The Science of Growth with Sean Ammirati (2-time Founder Turned VC)

I recently finished reading a new book about startups. It’s called The Science of Growth: How Facebook Beat Friendster and How Nine Other Startups Left the Rest in the Dust. It’s written by Sean Ammirati, who is a partner at Birchmere Ventures and an Adjunct Professor at Carnegie Mellon, where he teaches a courses on entrepreneurship. He was previously COO of ReadWriteWeb and cofounded mSpoke, a content recommendation engine that was acquired by LinkedIn.

The book is a spiritual successor to Four Steps to the Epiphany, in that it is an intellectual framework for thinking about high-growth entrepreneurship written someone with deep experience in the field. While there’s a cursory similarity to Good to Great / Great by Choice in comparing pairs of winner/loser companies, it really shines as a way of thinking about, talking about, and analyzing startups at different stages of growth:

  1. Prerequisites for Scaling — focuses on four elements that indicate founder-market and product-market fit that must be in place before you try to scale
  2. Catalysts for Accelerating Growth — focuses on four strategies for rapidly acquiring new customers for your business
  3. Elements for Sustained Long-Term Growth — emphasizes five practices that support a startup’s growth from an organizational perspective

Ultimately, I think this book is an important contribution to the startup ecosystem and I hope Sean’s ideas and terminology make their way into the vocabulary we use to discuss scaling businesses.

I sat down with Sean and we discussed a number of topics about startups, teaching entrepreneurship, and the venture business, including questions from the Art of Ass-Kicking community! I’ve done my best to edit down the conversation but it was pretty in-depth and interesting, so tuck in for a longer read. It’s worth it.

Interview with Sean Ammirati

Jason: Why this book? Why this topic and why now? How did it come to be?

Sean: I’ve been teaching now for over five years, the Lean Entrepreneur course at Carnegie Mellon, which would basically be the lean startup methodology turned into a course. People have gone through the course, created startups out of it, and it’s been a popular way for people to dip their toes into this entrepreneurial mindset.

Then through their feedback, through the students’ feedback, they were like, “Hey, we’d love to have another course that’s more, in their mind at the time, the second half of the startup process. Think about your Ridejoy experience versus your Etsy experience.

I said, that’s interesting. One, I don’t know if there are things that would even be good generalizable things to teach you about that.

Two, there’s a lot of point literature like Geoffrey Moore’s Crossing the Chasm, but there’s not a whole lot of holistic stuff, like what Eric Ries has done with Lean. So I said, well, let’s just start with some independent studies and see. I felt like the case-based approach was a good way to go about just seeing what we might or might not discover.

Jason: In a sense, this emerges from a series of case studies that you conducted, each one on its own and then bringing it together.

Sean: That’s right. There was a bunch of case studies we did on their own, and then we basically did a workshop-style class. That was the first crank towards what ultimately became the framework that is in the book and the later versions and iterations of the course.

Jason: What is your goal now with this book? Is it the idea that just to share more broadly the work, the research and have this be a blueprint for other schools that have entrepreneurship programs?

Sean: Yeah, that was very much the goal when I started. Entrepreneurship in places of higher education has gone from the ugly red-headed stepchild of schools to how they differentiate themselves, which I think is a good thing.

Now the interesting this is in parallel, while I was doing that, I also teach a number of executive education courses at CMU. One of the things that became interesting is a lot of the, for lack of better terms, they’re intrapreneurs inside large companies who are like, “Oh, we really want this, as well. These ideas can help us grow our businesses.”

Jason: One thing you talk about in the book are these prerequisites before scaling. One of them is the founder’s vision and having a core vision that is sustained throughout the course of the growth. As a founder, I sometimes wonder… Mark Zuckerberg, for instance, you see the 2005 interview where he does, and he’s very obviously just talking about it being for college students only. He has no conception, at least at that time, of it becoming this global phenomenon.

I’ve heard some of the Airbnb founders talk early on about how they were just trying to make enough money to live. They just thought it would be cool to rent out the room. They didn’t really realize the opportunity with the VRBOs that home away market until much later in the game. How do you contrast that with this conception of, “From day one, it’s going to be take over the world.”

Sean: When I think about the founders core vision, what I’m really trying to get at is what are the things that you observe about the world that other people haven’t, and then what gives you confidence that you’re correct about it?

Even in the 2005 interview, I would argue that Mark probably understood better than most people the power of connectivity between platforms and the importance of people versus connectivity. What I think you hear in 2005 is, “Hey, even the college market is large enough to build the kind of business I’m aspiring to at this point.”

I try really hard in the book to stay away from absolute numbers and saying, “Hey, if this isn’t an X hundred million dollar business, you shouldn’t do it.” I think that’s a very personal choice. But you ought to know what you’re shooting at, and is that worth the time you’re investing?

Edit: While editing this post, I took another look at that 2005 interview and I was mpressed with how Mark’s vision of Facebook as being a mirror for the real world, not a place to “make new friends” is still very much a part of Facebook 11 years later. So Sean has a point!— Jason

Jason: How do you differentiate this book and its advice as a professor of entrepreneurship with your day to day role as a venture capitalist? Because to me, there’s definitely some conflict of interest between the advice a VC gives and what’s best for an entrepreneur individually from the perspective of, “Swing big. Go big or go home,” which is in the incentive for the VC, because that’s what allows them to have a portfolio of one or two really big winners and they don’t care about anyone else.

But a $10M exit maybe means very little to someone with a billion dollar fund, but it may change the life for the founders and even some of the key employees, right? Depending on how much they raise and the terms of the deal.

Sean: First of all, I would say that a lot of students I work with as a professor, I’ve strongly encouraged them not to raise venture capital because I just don’t think it’s the right thing for them to do.

For certain kinds of businesses, I fundamentally believe the only way to realize the vision that that entrepreneur has is through growth capital. Then I think the question becomes, can you find the right kind of investor to partner with you on that? We’d like to think we [at Birchmere Ventures] are that, but in reality, entrepreneurs need to talk to other entrepreneurs to figure that out.

Jason: You talk about the double trigger event, which is one of the ways where growth is scaled, right?

Sean: I call them catalyzing events. The idea here is you’re contrarian and right as an entrepreneur, right? But at some point, you need the market to catch up with that contrariness. I look at all four of the catalyzing events as techniques you can apply to help the market catch up with that vision once you satisfy the prerequisites.

Jason: Where did the term “double trigger” come from? Is that a legal contract term?

Sean: Well, there is the concept of double trigger and options. That’s not what this is a reference to. I was trying really hard to not use the word “launch”, because I think “launch” is one of the most loaded words in entrepreneurship.

I went through a number of iterations where I tried phrases like double launch, second launch, things like that, because later, people write about these double trigger events as the time that company “launched.”

But then when other people hear those stories, they’re like, “Oh, so they sat in a room for a year, came up with the perfect product in a very Steve Jobs way, unveiled the product itself at South by Southwest or the D&D Convention in Denver.” That’s just so not the case, that in early iterations of using this material I’m teaching to people, just having the word “launch” at all in there came with a bunch of cognitive load that I think was just not desirable.

Jason: What you would say is almost like you have to have launched and then at some point something happens. As in situations where a lot of people are in one place or there’s a high visibility situation, that you can get yourself into somehow and you have to keep your eyes peeled for that. You can’t necessarily manufacture them. You can be ready to capitalize on them and you can be ready to … You can anticipate that it might happen, but you don’t know when.

Sean: It’s a very helpful thought exercise, I’ve found. I’ve done this with my students and I also do it with my portfolio companies now, to just spend 30 minutes once a quarter brainstorming what these things might be. Where is there a disproportionate amount of pain in a physical event that you can help solve and help the word catch up with your vision?

We’re investors in a company called No Wait, which replaces the hockey puck pagers that you would get at a Chili’s or a TGI Friday’s with an iPad and a software app.

Well, it turns out they end up using this double trigger concept at The Masters in Augusta because Augusta, Georgia, 51 weeks out of the year, anybody who is going there to eat at a fine dining restaurant goes and eats at the club. But for one weekend out of the year, when The Masters Tournament is there, they go and eat at Chili’s, TGI Friday’s, Hooters, because that’s the only restaurants within like 100 miles in any direction, right?

We partnered with the mayor of Augusta to have 50 restaurants in Augusta use the No Wait platforms, so that everybody could see the wait of all the restaurants around them. It was this magical early experience that validated some of the network effects of the business

Reader Questions

Jason: This is a question from one of our readers, Melissa Thompson, who is in healthcare, and wants to know how would you deal with competitors who are acting unethically, basically ignoring regulations, but still raising VC funds, gaining traction, while you are an ethical company and getting the right approvals but having trouble competing in the short-term. How do you respond?

Sean: It is a bit situational. What I’ve encouraged entrepreneurs to do outside the healthcare space when this has happened is sit down with that CEO and explain to them that you’d prefer they come clean. You’d prefer they play by the rules. If they won’t, then you’ll have to make a story around it.

One of our portfolio companies was an app company that was competing with another, a different mobile app company. There was some significant vulnerabilities in their competitor’s product. They said, “Should we go make a big story around this?” I said, “I think everybody ends up looking like losers if you do that,” because you’ve gotta remember, although it often feels as the entrepreneur you’re competing with that other party, you’re really competing with status quo.

Jason: That’s a great tactic because it puts the ball in their court and doesn’t make you feel as slimy for calling them out, because you’ve said to their face that this is what might happen and here’s why you think it’s such a big deal.

Sean: Right.

Jason: Here’s another question, this one from Malcolm Ong, who previously cofounded Skillshare. He’s considered going the venture route in the future and is asking about deal flow. Widely, it’s considered the most important factor of becoming a successful VC is having the deal flow to be able to see the best companies. One, do you think that’s true? Then two, would it be fair to say that it’s almost impossible to succeed as a new VC in a saturated market like SF or New York City, since all the relationships are already owned by somebody else? You have to spend so much time building those relationships that it’s very hard for you to show any great results from day one.

Sean: Those are great questions. First of all, there certainly are people who have built fantastic firms in the last decade in both those markets. It’s certainly not impossible. I do think it requires a certain strategy to do that.

When I made the decision to transition from being an operator to being an investor, I didn’t feel like the strategies and tactics to compete for the best deals in New York and San Francisco played to my strengths transparently. It’s hard to say, “You know what San Francisco definitely needs? One more $40M seed stage fund.”

I joined Birchmere four years ago. The firm has been around for 20 years, but my focus right off the bat is really to go to places where there aren’t a lot of seed stage funds actively investing. That requires a different strategy and it requires creating deal flow in a different way, but I have investments in eight cities right now, which means that I’m platinum on every airline by the end of January, but which is the downside to the strategy.

But the upside is when I go to these places, Portland, Austin, Chicago, and certainly have some empathy for these places. Being an entrepreneur who started my companies in Pittsburgh, I think the entrepreneurs in these cities, with the right seed stage capital, can absolutely build amazing companies.

Jason: You’re saying you’ve had to take a different angle into it, right? You’re acknowledging that it is saturated in San Francisco and New York City, but you’re contrarian thesis is that not all the best companies are in San Francisco and New York City. Therefore, it can be valuable to do that.

Sean: That definitely is contrarian among early stage tech investors, but if you look at the world, it’s actually just obvious when you look at the data. But yes, that’s right.

And in fact, our LPs love it. They love this story of going where the others aren’t and we’ve built great companies where the others don’t spend a lot of time. Now interestingly, to make that strategy work as well, we actually have a condo in San Francisco. All of us are in San Francisco at least a week a month, because you can’t make that strategy work without knowing the downstream investors.

I spend some time with entrepreneurs out there, just because I love entrepreneurs, but when I go to San Francisco I spend time with the Series A, Series B, Series C investors.

Jason: Because you need to sell them on your companies. You’re almost soft pitching them on their behalf.

Sean: I have a deck that has a portfolio logo, a slide and two bullets on each company. I sit with these investors and flip through the deck and just take notes on their responses. It’s in their interest and my interest to know which of those companies, when they’re raising next, they’d like to talk to them.

Jason: Here’s another one from Anthony Abbot, who asks, “How has teaching entrepreneurship changed either the way you evaluate or invest in a company/idea?” If it has changed.

Sean: The great thing about teaching is that your students are smarter than you are, right? It’s nice of them to pay all that money to be taught by somebody who’s not as smart as them. They just help you. They challenge your assumptions in ways that helps you think through the advice that you give in helpful ways, and it also forces you to know it well.

The whole thought exercise around different catalyzing events — that really came from the research that we did, that I now do with my portfolio companies on a regular basis. How I think about problem founder fit is very different, having had 100 potential founders in a class once a year to understand how they look at the world, that kind of thing.

Jason: Let’s wrap it up with one more reader question: Rahul D’Silva, who wants to understand your strategies for getting balance. In his life, he’s working on a startup, advising others with their businesses and family and personal obligations. You’re obviously involved in a lot of different things. How are you able to stay on top of a very varied and multi-commitment type of career and life?

Sean: That’s a great question. I think transparency is key: people know where I am all the time. My partners at Birchmere know what I’m doing at Carnegie Mellon. Carnegie Mellon knows what I’m doing at Birchmere.

The other thing I think that’s important is as soon as you start beyond working on your own things, advising and helping other people, especially as an investor, is to remember that the work entrepreneurs do is way, way harder than the work I do. I think this is why it’s great to have early stage investors who have been entrepreneurs. That empathy is super important, because the reality is while investing is a very stressful job,  relative to the stress of being a founder … it doesn’t hold the candle to it.

I try to have empathy about that. That means that when they need help, that’s got to be the priority. When they call, calling them back has to be the priority.

Sean’s new book, The Science of Growth is available in bookstores everywhere and on Amazon and Barnes and Noble on April 26th, 2016.

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Jason Shen

Jason is a tech entrepreneur and talent expert. He is CEO of a performance hiring platform called Headlight, a Fast Company contributor, and an advocate for Asian American men. Follow him on Twitter at @jasonshen and subscribe to his private newsletter.

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