Luck and Entrepreneurship: A Tale of Two Startups

Posted by Neha Palacherla /November 14, 2013 / Entrepreneurial Advice, FounderTalk

This FounderTalk guest post is written by Yee Lee, VP Engineering at TaskRabbit.  He is a 3-time founder, angel investor in over 20 companies, and a limited partner in 500 Startups 

The tech press and entrepreneurship blogs project a heroic image of startup founders — driven visionaries, technical geniuses, and sublime designers all cranking away with maximal efficiency to ship the right products, extracting brilliant market learnings and customer insights along the way.  If you’re smart enough to read the market, hard-working and scrappy enough to outpace the competition, and execute flawlessly, then you’ll disrupt industries and change the world!  Fame and riches await!

The “epic hero” vs. “village idiot” are pretty commonly-held extreme views of startup founders. Just about any self-aware person who’s been through the experience of founding a venture backed tech company will attest to feeling much more like a chihuahua in a tumble dryer than a captain of industry. At the highest level of the startup game — when you’ve got a great founding team, backing from experienced and helpful investors, and are executing like all get out — even when you’re playing the game at that level, luck and it’s close cousin, timing become the overriding determinants of success.  

Dirty Little Secret

Let’s define “luck” for startups as: any events or actions that occur outside of the company’s control that have materially beneficial or harmful effects on the company.  With that definition in mind, even if you bring your A-game and masterfully execute on all the things under your control, all that earns you is a lottery ticket.  

An example of just how fickle luck can be:

At Katango in 2011, we were definitely bringing our A-game.  Our founding team had three CS PhDs on it, including a full-tenured Stanford professor who lead the Stanford AI Lab — all of whom were true experts in graph analysis, pattern recognition, data clustering, and machine learning.  We were backed by Facebook and Kleiner Perkins’ new S-Fund.  And we had built a new social app that our initial beta users loved.  They described our app as: “It’s magic!” and “It feels like the computer really knows me!”  

Our tests were going great and we were fleshing out the service in anticipation of public launch.  All of a sudden, we caught wind of Google’s new social network, Google+.  It had a feature called “Circles” which sounded pretty much exactly like what Katango offered.  We feared that Google were going to apply their vast datastores and incredible algorithmic power to building the best Circles of friends for everyone.  Crap.  Our new startup was being relegated to “feature of a bigger platform” status before we even had a chance to launch!  

Google announced Google+ to huge national fanfare and it turns out the “Circles” feature was resoundingly panned by journalists for the excessive amount of dragging-and-dropping it took to create a Circle.  Some of those same journalists tried out Katango the week after Google+ launched and gave our app rave reviews — they loved how quickly and easily Katango made perfect sets of friends for them.  “Katango is what Google+ Circles should have been” was a quote we heard more than a few times.  

Google’s announcement had started out looking like a looming disaster for us, but their announcement wound up focusing a lot of attention on the problem that Katango was working on.   And that generated a lot more traffic for Katango than we could have garnered on our own.  Ultimately, the company was acquired by Google at the end of 2011.  Since then, team members from Katango have contributed to a wide range of Google products, ranging from G+ Circles (naturally), to Search, Hangouts, and Android.

What’s luck got to do with it?

Katango benefited from unpredictable events in the market but luck isn’t always so friendly…

I co-founded TipMobile in 2007, just a couple quarters before the real estate bubble burst.  We cranked away on user acquisition and engagement, and were able to build a userbase of over 3 million monthly active users for our social communication apps.  In the immediate aftermath of the housing collapse in early 2008, turns out VCs weren’t interested in propping up free services with lots of users and high burn rates.  The advice we got was: “No one knows how long it will take for financial markets to recover, so you should focus on becoming profitable.  Investors are looking at their reserve funds right now and they’re triaging their portfolios.  The only companies getting further investment are the ones operating in the black.”  Yikes.  

We fought to control burn and generate revenue, but ultimately decided to dissolve the company after the founding team worked for more than quarter without any salary at all.  We just didn’t have the personal funds to continue operating our servers.  It was sad to see all the customer support emails asking “Hey, what happened to your app?” in the weeks after we turned off our AWS account.   

In hindsight, we can only shake our heads.  If we had just gotten started 6 months earlier, we probably would have been able to raise a round of financing before the market catastrophe struck and would have been able to survive through 2008.  And if we had gotten started 6 months later, we also probably would have been fine because our seed round would have enabled us to keep the servers up until VC investments started to flow again after the US government enacted the financial bailout plan in Oct 2008.  We saw lots of examples of SMS-related companies that were founded before and after us who made it through 2008, but we were just “unlucky” enough to have run out of runway right during the lowest point of 2008.

Marc Andreessen, an investor in TipMobile, summed up our situation this way: “There’s very little difference between being early, late, or just plain wrong.”  While that may sound harsh, I think there is some wisdom encoded into that view of the world.  Markets can be fickle, after all, and so if a market shifts on you and leaves your current product out of fit, then it’s your responsibility as an entrepreneur to adapt to the new conditions and tailor your company to survive in whatever environment you find yourself in.  

In this view of entrepreneurship, you’re forever behind the ball, always looking over your shoulder, continuously re-examining market assumptions that you thought you could take for granted.  “Only the paranoid survive”, right?  It’s a heck of a way to live!

Make your own luck

If we’re going to play a game of chance as entrepreneurs, then we owe it to ourselves to constantly up our level of play.   

After the bad-luck experience with TipMobile, I spent a lot of time becoming a better coder by building projects with friends in Ruby-on-Rails and Python & Django/Pylons.  And I worked for Skype during their year of transition from an eBay-subsidiary to a private company.  I learned a ton there about how to accelerate a product & engineering organization by helping to implement agile software development practices at a thousand-person organization.

I think that good-luck experiences create opportunities to double-down on investing in yourself.  After Katango was acquired by Google, I spent a year there trying to meet every smart person who would take lunch with me.  I jumped at the opportunity to travel to other Google offices and meet bright folks halfway around the world.  And as I was expanding my network, I started angel investing more systematically in companies started by people in my 1st and 2nd-degree networks.  I really cherish the connections I’ve been able to make with other entrepreneurs through investing.  Getting a chance to talk with the founders as an investor and learn how they think through challenges has taught me a lot and given me many entrepreneurial role models to emulate in my own ventures.

Ganbatte” and good luck!