Euphoria over Snapchat parent Snap Inc. has diminished since the IPO, but it is still trading well above where the shares were initially priced, with a market cap of $23 billion on Tuesday. Not snoozing on that perch, Snap opened the second of its Spectacles stores just blocks from its Venice office last week as part of its new, even more public, life.
For startups that would like to taste a snippet of Snap’s success, Silicon Beach veterans say it’s not just about one boundary-busting idea and a bold investor.
Crain's asked three operators of Los Angeles technology accelerators and incubators to name some of the most crucial, and often underappreciated, requirements for a startup to survive and prosper. Those leaders include:
- Bill Gross, entrepreneur and CEO of Idealab, a technology incubator founded in 1996 in Old Pasadena. Idealab has created more than 150 companies with more than 45 IPOs and acquisitions.
- Erik Rannala, co-founder and managing partner of Mucker Capital in Santa Monica. Mucker is typically the first institutional investor in a company and also runs a low-volume, high-touch accelerator, MuckerLab, with 10 to 12 companies a year coming through the program.
- Noramay Cadena, a Boeing engineering veteran who is also founder of the Latinas in STEM Foundation. She co-founded Make in L.A., a predominantly female-led hardware accelerator in the San Fernando Valley that helps entrepreneurs launch technology products through a four-month concept-to-market program.
Gross has given TED talks and other presentations on factors that are most critical for a company’s success. Perhaps the most obvious is the idea.
“Snap definitely had a big idea,” Gross said. “They came up with something that really met a need that many people doubted even existed. I’ll call it, discovering a truth that other people don’t see. That’s very rare.”
But a great idea doesn’t guarantee success. Nor does gobs of funding or a sound business model. Those two often lie near the bottom of the hierarchy of needs for a startup, our experts said. We’ll start there and work our way up:
“They spend on Salesforce and marketing campaigns or big offices and long-term leases before they have product-market fit,” Rannala said. “There’s an age-appropriate amount of capital at different stages that’s really for their own good.”
Having too much can lead to companies getting sloppy and overspending.
“It’s the kiss of death when they’ve spent a whole bunch of money and haven’t made progress; that’s a quadrant you don’t want to be in as a startup.” The opposite bodes well: “When you have made a ton of progress on a shoestring.”
A business model: Snap didn’t have a clear plan for generating revenue for a long time, Gross said, which reflects a tolerance for uncertainty that can fuel innovation.
“I might even argue it’s why startups can succeed,” Gross said. When a leadership team commits to a certain course, which typically occurs when the company has some success and grows, “what starts happening is people start protecting revenue streams rather than trying to invent new ones,” Gross said.
He cites the classic example of when Apple was debating features to include in the first iPhone, and the iPod division resisted adding music, understandably—it amounted to giving away a free iPod with every phone. Steve Jobs decided he was willing to cannibalize iPod revenue for a bigger gain.
“Very few CEOs would do that,” Gross said. “The guy who brings in that revenue will threaten to quit, and the CEO has to stand up to that, and the CEO will be too nervous.”
Such protectionism is “a terrible ossifier,” Gross said. The opposite is “the only thing a startup has going for it,” he said. “It has less money, less people, less brand awareness; what it has more of is the ambition to make something new.”
Snap suddenly has a much bigger profile. But two of the founders are still there. “I will put in a small plug for founder-led companies,” Gross said. “They can resist that [ossification] the best.”
Execution: Brilliant execution isn’t just about savvy strategy, it’s also about basic accountability, both of which fueled Snap co-founder Evan Spiegel’s success.
Accountability is foundational to Make in L.A., an early-stage hardware accelerator with entrepreneurs ranging in age from 22 to mid-30s.
“One of the first ideas we put up on a whiteboard when we were throwing spaghetti at the wall was, we wanted to focus on the entrepreneur first, the business second and product third, and that meant we were going to focus on leadership, culture and mindfulness,” Cadena said. "Beyond the stigma of the young entrepreneur, we wanted to make sure we were developing strong, purpose-driven and ethical human beings.”
As Make in L.A. began with its first cohort, founders were showing up late for sessions with mentors, without having done the assigned reading, Cadena said.
“After a few sessions we had to have a big timeout and say, ‘What’s going on?’”
The answers reminded Cadena of her teenage daughter: There was traffic, I got caught up in something I was working on, this meeting didn’t update on my calendar.
“Traffic in L.A., of course, can be ridiculous, but we wanted to protect our credibility with people volunteering their time to come in, and we wanted to set our founders up for success,” she said. “If they’re late to an investor meeting, not completing something on time, taking too long to respond to emails, that really affects their ability to close a deal.”
It took founders aback the first few times Cadena and her partner told them they owed an apology to a mentor.
“It takes a very strong person to be able to react to that without impacting the relationship,” Cadena said. “But they have grown a lot and are thankful for that, now, especially founders who came in from different countries who were used to different styles of leadership.”
Make in L.A. also has every team self-grade with “grit scores” each week, using a simple rating of minus, zero or plus, as well as tracking their “zero-dollar day” — when they run out of money — to serve as a motivator.
“If someone says, ‘My team is a plus [for grit], we look around the room to make sure there’s agreement. Maybe someone says, ‘Really? We didn’t see you here for two days straight.’ Then we start a conversation,” Cadena said, “and it’s good to see them challenge each other on how well they’re maximizing use of time.”
Evolution: Near the top of the heap of essentials for success, Rannala said, is a desire and ability to iterate. “Snap has done this, and it’s something you have to continue to do, especially in a social consumer business like that, because other folks like Facebook are building features and functionality that are effectively competing against Snap.”
Facebook, for its part, is almost unrecognizable relative to how it started out over a decade ago, as an offering for college students. Compare that with Twitter, which has been criticized for not living up to its potential. “Part of that criticism has been that they haven’t really evolved the product,” Rannala said.
In meetings, Mucker Capital keys into an experimental mindset in founders.
“It’s not just evolving, because that presumes you’ve figured something out, but even to figure something out, you have to go through an iterative, experimental process,” Rannala said. “Often, the initial product or business is not what actually will end up working or satisfying market demand.”
PayPal watched how consumers were using it, first to send IOUs to one another on Palm Pilots, then to pay for transactions on eBay, to spot and fulfill a need for an all-purpose payment platform.
“PayPal, now a huge company with millions of users, the way to pay someone on the Internet; until it isn’t,” he said, citing Venmo, which appeals to younger users and has a social element.
PayPal quietly acquired it in 2014.
Timing: A couple of years ago Gross performed an analysis of 200 companies, 100 that were Idealab companies and 100 that were not affiliated with Idealab. He weighted each of his five factors according to the role they played in the company’s success or failure.
What he found was that timing accounted for more of the difference between failure and success than any of the other criterion, including the idea. That’s not what he expected to conclude. But there’s evidence to support it:
“Instagram, for example, was invented right after the iPhone came out and people started taking a lot more pictures because everyone had a quality camera,” Gross said. “These guys jumped on the timing. They didn’t necessarily know it, it just happened to be great timing.”
“Uber was a good idea; what made it a great idea was that the recession had hit in full force, and many people were out of work and there was great demand to make more money, and that helped them get more drivers,” Gross said. “Would that have worked four years earlier or four years later? I don’t know.”
Snap, too, launched when smartphone penetration was high and there wasn’t an app for what Snap did, Gross said.
By contrast, Idealab began working with an online entertainment company called z.com in 2001.
“We saw e-commerce succeeding, and we predicted entertainment content would be next. We were right, but we were five years off. There wasn’t enough broadband penetration to watch good video content. Too small of an audience could appreciate it,” he said.
The company went out of business in 2003, and in 2004, broadband penetration crossed 50% in America, reducing the need for additional plug-ins to be able to stream video satisfactorily. Cue YouTube.
“YouTube didn’t even have a business model,” Gross said, “but it was beautifully timed.”
Timing isn’t everything, Gross said. “All I’m saying is people underrate how important it is to make sure the world is ready for your idea.”