Andy Kessler, former hedge fund manager and Silicon Alley investor, has published a book that every entrepreneur needs to read as a reality check on her business.
It has the unlikely title of Eat People - and Other Unapologetic Rules for Game-Changing Entrepreneurs (Portfolio/Pengiun). The title is taken from a set of Rules (punctuation by Kessler) the author believes are essential for entrepreneurial success. One of them is to create businesses that devour jobs and cost. Counter-intuitively, that kind of creative destruction is what sets the conditions for new enterprises and new jobs to be created. Angry about it? Kessler says, "Don't hate me. I'm just the messenger."
The last book I felt was truly groundbreaking for entrepreneurs was Linchpin: Are you Indispensable by Seth Godin -- a book that defines what work is going to be all about for the next 100 years. In it, Godin argues that enterprises no longer want to hire people to do "jobs," and if they do, those jobs will be of the burger-flipping variety. Growth companies want problem solvers, or "artists," in Godin's vernacular.
In Kessler's book, entrepreneurs will find a yardstick to measure the chance for success of their as-yet undeveloped concept, or more precariously, the one they've already birthed. Will your product reach thousands? Not bad. But not enough. It needs to scale to reach millions or billions to be important in a world in which technology cycles happen faster than even their inventors can keep up with.
Kessler answered my questions about entrepreneurship in the new century. His responses illuminate his book, which you should buy and read as soon as possible.
How do you feel about entrepreneurial organizations that don't have classic scale potential, like some service businesses -- non-chain restaurants, for example, or online media companies? Can you think of any service businesses that can be game-changers in the way you describe by adhering to most or all of your other rules?
In my book Eat People, I lay out a dozen Rules or criteria to help entrepreneurs find the next big thing. Things like Scale and Horizontal Business Model and Intelligence at the Edge. They were developed over 25 years of investing in Silicon Valley and they have worked for me many, many times. The first Rule is Scale. Find something that goes down in price over time. And instead of selling to tens or hundreds or even thousands of customers, find something that can be sold to millions or tens of millions. That's Scale.
Many service businesses are one-offs. That doesn't mean they are not perfectly good businesses, but they are not going to become big barn-burners, creating wealth for their owners as well as for society. That's okay, but be warned. Someone who does leverage Scale is going to eventually run you over. Think of all the local retailers who made good money and were happy to service local customers on Main Street and were blind-sided by a Wal-Mart out by the Interstate exit.
Consultants are another great example of something that doesn't scale. Need another customer? Hire more consultants. They are body shops. On Wall Street, there was a great put down of consultants: None of the upside, all of the downside. It's because they don't Scale. Oddly, Hewlett-Packard and IBM have turned into large consulting shops. I wonder about their growth. Businesses don't have to Scale to be successful, but it's nice to have that wind at your back.
Who are some of the up and comer companies that you see doing all the right things?
I think a company like Groupon is a great example of doing the right things. It is horizontal, it takes advantage of intelligence at the edge, it seems to have a market component, it's productive. My concern is that it is still people intensive setting up the sales. They have a huge sales force calling on customers, but I suspect they will eventually put in a self-service operation much as Google does with their ad platform. I think there are many other great examples out there. Perhaps Zynga, which takes advantage of Rule #11 -- "Zero Marginal Cost" and Rule #12 -- "Virtual Pipe" by selling virtual goods in their online games.
In the book, I do a count for Facebook and figure they take advantage of maybe 10 out of the 12 Rules. Really 13, because there is a bonus Rule! The trick for entrepreneurs is to take advantage of as many of them as possible to leverage them to success. You won't get them all. But the Rules are also helpful for investors and job seekers who can use the Rules as a filter to find companies with a higher probability of future success. I use them all the time when considering investments in stocks or private companies. It has saved my bacon many times!
For Part 2 of the interview with Andy Kessler, please click here.