As a startup founder, I go to several “entrepreneur” networking events each month. Often these events feature panel discussions on topics relevant to starting a new company, such as how to raise angel financing, how to form strategic partnerships, whether and how to outsource, etc. In general, the panel discussions are on point and helpful and the panelists are successful, experienced, and candid with their comments.
However, inevitably at some of these events, the subject of “what it takes to be successful” comes up, and one of the panelists will say the following, usually with all the other panelists nodding in agreement: “New founders are obsessed with the quality of their initial idea; they think all the value of their new startup is in this idea… when actually, the initial idea is worth about 1% and the other 99% is all execution–EXECUTION IS ALL THAT MATTERS.” Then sometimes, to my amazement, one of the other panelists will say, “In fact, any new founder here should be happy to tell their startup idea to this room full of 150 people because if they can’t out-execute them, they shouldn’t be starting a business anyway.”
With all due deference to these panelists, many of whom have built startups with exits in the hundreds of millions of dollars, I would respectfully disagree. First, a disclaimer, as a product guy and consultant who spends a significant chunk of time coming up with new product, marketing, and biz dev ideas, I have a bias toward believing ideas, especially good ideas, are valuable. However, I fully recognize and embrace that outstanding execution is absolutely critical to the success of any venture or product.
The question is, is a good idea (let alone a great one) really worth 1% of the value of the startup, to the point where indiscriminately sharing your ideas in the earliest stage with a room full of strangers is a positive expected-value proposition?
The short answer is no, and the longer answer is this is not quite the right question.
For starters, let’s agree on what we are talking about. A truly great startup idea–the kind that motivates teams of passionate, highly-skilled individuals to drop their other projects, potentially leave lucrative day jobs, spend countless extra hours away from their families and friends to realize its full potential–is one that, if executed well, confers a significant strategic advantage on that team over others. I.e., they are doing something other people have not thought to do yet, because they have a high-quality idea. This type of idea is often very valuable and usually comprises much more than 1% of the value of the new venture. Consider the following:
- A-level individuals do not drop what they are doing to join teams that are working on mediocre ideas. Yes, there are cases where colleagues decide they want to work together first, then come up with the idea. However, usually the idea comes first, and even teams that decide they want to work together wait until they have at least an excellent idea before they jump in with both feet. So the idea itself is usually critical for motivating the team to come together and start the project. That alone is worth more than 1%.
- Many if not most of the great startups and products of the past 10 years were founded on great ideas (which can also include great IP)… and then continued to add more great ideas over time:
- Google – PageRank, then later the ad auction model and algorithm
- iPhone – Full device display with no keypad; plus the appstore
- Facebook – School-based network, then later passive news updates (huge) and the 3rd-party developer platform
- Twitter – Super simple micro-blogging, limited to 140 characters
- Amazon – Largest inventory, 1-click purchasing, then later superb recommendations engine
All these companies enjoyed large competitive advantages by virtue of starting with critical innovations and then adding to them over time. Take Google as an example, how much smaller would Google’s market cap (currently $145B) be today had they not started with PageRank and then later added other innovations like the superior auction model… 1% smaller? Of course not. Even with the brilliance of Sergey and Larry and the execution of thousands of super-capable professionals, Google would be significantly smaller without the advantage of their ideas. In fact, there is a decent chance the company would not exist at all today in its current form without the early innovations that set them apart.
Also, the concept that ideas are worth 1% and execution 99% implies the founding team starts with an initial idea and then once they launch the company they stop creating new ideas and focus on executing. This misses a key point:
A major part of successfully executing is continuously coming up with new ideas–for product, marketing, biz dev, finance, and every other part of the business.
Once a company stops innovating, they are on the path to failure. Or, to paraphrase Tim Robbins’ character Andy Dufresne in Shawshank Redemption, if a company is not getting busy living, they are getting busy dying. Fred Wilson pointed this out today in his Ten Characteristics of Great Companies, in which he listed new innovation as #1.
So, if an idea, or the combination of ideas over a company’s life, is worth more than 1%, how much is it worth? My answer is 15-20%, based on gut feeling and a few observations. First, when a new founding team comes together, if one of the founders single-handedly came up with a truly great idea (also called vision), he/she will usually receive an additional bonus of founders equity tied to the idea, often in the range of 15-20%. Also, Google explicitly encourages engineers to devote 20% of their work time to coming up with new ideas, as opposed to executing existing ones.
In my opinion, the right question is not, “is a good idea worth 1% of a new company?” The right question is, “are good new ideas absolutely vital to the launch and growth of successful companies over time?” The answer is yes, and companies should do everything they can to value and foster innovation at every level of the organization.
