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I’m fond of saying that the best companies in the world are built, not bought. That’s our investment thesis at the end of the day. I’m equally fond of entrepreneurs who are in it to win it, to build something. If you’re just in it to flip the sucker, your chances of success are low.
Building for the long haul is really hard, and many decisions we make actually push us toward short-term outcomes. Let’s face it, we live in a short-term world, so if a founder can think and act for the long term, it’s probably a source of competitive advantage. Building for the long haul is a big topic that I think comes down to a handful of items: Delaying gratification and focusing on a powerful fit with customers, employees and investors.
And if some of this seems remedial … well, that’s because it is. Hear me out anyway, because in my decades as an executive and investor, I’ve seen smart people and smart companies miss this “basic” stuff all the time.
Delay Your Gratification
Delayed gratification is not part of our culture. The problem is, if you can’t delay your gratification, there is no way you’ll ever do anything special. You can’t shortcut the 10,000-hour rule. We have to persist and work through the drop in life’s J-curve before we can accelerate. I once interviewed a Stanford computer-science whiz and asked him to share with me what a perfect career could be for him. He told me he wanted to spend two years each at four different startups, learning as much as possible and creating a diversified portfolio of stock in the process.
Are you kidding me? I asked him about career thinking, and he told me about his personal portfolio theory. Pretty easy to see that he wasn’t a fit for the mission I wanted to go on with him. People who have a two-year horizon for everything they work on are never going to build anything great. Sometimes they don’t have enough grit to tough it out and keep pounding the rock. Sometimes they’re fooled into thinking that they can get rich quickly and go on vacation for the rest of their lives. Founders, employees, investors and partners can all fall into this trap.
Building for the long term is really freaking hard, okay? It’s supposed to be hard. If it was easy, everyone would do it. But the payoff is huge. If you can build a company for the long haul with people you care about, there’s no better life.
Find the Right Customers
If you’re going to build for the long haul, you have to start by setting a high bar for those first customers who shape your product.
Your first customers need to be a good heuristic for what the market wants. If what’s good for them will be good for others, proceed. But don’t get tricked into working with a customer that pulls you in a direction that doesn’t feel right.
Back when Rackspace was still a small company, we had the opportunity to do a deal with a huge Japanese automaker you’ve definitely heard of for $100,000 per year. The sales guy was ecstatic about crushing his quota with one sale. Everybody was pumped about landing the sexy customer with the household name.
Then they sent us their contract, which was something like 200 pages long. I could see the legion of lawyers descending upon on our company and pounding on each of those 200 pages. Just like I wouldn’t marry a person with a 200-page prenup, I decided this customer just wasn’t a fit for us. On top of that, we weren’t ready to pursue enterprise customers then, so we wouldn’t be building any capability by landing that big logo. It was just ego for us.
As tough as it was for the capitalist in me to do, I killed the deal, and the lesson stuck with me: The only customer we should want is one that fits us. One who we can serve well and who will be a loyal customer for years.
Find the Right Employees
If you’re going to build for the long haul, you have to set a high bar for the people you invite into the company, especially in the early days.
Are you hiring someone just because they are available and willing? Are new hires triaged by how quickly they can get up to speed instead of how big their impact could be over time? Are you struggling to keep up so hiring just about anyone with a pulse would help? Or are you clear about what skills and talents are required for folks to fit in your company? Are you able to identify the behaviors and work styles that make your culture great?
At a minimum, you need to assemble a nucleus of people who will stay and be able to contribute to the cause for at least five years. Has your core team ever been somewhere for that long? Or do they company-hop, distracted by shiny new things? Sooner or later, there will be a downturn of some kind. You need people who have the courage to see it through with you. Place a premium on staying power, and look for people who have overcome hardship.
While you’re at it, take a hard, hard look at yourself — do you have staying power? Have you overcome real hardship … or are you expecting everything to just break your way?
Find the Right Investors
If you’re going to build for the long haul, you have to set a high bar for your first investors, too. These investors will shape the time horizon and ambitions for the company.
Sad to say, startlingly few entrepreneurs recognize this. The most effective investments work for both parties, so the idea that only the VC or the entrepreneur can “win” is an important fallacy. Too many founders today obsess over valuation and forget about the other terms and how the investors fit with the company’s mission. We’ve all heard the war stories about VCs and founders battling with each other. I’m here to tell you these battle seeds were sown when the investments were originally made.
Here is a fun example from today’s frothy market: A couple of months ago, I received a call from a founder asking me for some help because he was having trouble with his investors. He had raised $20 million from a brand-name VC at a $100 million valuation. His company had $1 million in annual sales, growing at a so-so rate, and his VC was all over him all the time. I asked him a few clarifying questions:
Who led the investment at the VC?
[Name redacted], junior partner.
What type of projections/promises did you present to the investors?
Aggressive ones.
What was your goal for the fundraising?
We wanted to maximize the value of the company …
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It doesn’t take a rocket scientist to determine that this founder did a dumb deal. In a frothy market, it’s pretty easy for founders to maximize value, but a whole lot harder to structure an investment that can go the distance. In this case, the founder got a junior partner at a brand-name firm to stretch into a high valuation. The founder loved it at first ,because he told me he owned half the company and was therefore worth $50 million. The problem is, the VC junior partner made the investment based on aggressive assumptions and a high value. The company isn’t delivering on the aggressive projections, and now the junior partner is worried that he’s going to get hammered because he went to bat on a big investment in a company that is now underperforming.
When you price an investment for perfection like this founder did, you better deliver perfection. If you don’t deliver perfection, the battles begin, and I’ll bet the founder is now getting a pretty big education on all of the other terms contained in his stockholders agreement.
My view is to look at investments holistically. Valuation is a term everyone likes to obsess about, because it’s easy to quantify. But the terms and alignment actually matter more to the long term than the valuation does at any particular moment. Valuation is relevant for the discrete moment that the stock trades hands. The terms just might last forever.
(The only time you should maximize your valuation, by the way, is when you sell the company, if you ever do.)
Venture capital has unfortunately become a new kind of branding for startups. The market is obsessed with brand-building through unicorn fundraising and other mythical creatures. Don’t let the noise confuse you. The most durable brands are the ones built in close collaboration with customers, who are more likely to have a long-term mentality. You should build your brand and grow your valuation by creating intrinsic, repeating value for customers. Financial engineering is a sugar high. Raise capital to build your company and trust in your ability to build.
Building Isn’t for Everyone
Biggest picture: If you’re going to build for the long haul, you have to make good decisions every day. You have to stack up one little victory after another in each of the above areas, although this is certainly not an exhaustive list.
So, are you in it for the long haul? On principle, I think you should be, but the truth is that this path isn’t for everyone. Maybe it’s not for you, and there’s no shame in that. In my experience, most people can’t hack this approach, which is why they either won’t try it, or they try and then bail out when the going gets tough.
I have found that a builder’s personality often contains a strange duality. Builders have sharp elbows, yet at the same time they are humble enough to realize they need help. Another paradox: Builders are risk-averse and risk-tolerant at the same time.
My hero is the woman who stays at La Quinta and flies Southwest, yet raises $50 million to build something that makes a difference in the real world. I love the tension in that — the idea that you can be super-conservative and super-ambitious at the same time. I love people who shave nickels, yet never hesitate to bet really big at the right moment.
The people who change the world keep pounding the rock, day after day. Find a long-term trend that you’re passionate about. Find people who are equally excited about that ride. Find investors who believe as much as you do. Those are the only levers you have to pull, ultimately.
You win and lose on customers, employees and investors. Focus on those, and you’re on your way.
Lanham Napier is a co-founder of BuildGroup, a Texas-based growth outfitter that debuted last month. Along with Jim Curry and Alan Schoenbaum, Napier is seeking to redefine what it means to be a value-added investor. Previously, he ran Rackspace as CEO for eight years. Reach him @lnapier.
This article originally appeared on Recode.net.
