Startup studios, company builders and parallel entrepreneurs > Insights from Bill Gross of Idealab on building successful startup studios

Insights from Bill Gross of Idealab on building successful startup studios

Bill Gross is arguably the grandfather of company builders and startup studios, having founded the enormously successful Idealab in 1996, which has built over 150 companies including 7 with billion dollar exits. For background see our article on 10 leading startup studios successfully growing multiple ventures simultaneously

In this video Bill Gross shares distilled insights from his decades of company building. See below for a summary and a transcript of the segments relevant to startup studios and company building.

Summary ideas

Idealab helps other companies grow and make a big impact in the world. The ideas for the companies they work with usually come from the inspiration of the company’s employees, and they welcome ideas from everyone.

It follows the philosophy of “lean startup” which emphasizes testing ideas with minimal work, such as creating a website to gauge interest in an idea before investing time and resources into developing it.

Understanding demand for a product and delivering it are the hardest parts of the process. They always try to iterate and make changes to get to the right product.

Idealab’s model is to test ideas and find a CEO to lead the company. They pay potential candidates to work with them for a period of time to see if they are excited about the idea and if the test works. Sometimes, if the test doesn’t work, they pivot to a new idea or come up with a new one while working with that person. The company is always looking for talent and the bottleneck is finding people who fall in love with the idea.

Gross learned that the idea has to become the CEO’s, and that they have to be willing to let the idea shift and become the CEO’s idea. It’s more of an art than a science and requires experimentation to get it right. They look for people with integrity, passion, entrepreneurial verve, storytelling ability, and money raising ability. They also prefer people who have had a failed startup because the lessons from a failed startup are more valuable than a successful one.

Idealab starts with 100% ownership but immediately gives at least 50% to the founding team. They provide initial capital and usually have 6 months of runway. They own a minority stake and help the company raise money as soon as possible. They want the company to have their DNA and imprint on it but ultimately want it to be the team’s company.

Transcript

It’s a technology incubator. So it’s often referred to, but really, we’re a startup studio. So we brainstorm ideas from scratch. Look for big problems in the world that need technological solutions. When we come up with something that we think is promising, we prototype it. And we think it’s promising enough to form a company, we spin it off for a brand new company, recruit a team, put it in the seed capital to get started, and then help it grow.

The companies usually stay here for anywhere between one two, and even five or 10 years, as we helped grow the company to make a big impact in the world. And these are mostly my ideas, I would say 95% of my ideas, but all around the building where we welcome ideas from everywhere, they usually have some touch of mine in there, I’m usually going to be the inspiration to help formed a company to help raise the money. So it has to be some passion of mine. But we welcome ideas from every corner of the company.

Well, we always are trying to test things with the minimal amount of work. So in the whole lean startup philosophy, you want to have a hypothesis, and you want to test it, preferably without writing a line of code and without building a product. And you can make a website to allow you to sell your idea posted. If people come and are interested, you can say well, I’m sorry, I haven’t made it yet. But the fact that you’re interested might make me Now go make it.

And we really love doing tests like that just to try and find out what the the hardest thing is having demand for your product and understanding what the demand for your product is. Obviously, you have to deliver your product. Maybe that’s really the hardest thing. But but very often you can make the wrong thing. And you always have to iterate to get to the right thing. But if you can do some of those iterations at no expense, just by understanding the proposition, we always try and try and do that.
One of the earliest stories was Cars Direct. So this is a classic story of ours, where it was 1998 and I thought I was going to buy a car and I went to the auto mall in Glendale to buy a car and the dealership gave me the runaround and told me the car I wanted you can’t get that car literally can’t get those features, let me call around dealers. He was trying to sell me something, it was on the lot. And I knew what I wanted. And I was really frustrated with the process.

Of course, everybody’s gone through some experience almost like that it’s gotten better, but it’s still pretty bad. So I thought, why can’t you go to a website and buy a car online, configure it the way you want. The price shows up transparently. You make a down payment, the car shows up on a flatbed truck, you pay the balance as your car you wanted. And I don’t care about the weight. I want the car I want and I want to know, run around. So I had that idea back then.

But how are we going to test it how we can see and everybody said, Bill, you’re probably the only one who wants it that way. Most people are willing to go to the dealership, I said, Well, I think there’ll be other people like me who want to do it that way. So we set up a website called Cars Direct, where you could go and configure a car and get it exactly what you want. And then we would deliver it to you.
But we weren’t ready to be in business yet. So we made the website so that no matter what you typed in, we were just going to go buy the car at the Monrovia Auto Mall and drive it to you. But make it look like it was all working in the background kind of Wizard of Oz in the background running around to get your car. And when we finally put the site live after like 90 days of just prototyping, getting the basics ready.

We turned it on on a Thursday night and Friday morning when it came in. The next day, I found out how to do what happened. And they said we sold four cars last night. And I said hurry up and turn the site off, we’re gonna lose money on each of these cards, we lose 15 hours by buying them at retail and selling them an invoice price. But we learned that people will put a full $1,000 deposit sight unseen on a car that they want. And let us deliver it later.

That was the evidence we needed to know to build the company because now we had to go secure supply and demand, build the whole configuration website, build out all the relationships and build all the economics to make it work. But now we knew people will do it for people unaided will give us $1,000 deposit on a credit card in one night. That was a bit. So that was the ultimate way of finding out is there something there without having to go spend all the money and then we were able to raise money now because not we proved customer demand. And that’s basically we try to do that with every company if we can some variation of that.

DirectX grew to be a billion dollar public company, and is now part of a company called Internet brands. It was acquired by a company called Internet brands. Product Market Fit is the most amazing thing when you had it.

You know, companies that have product market fit like Facebook had Product Market Fit early on. Early on, people were clamoring to get in. Remember, Facebook was closed down only to colleges at first, when it first started, right. And people were clamoring to get in? Well, that’s the ultimate product market fit when people are tearing down your doors to get what you what you have.

Well, that is the elusive thing for a startup. And experimenting around the edges to determine what it’s going to take to get there is almost as valuable as the technology itself. Because the technology itself, if you don’t have product market fit won’t go anywhere, you can’t push something onto somebody, you can’t, you can’t spend enough marketing dollars to convince someone to take your product if they don’t fundamentally want it. So coming up with the actual want and need is very valuable part of experimentation and the early stage of startup.

So we always have to find a CEO. So I could either be CEO of the company myself, but I can’t scale to do that. So our whole model is to do that testing, get some confidence in that idea. And then find a CEO, as soon as we do that testing with a possible CTO candidate. So we’ll be looking around for people who may be excited about the idea, we’ll bring them in to work with us, we’ll pay them to work with us for some number of months while we’re doing those tests, both to see if they get excited enough about the idea. But to see if the test works.

Sometimes at the end of 30 days, it’s not working, maybe we’ll pivot to another idea. Either a slight variation, or a full U turn. I mean, we might we might come up with a whole new idea along the way, while working with that person. But we’re constantly looking for people, our bottleneck is talent, not number of ideas. I got a spreadsheet with IDEA day in it, you know, it goes back 1000 ideas we could we could do if we had more people.

So we’re always looking for people, but they have to fall in love with the idea. The biggest thing I learned probably because we’ve been doing it a lot for 22 years now took me 10 years to learn this painful lesson. The idea has to become the CEOs, they can’t work on my idea, they can only work on their idea, the same way that only I can work on my idea.

So the idea has to get grafted, transformed and become theirs, I have to let the idea shift enough that it really is theirs. And I have to be willing to give a little bit and let it not be my full vision. But as long as my mic peut my initial passion is in there and we’re solving the problem I set out to solve then I can be happy, but then it has to become their idea. So we have to find people that we can graph that into it’s almost like a trend idea transplant. And that has to happen. And that’s a more of an art than a science. And you just have to experiment to get that right.

But we’re always looking for great people who have integrity and passion and entrepreneurial verve and storytelling ability and all the money raising ability all the things you have to do to be a successful entrepreneur, but then have to fall in love with our idea
So every conference I go to everywhere I go, like the conference I’m presenting at Yeah, I look for people who just come up to me afterwards and say, I’ve always dreamed of doing a startup or I’ve done a startup, it didn’t work out. In fact, we really love people who have done a startup that didn’t work out. I think the lessons from a failed startup are almost more or almost better than the lessons from a successful startup, if you if you paid attention to them.

So you can you can be arrogant enough and have a failed startup and think that it was none of it was your fault, and have no accountability. And think that it wasn’t, you know, take no responsibility for the decisions you made. But if you do, we actually think that’s almost superior to having a startup that maybe was just lucky, but succeeded, because then you might not have learned some of the tough, tough times that you have to go through because every startup really is going to have tough times, it never is just smooth sailing the whole way. So we want people have experienced that.

So it starts out on the very first day, we own 100%, because it’s our idea, but immediately, at least 50% goes to the team. So the founding team that we recruit is going to own at least half the company, if not more, so we’re always going to end up being very quickly, a minority shareholder. So we only want to be a minority shareholder, we want it to be their company. We want to have it have our DNA and imprint on it. And we want to help the company succeed. But we want it to be their company.

We’re putting in the initial capital. So usually there’s there’s six months of runway in the company when we start it. And then we’ll own a minority stake. And then we’ll help the company raise his next million or $2 million, as soon as possible. Usually, within six months or a year, maybe even within one month, sometimes the company has so much demand that we can raise a million dollars or $2 million quickly. And then the company has a year of runway in the bank. Our goal is to get the company to have a year to 18 months of runway in the bank as quickly as possible. And we help them do that. Sometimes the CEOs have raised money before. And they can do that on their own. Most of the time, we’re helping them do that.

Most of our companies have exited either from acquisition or IPO. So out of 150, we’ve had 45, IPOs, and acquisitions, we’ve had 60 failures. So we’ve learned a lot from the failures. We have 45 operating companies right now. So 90 companies have made it and 60 have failed out of the 150.

But all of them are looking to either get profitable, so they have standalone profitability. So we’ve had some companies are just making profits for years and returning money to shareholders that way, returning money to employees that way. But many companies are gonna get acquired by a bigger company at some point, or if they can be independent, go public on their own, a lot of the failures are from companies that were too early.

A lot of the failures are companies that didn’t have product market fit. So a company that that actually succeeded, but maybe not to the full hope that we had was one that was just way too early. Everybody knows Alexa, now I have an Alexa in my house. Google is getting really, really good with their home product. They’re advertising heavily on the World Series, how you can ask almost any question and then just get an answer right from

We had a company in 1997 called answers.com. That was trying to do that. We were trying to do ask any question and just get the answer. And the capability to crawl the web wasn’t good enough yet. Voice Recognition wasn’t good enough. Yet. Natural Language Processing wasn’t good enough. All those things. So we had a pretty lame product. Turns out the company still had a successful exit. But it was not a billion dollar exit.

It was we were just the technologies weren’t in place to make that happen. Another company we had that failed completely. But it was way too early, was a company called z.com. So we had a lot of successful e commerce companies in the late 90s. And after all those companies were succeeding cars, direct toys.com youtube.com cooking.com, we had a whole bunch of companies that tickets.com grew into Ticketmaster. So we had some really great successes. I thought next thing was gonna go online is entertainment.
And we started this entertainment company called t.com. It was sort of like funny or die. It was it was a compact comedy, great shorts. And we raised $10 million. And we signed Chris Rock and Adam Sandler to make exclusive content for us. So we had everything going for us.

But it was 2000 2001. Only about 20% of America had a broadband connection. So most people still had dial up. Flash hadn’t even been invented yet. So to even get a video to play in your browser, you had to install these weird codecs and do all this stuff. So it was terrible. We had this great content that nobody could watch. So the company eventually failed in 2003 2004, the Flash plugin was invented 2005 YouTube happened. We’re like we missed it by two years, like you’re so close. But what we should have seen was that and by 2005, broadband penetration crossed 50% in America.

So what we should have seen was, we had a great idea. It’s too early. Let’s slow down our spin rate, make it $10 million last five years instead of three, and we would have made it so a lesson that I learned from that That is the lesson I often share about timing is, it’s really important to look if you have a product that people like.

And it’s that, that you have product market fit, but you don’t have enough of a take up rate. Maybe there are other factors in the world that need to develop more that you can’t force that you just have to wait for. So you should make your budget plans appropriate for the time duration that needs for your company to succeed. And we really try and do that I’d say, of the 60 companies that failed, 30 of them are because of that. They raised their money, they were so excited about their market, they said I gotta hurry up and build my marketing and grow my get more customers fast.
And what they should have done was pace it better, lasts a little bit longer, wait till the market is ready. And that is a painful lesson because that means you actually had the product market fit, but just spend your money too fast. The other 30 companies failed because they didn’t have product market fit, just making the wrong thing, making a thing that people don’t like, and not iterating fast enough, I mean, not iterating, to change to what the customers are saying, like you really have to listen to your customer.

If your customers are not taking what you make, and you sit there and think, Well, they’re wrong, I’m right, that’s never never the case. They’re always right, you’re always wrong. And yet, there’s very often you can iterate just a little bit to adapt what you’re making to what they really want and then succeed. And companies often are just too strong willed or you know, not listening enough to make that change. And that’s a shame too. But all of them are a shame. I mean, every company doesn’t make as a shame. And every one of those failures, we have used to make ourselves stronger.

So when we start a new company now, what do we do to learn from that? Well, one, we start fewer companies, by pushing them further on a product market fit on a timing scale, before we even fund them. So we set we set them off out of the gate with a better start by using those lessons. But then, when the company is facing some of those challenges, we really, really push the CEOs of the management team to listen to the evidence, you know, pay attention to that evidence and adapt to it. And that helps that helps us success rate.
So our batting average has gone up, you know, a batting average going up maybe from still only above 500. But we used to be batting maybe 250. And now maybe we’re batting 666, you know, whatever third company has failed, instead of four out of five fail, or three out of four are failing. And that’s great. We’re really happy because it really is painful to close a company after you put all that hard into it. And for all the employees who put their heart into it and all that. One great thing about Idealab.

And the structure we have is if a company doesn’t make it, very often we can start a new company with those people different ideas or pivot to something different or there’s other companies around the building that want to hire those people. So it doesn’t necessarily mean full loss of jobs. But it is really painful to have loss of jobs.