadrants. And so, you know, turns out the guy who— the guy or gal who has a lot of experience but is a low cultural fit, these are the guys, the people that I was talking about who are like, I don't want to do X. I don't want to do Y. It's not my job. They're used to being in big companies. And usually you hire them, when you hire them, you ask them, well, you've only worked at big companies. Are you sure you want to work at a startup? And they say, oh yeah, I want something with less structure. It'll be nice to not have all this bureaucracy. But then you find out that they relied on that structure.

Yeah.

We had a guy, we hired him from Zynga, which is a really well-known game company. They did FarmVille, which is very popular. And he said, yeah, I want to be at a smaller company. And we made him our lead engineer. And he said, well, I just want to build these tools for the games. I'm like, well, look, we only got 3 engineers. You can't just build tools. You have to build the games, you know? And so he just didn't like the lack of structure, and so he tried to impose a structure based upon what he did at Zynga, where you had 20 game developers, 5 guys developing tools, you know, 10 guys doing QA, all within one, you know, one game. And we just didn't have that. And so, you know, somebody who has great experience And low cultural fit causes problems and headaches for the entrepreneur. And that's the person you don't want to hire or you have to let go. On the other hand, somebody who has great cultural fit, who's willing to learn but doesn't have any experience, is actually good for the startup because then they're willing to learn different things and do things in different ways. And they'll just go out and learn what they need to learn and they'll just help out in, you know, customer support, QA. Some of the best employees I've had have come Without a lot of experience. Now that's in the early days of a company. Over time, you need to get people with more experience in specific areas as the company grows bigger, right? In the early days, we used to always have QA and support as the same person. Like, you know, you got to test it, and then when a customer has a problem, you got to tell them how to fix it. Later, we had a QA manager, we had a support manager, right? It's different as the company grows and things become more specialized over time. But the 4 quadrants of hiring still applies, you know. when you think about whether to hire somebody or fire somebody. And I think it's one of the most valuable tools that I've learned over the last few decades on how to think about employees. And the fact is, I still make mistakes on this. And this doesn't just imply to— apply to startups. Like, I was gonna hire an editor for one of my books, a new book that I'm working on, which is a sequel to my first book, Zen Entrepreneurship. And, you know, someone recommended her. And, you know, she just didn't seem— she seemed to have a lot of experience because she worked for a really well-known publishing company, but she didn't like answer my emails right away or she'd say little things like, I'll, you know, I'll get back to you, I'll call you later today or I'll send you something more detailed later today. And a week later she'll finally send me something and I realized, you know, she's just not a good cultural fit. Like she's just too lax for me because I'm used to answering emails like the same day at least and if something's gonna be late, you know, but I didn't listen to that. I didn't even take my own lesson. I hired her anyway because of her experience. Right? And because of where she had worked. Turns out she was supposed to do the project in a month. Within a month, she hadn't really even started and didn't tell me until afterwards. And turns out the cultural fit was causing the problem, and she has great experience, so it wasn't that. And so, you know, it's a hard lesson, and it's one that, you know, I've taught to many entrepreneurs, and sometimes I forget it myself. But we can apply it, you know, to really any professional endeavor, not just to startups.

Well, we had an amazing conversation today, and I know a lot of people are going to find a lot of value in this. And so for more information about you, where should people go? What should they do?

So they can go to my website, which is zenentrepreneur.com, and from there, there's links to my blogs on Medium and articles I've written elsewhere. You can download free chapters of Simulation Hypothesis, and you can download the bonus myths for Startup Myths. And of course, the links to the Amazon books, you know, are all there as well.

Awesome. Well, appreciate your time today, and we'll talk again soon, hopefully for the follow-up to Zen Entrepreneurship.

Sounds great. Thanks for having me on.

That is a wrap. Thank you so much for taking the time to listen to this week's episode of Book Thinkers: Life-Changing Books. To discover more books and more mentors and more resources that you can use to achieve more and live better, make sure you check out our website at www.bookthinkers.com. There you'll find links to our mobile application, more podcast episodes, our shop so you can get some Book Thinkers swag, and our socials. With that, I'm signing off and I'll see you for next week's episode of Book Thinkers Life-Changing Books.