CEO of Oyster.com – a blog about startups, entrepreneurship, photography, and business building

Fred Wilson’s always interesting blog and community of commenter recently got me thinking when Fred posted about sustainability. Commenters had a variety of very interesting things to say about the topic with several focusing on the issue of incentives. Sadly, there is now a fair amount of evidence that people - in government and private industry – will not only react to their incentives but also abuse them – even when the livelihood of the business (or our country) they work for is at stake.

My thought is that sustainability is closely connected to our definition of success. Here was my comment:

Part of the problem is that there are just enough startup “winners” who are able to get in and out quickly that it creates a false path for others. Other startups see the winners and aspire to be them – to build something that will scale up super fast and be sold quickly for a big payday. The real reality is that it’s like winning the lottery. You’re not likely to win even though someone does win. Even in today’s world, most businesses – especially the ones that will be around for the long term – take a “long” time to build. Not two or three years – more like 7 to 10 just to get a firm foothold. But success is too often defined by monetary standards and by measuring things that are as of yet half baked. You don’t often hear people saying “I’m building this business to be here in 40 years”. Far more prevalent is to hear people lauding the startup that sold quickly. People are impressed by the quick exit, rare as it actually is. But what’s far more impressive is to build something that will be here after we’re all dead and gone. That kind of long term view is hard when the pressures from the environment are counter. It’s particularly hard when a company is measured, only a few years since launch, as not being a huge success relative to its peers that were already sold with the entrepreneur now off to the next thing. The operative word there should be “yet”. The company is not YET a success. If success is defined as building something that is here, and going strong, and getting stronger, 10 and 20 years from now, it’s obviously not possible to evaluate it’s success at two or three years since launch. But yet that’s the environment that we largely live in today. (and having worked in this general universe since 1998, I’ve seen it get worse, not better).  The media does not care if a business will be here in a year or two or a decade. They need todays story. Exits and the like are sensational and make for easy articles to write so that’s where the glory goes. We don’t glorify the folks who are trying to build things for the long haul. And unfortunately, since we don’t glorify it, we see far less of it than we should. My hunch is that our industry is exceptional in this regard. That there are industries – perhaps real estate – where the time scale is very different and the behaviors very different as a result. I’m speculating mainly.

A few weeks ago I had a long meeting with an extraordinarily successful entrepreneur who lives in Austin TX. He’s made his money in and around tech. A vast fortune yet he is as humble as you would expect a person who has seen it all to be.  He lives outside of the glare of the day by day world of techcrunch and the consumer web. We got to talking about timeframes and he said to me (I’m paraphrasing) “I could never do what I do if I lived in, or cared about, the world of Techcrunch and silicon valley mentalities. My approach to building businesses is Warren Buffet like – I can’t and don’t measure success based on what happened this quarter or this year. My most successful business won’t even be ready for an article about it until it is 11 years old”. To him, 11 years is a relatively short period of time. In today’s silicon valley mentality, that’s time to have started and sold three companies. But if we’re all being honest, the vast majority of those businesses that are sold after a few years end up amounting to not very much at all. They’re too young and fragile to be owned by a corporate parent and still made to be something great. And so they quickly become a small company with big company problems. They are old before their time in effect. And they tend to die. Someone made a nickle along the way. An article about the great rapid success was written. But is that really success?

Of course, if you’re an employee or founder with kids, you won’t lament having the cash. As my business partner Ariel has said “you’t can’t feed your kids powerpoint slides”. Staying power and patience are probably the hardest part of building for the long haul – especially if you’re not already rich. Is it a surprise that two of the companies most likely to be around 50 years after their founding, Apple and Pixar, were built – over decades – by a guy who already had more money than he could ever use.

How many of our startups will be around in 20 years? In 50? Many of the great companies and brands of the US and the world are decades and decades old. How many of those businesses were a success at age two or three? The definition of success is operative in our perspective on sustainability.

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If you’re an entrepreneur focused on building a high-growth scalable startup it’s very likely that at some point you’ll want to raise institutional capital in the form of VC or private equity (PE) money. Many others have written about how to prepare your pitch presentation, which VCs to raise money from (good list from Chris Dixon), and how to raise money and interpret the level of interest a VC is showing (VC’s rarely speak directly).

But what all of this great thinking on the fundraising process often neglects is how to handle the endgame of a financing process. If you’ve been fortunate enough to get to the point where you have a term sheet – or preferably, term sheets (plural) – what does a term sheet mean exactly? Can you start spending the money? Telling the press? Sharing all with your new VC friend? The quick answer: NO NO NO.

A term sheet is not a closed deal no matter how much it may start to feel like one. In the best fundraising scenarios, you’ll start to work collaboratively with the funding source. You’ll like them. They’ll like you. You’ll go to dinner and talk about the future and your ambitions. It will FEEL like the deal is closed. But that’s just a feeling. It’s not reality. Closed is when the docs (not the term sheet) are signed and you see the investors money in the bank.

Until you’ve actually closed, you NEED to behave as if you haven’t. You NEED to keep multiple funding leads as warm as possible and you should absolutely not start to treat the potential investor as if they are are already a shareholder (or your best friend). A term sheet is NOT a closed deal and even though you don’t hear about it all that often, deals absolutely do fall apart after a term sheet is signed. Term sheets are basically always, very explicitly stated, non-binding documents. These deal blowups don’t receive a lot of press – entrepreneurs often don’t tell the stories in a public setting and even when they do, journalists often don’t want to write about them for fear of getting involved in what is basically always going to be a he-said she-said, potentially making future stories harder to access. Fortunately for entrepreneurs, these stories are starting to be told by bolder journalists.

I’m saddened by yesterday’s article by Sarah Lacy about BNTER‘s misfortune with a fundraising process with Spark Capital; unfortunately, having had my own bad experience with Spark, I’m not particularly surprised. Despite Spark’s impressive portfolio – with standout Twitter among it – my personal experience with them showed them to be completely unprofessional, insensitive, arrogant and disrespectful – exactly the behaviors that I associate with the BNTER fundraising fiasco. But above and beyond the terrible experience that this is for Lauren Leto and her company, it is also a critical lesson for VC seeking entrepreneurs everywhere. Don’t be a victim. Have an explicit plan for how you’ll deal with a failed process. It’s not closed until the docs are signed and their check clears the bank. Period.

Speaking of closing, Oyster just closed (docs signed, money in the bank) a big new financing and strategic partnership. Details soon.

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The issue of Google’s ranking of results on travel and hotel related queries – and all queries more generally – has popped to the surface a few times over the past several weeks.

Chris Dixon wrote a thoughtful piece about it most recently in which he used Oyster as an example of search results not being as good as they can be. Danny Sullivan responded. TechCrunch and Mark Suster also covered the topic recently.

Without wading into the debate between the SEOs and Chris, I wanted to share the experience we’ve had at Oyster. Reposting here the comment I left in response to Chris’s post.

I’m really glad to see that this issue – in the hotel category in particular – is getting attention. The hotel and travel category is a very valuable online category and yet is manifesting important problems with the quality of Google search results. If it’s like this is as high a value a category as travel/hotels, I can only imagine what it’s like in other categories.

By way of context on Oyster and SEO, here’s a bit about how we thought about the problem when we started.

During the summer and fall of 2007, while doing hotel searches for our own hotel and travel needs, we found that the quality of results in Google was lacking. We felt that outside of TripAdvisor, most of what we saw in the Google results was low quality, redundant, information that did not help customers make better decisions more quickly. We also had our issues with the challenges of using TripAdvisors’s UGC to make decisions but we never made a bet that TripAdvisor has to lose so that we could win. On the contrary, we believed at the time – and still believe – that both original UGC and Oyster’s expert content should be surfaced by Google in their first results though we feel strongly that Oyster expert approach is superior to UGC in a variety of critical ways. Original UGC was not a problem that needed solving – TripAdvisor had already done that – and we were passionate about solving the consumer problem with an expert perspective so we founded Oyster in early 2008 and launch in late June 2009 with a subset of the hotel coverage you see on Oyster today.

One of our co-founders, Eytan Seidman, had worked on relevance and relevance measurement in product management at Microsoft Bing so we were well grounded in the tactics of SEO. We did expect that unique, high quality, original hotel coverage that helps customers solve a very real problem would rank well in Google and other search engines. For the most part, we’ve been very surprised by how long it has taken the search engines to rank us. This is despite our having received a significant amount of press attention and customer love. The first page (and typically the second, third and fourth page as well) of Google results for basically any hotel Oyster covers is still covered with content/product that a panel of human relevance rankers would find, as you’ve found, inferior to the Oyster product. At 20 or so months since launch this is no longer my subjective opinion – it’s something I can back up with the feedback from the large pool of users who have found, used, and enjoyed Oyster.

There were other startups in the travel space of a similar vintage to Oyster – Uptake and Dealbase come to mind – where SEO was most, if not all, of their strategy. At Oyster, SEO was something we knew we needed to understand as a tactic but it was never our strategy – our strategy was to solve the problems that a customer trying to make a hotel decision faces. That’s where we were focused and that’s where we continue to be focused. As we iterate on and update our product, we continue to be very sensitive to the realities of SEO. We often find ourselves having to balance product decisions with the needs of SEO and the needs of our customers.

We came to the table with a strong understanding of the tactics of SEO. We’ve kept the tactical needs of SEO closely in mind as we’ve built and iterated on our product. We’ve definitely benefited from receiving search traffic (in any given month about 50% of our traffic comes from search) but have been surprised by how long it has taken our coverage to rank and rank well. What I believe is that search engines are failing customers by not quickly enough finding the better solution that’s available. It certainly seems that this issue – in the travel vertical in particular – has Google’s attention and that they’re aware that their product can, and needs to, do a better job for customers.

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Fred Wilson had a great post about an issue that I think most entrepreneurs have to deal with: how to process all of the information that is flowing past us about other startups.

Here’s the comment I wrote in response:

Such an important topic. 

I’ve found that as a competitive person the hot new startup of the day can trigger the competitive gene. I read something and want to be as successful as that hot new company that did the new deal, raised the big round, etc.. But the reality is that history is not written today. Many of those companies that are hot today will be gone tomorrow so getting my vision of the future from today’s newspaper is a recipe for disaster. 

Ultimately, comparing business A against business B is something only investors get to do. For me as an entrepreneur it’s a largely fictitious option since I can’t start a new company for every new idea that comes along even if that idea is, in fact, a better idea/business than the one I’m currently working on. And of course, by the time another business has *actually* been proven to be a better business, it’s often too late for the new entrant starting from scratch. Though, of course, following the hot business model is a concept that is alive and well – hence the 10s, if not 100s, of daily deal email lists that have been started (and funded). 

Investors get to work on maximizing global maxima by finding the best company among many. Many try, few succeed. The downside is that all of those potential options (companies to invest in) can drive the investor to be unfocused. They know a little bit about many things but don’t really know very much about any one. Unwittingly, in the search for the best business, they become momentum investors trying to get into the hot deal of the day in sectors that seem “hot” but about which they actually don’t yet have a deep feel. I believe that my job as an entrepreneur is to focus on creating a local maxima within the opportunity I’m working on and leave the global maxima challenge to investors. I make my money by getting a single, double, triple or homerun in what I’m working on – all of those outcomes make me and my investors money. I’d love to hit a homerun but if the business is only capable of hitting a double or single, that’s also still good. And it’s very rare that a business, properly executed, can’t hit at least a double or single. 

There is a lot of noise out there in the press and in the blogs and if you emotionally invest in every new trend and meme you’ll get a bad case of whiplash. I’m confident that if you constantly implement the newest feature of the day the result will be a product mishmash and two years down the road you’ll have a bundle of stuff that what was hot but that turned out to be only novel, not important. This will have come at the cost of being focused on the the core big ideas that really catapult your own business. You have to keep your own counsel, for better and worse, if you plan to create the future. 

It’s my job as an entrepreneur to not only see the future but also create it and I can’t do that if I’m also worrying about the five other futures I could be seeing and creating. 

History is not written in todays newspaper.

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See the video of Oyster on ABC’s Nightline

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We live in a global world – particularly when it comes to hotels and travel. To that end, we’ve just launched Oyster.com en Francais. Stay tuned for Oyster.com in Spanish, Italian, Portuguese and German – all coming soon.

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“Vision is not seeing the future, it’s creating it”

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We just added a small new feature to Oyster.com. You can now search for a point of interest – say the Empire State Building – and we will show you hotels that are near it.

http://www.oyster.com/about/points-of-interest/

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Investments in innovation do not pay out in the current quarter. Typically, they don’t even pay out in the current year. If you care about your bonus this year, you are directly incented not to make investments in new inventions as you will incur the expense, but reap no profits. – Ben Horowitz

In his post “Why We Prefer Founding CEOs” Ben Horowitz, inadvertently, explains the root cause of Wall Street’s problems. Professional managers with short term outlooks and incentives tend to be far better at maximizing the profits of an existing business model than they are creating new business models and products. The innovation required to create the latter is significant and risky whereas maximizing short term revenue – while its own set of problems – tends to be not only lower risk but also what the professional manager is going to get paid on. If you make a lot of EBITDA/net income in the short term, you get a nice bonus for your contribution. But what if the right answer for the long term prosperity of the business was to forgo some of that short term profit (and therefore some short term compensation) and instead invest in innovation on things that might not work and if they do work, won’t pay off for a few years.

It’s a problem that afflicts many – but clearly not all – companies run by professional managers and particularly those with strong “pay me now” bonus cultures. It was blatantly in effect at the likes of Citi, Bear, Lehman, Morgan Stanley, AIG, Countrywide, WAMU, Merill (but likely not Goldman) during 2006 and 2007 when, despite tremendous evidence that their existing profit centers (creating mortgage related securities) were failing badly, they chose not to innovate on new business models (GS famously reversed course and went short) but rather to maximize their short term profits. In “The End of Wall Street“, Lowenstein gives some shocking [click to continue…]

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