Thursday, March 14th, the Seventh Annual Wharton Entrepreneurship Alumni Dinner was held at the Rittenhouse Hotel in Philadelphia. Over a hundred alums mingled with former classmates and advisors. Discussions of new ventures interwove with recollections of Penn adventures. Josh Kopelman, Wharton Undergrad 1993, took the stage to share the wisdom he has gained since graduating. His witty keynote speech, “Ten Startup Lessons Learned Outside the Classroom,” gave insights for both budding entrepreneurs and more seasoned veterans.
Lesson 1: Succeed By Saying No
In business there is sometimes a pressure to be everything to all customers. The most successful companies, however, don’t try to serve every market demand and instead have a unique idea. Too many options create drag. By limiting yourself, you are able to focus on the core of your business. Steve Jobs originally began working on the iPad first, but put the project on hold to focus on developing the iPhone. He had enough people and money to work on both projects at the same time, but he wanted Apple to have a clear, unified goal.
Lesson 2: Shrink a Market
There are no new markets or unmet needs. Great entrepreneurs solve existing problems “faster, better, cheaper.” Half.com, Josh’s second venture, centered on aftermarket book sales. By asking customers if they wanted their money back three weeks after purchase, he was able to shrink the book sales market. For example, with the first four Harry Potter books, Half.com reduced the books’ market value from $120 for brand new copies to $12 for used copies.
Lesson 3: The Power of Asymmetrical Risk
Prior to the development of widely used online payment systems, PayPal competed with an eBay/Wells Fargo product to become the dominant online payment processor. To gain market share, PayPal used a great deal of its venture capital to pay users for referring friends. At the time, PayPal was being sued in several states for breaking banking laws. As a recently public company, eBay couldn’t 1) risk being on the wrong side of a lawsuit, and 2) couldn’t use the $2Billion it had in cash to buy users. PayPal, a VC-backed company, was able to win the market because it wasn’t constrained by size or shareholder opinion. PayPal found eBay’s weakness and exploited the asymmetry.
Lesson 4: Product innovation is not enough. You need marketing innovation.
The best way to do this is to build marketing into the product. At Half.com, the system was built to send customers an email three weeks after they purchased a book, asking them if they wanted their money back. The key in marketing is finding ways to stand out. At one meeting, the marketing manager got so frustrated trying to come up with a stunt to get attention for Half.com, he jokingly suggested they should get a town to change their name to Half.com. That is exactly what they did. Later on the same marketing executive came up with the idea to put a coupon and URL on the back of fortune cookie fortunes, which cost them very little and brought in thousands of users.
Lesson 5: Get Your Fouls
Be aggressive; don’t play it safe. It is the job of the founder to create an environment that encourages calculated risk taking. After the town renaming stunt, but before the fortune cookie success, the Half.com marketing exec came up with the idea of printing their slogan on urinal screens for a trade show (“Don’t piss away your money. Save a bundle at Half.com”). The screens were inexpensive and a lot of people would see them. However, eBay (which had recently acquired Half.com) was less than thrilled to have a reporter call and say “why are people pissing on your brand?” about this gorilla marketing technique. If Josh had overly chastised his marketing director for the flub, he might not have had the fortune cookie idea later.
Lesson 6: Plan for Flexibility
It is important to have a tight vision but allow for flexibility to adapt the product/company as the market changes. One such example was in the encyclopedia industry. Traditional hardbound encyclopedia companies, like Britannica, were slow to catch on once Encarta became bundled and distributed with Windows. After Encarta, no one was willing to pay $1200 for hard bound encyclopedias. Within a few years most encyclopedia companies had gone bankrupt. At Infonautics, Josh’s first venture, they signed contracts with hundreds of companies for free access to their data. As the internet boom came about, they spent 18 months changing all of their original contracts to allow for the distribution of information online. What had been free now cost them thousands of dollars.
Lesson 7: Your Business Plan Is Wrong
Over the years, Josh has seen thousands of business plans, but once printed or distributed they are out of date. Business plans are a prediction of the future, but what the entrepreneur needs is to know how to collect information and use it. Entrepreneurs don’t need to have the best crystal ball; they need to have the best antenna.
Lesson 8: Hire People Who Are Smarter Than You
This one is self-explanatory.
Lesson 9: Use the Scientific Method: Experiment
A start-up is a hypothesis; you want to test it as cheaply and as quickly as possible. When doing a startup, look at the biggest assumptions companies already in the industry make and focus on those, instead of trying to tackle all possible variables.
Lesson 10: We are witnessing the democratization of entrepreneurship.
As the world moves online and into the cloud, it has never been easier to start your own business. It took $5M for Josh to get his first company off the ground in the early nineties and now you can do it with $50,000. Everything is streamlined from social media to the amount of hardware and code needed; the barriers to entry are rapidly dissolving for the motivated entrepreneur.
After Josh Kopelman finished talking, he answered a few questions from the audience. When asked why he chose to found his companies in Philadelphia, he said that there is a period, usually when there are 10 – 15 employees, in which a company puts down roots. After that point, it is more difficult to pick up and move the company because the more employees there are, the more entanglements there are with a particular location, such as schools, spouses, and families. A great entrepreneurial ecosystem needs great ideas, access to money, and entrepreneurs that are already successful to spawn the next generation of viable companies through mentorship. Philadelphia has the first two ingredients covered, but is missing the third. Through the Dorm Room Fund, he is hoping to get student entrepreneurs to tip to the 10 – 15 employee level before they leave campus, which will ultimately lead them to stay in Philly. It only takes a few great companies to create the foundation for others.