The Two Keys to a Successful Startup - A Case Study for Entrepreneurs

hi everyone welcome back to the business paper

case

studies this week im taking another one of your suggestions and its whatsapp but i'm just going to use whatsapp to illustrate sequencing the importance of getting sequencing right when it's building your company or product and the importance of getting the sequence right when you are building financial support and investing and raising capital funds for your company both are important and we are going to talk about them through the lens of whatsapp so i'm going to teach you this week it's all about sequencing what it means and how to do it and why it's important and how it can have huge ramifications downstream patients opportunity luck everything plays a factor so let's dive into whatsapp i'm going to dispatch with i like the detailed and essential history of whatsapp but talk about the key milestones and how it relates to sequencing which is the topic this is what i want to help you understand this week so yawn command bri ian acton or on yahoo and they go they go in 2007 it's kind of funny this week my purple pen was dripping everywhere and it makes yahoo look like a pile of slime melted which I guess now is the official description you're going to Bloomberg says Yahoo, a media company that is now a bunch of melting slime. it's o7 they're looking into things like you know something else cell phones could do wouldn't it be great to have the status and my friends available to me things like that hook up with a friend Alex Fishman in the US in San Francisco and they're basically living with savings of about four hundred thousand dollars during this planning stage.

Now what's interesting about this is that they didn't go directly into the business after Yahoo. They spend a lot of time, you know, just living in you. he saved and pondered and planned and thought which is really important to really plan and think and test his ideas and test his thoughts and challenge them and they had a friend of theirs who helped them well right now Apple launches the app store and these guys they're not dumb they're coming from yahoo they're coming from an inventive technological world and they're like they know something those apps could be everywhere doing all sorts of things and what we're talking about we need to have an app developer to help us build it , so fishman goes out and finds it via rent a coder yep there is such a website rent a coder and they find this guy igor so a menikoff if i get it right though those of you who can remember Young Frankenstein maybe we pronounce it I Gore anyway Igor Solomon, a policeman, starts programming for them.

They are using savings and they go to 2009 and join in February 2009. In fact, they incorporated in California, so their idea became planning, then they incorporated the number 9, so they spent two years thinking about it using savings rent a coder get something going so they didn't just jump in they were able to do it and they were actually working small odd jobs and working with other

startup

s in other words have a real job have a plan backup while you use your savings, get going, this whole planning stage leads to the

startup

stage, so when they're out there and they basically start it off with savings then they join in February 2009 and they go out and get FN f FN f means friends and family, for which they get a seed round of $250,000.

They found four, five, six, something like that, as the story goes. from Yahoo, where they got them to pool their money, so they had another $250,000 because building businesses and living ain't cheap, but at the same time you don't always want to jump in with both feet. and just dive right they get it going and you know the prototype was having some problems it was crashing and at one point they were going to give up and I think it's like it's a fable or a fact who knows in June they were like no let's hold on let's go for a couple more months and towards the end of zero nine is when they said no wait a minute let's make a change to the product and bring in the state as well as they were planning now they got this experience with what they're doing they said let's go ahead and have the status right next to people's names so you can find out what's going on and so you know they're sticking with it but they didn't give up and they felt like giving up and if they had that would have been bad so from your planning to your bootstrapping except what you say there will be periods of despair there will also be periods of challenge where you are trying to decide if you know how this goes in too much or I should get going, but they had the sequence right.

Spend a lot of time planning. that's something I believe in. I never believed in bringing friends and family on the first day. I believe in putting the effort and effort to get past that planning stage to get something going before you bring friends and family, so that's early planning if you're going to do it and you'll get validation points from there. One of the big validation points would come when about 18 months later they were found in early 2009 as one of the top 20 apps on the Apple Store, which is an incredible achievement and also caught Sequoia's attention.

So Sequoia, one of the largest VC firms, and now it's gone live, it's got friends and family, it's got a real product and it's got some points of validation and it's good to go. to get their venture capital and you'll realize because they had that and they're sequencing they raised eight million dollars and they only gave 15% of the company to Sequoia which is a remarkably small number for some series I've watched series A which was 40 50 60% to the investor because investors bring in a lot of money and if we agree that the company is worth 20 million dollars and I give you 10 20 and 10 is 30 and now my 10 is a third of 30 that's 33% that it's the way math works folks and then i'll do a

case

study

on finance or maybe i'll do an entrepreneur class on finance you know we can tell you all about it and walk you through it in more detail but in terms of sequencing can be seen how whatsapp yonkou Brian Acton got it right because they raised 8 million for 15% and what that means the Sequoia thought it was worth 45 million dollars pre plus 8 million 53 post and the 58 million is 15 percent of the 53 , are its simple math and its out of place d working out well here you go this was april and about two years later they raised their series B also from Sequoia and Sequoia invested $50 million at a valuation of $1.5 billion you are telling me saying that in two short years you went from 53 million posts to a valuation of 1.5 billion dollars, there's only one word for that damn progress, and you also made it to the top 20 apps with 200 million users that you announced in February .

Sequoia does series B. I think it was in April and then by the end of the year you're at 400 million and that's the end of the 13th and clearly you're in your Venture stage you have validation and your growth and you're heading towards escape velocity which is exactly what was about to happen because in early 2014 Facebook comes along and buys the app for 19 billion dollars wait a minute that's almost that's like 15 times you know in less than a year the value in 15 times 19 billion there's only one word for that damn there's actually a word for that double curse you know now we've got a new double curse cause you look at something like that that's amazing absolutely amazing you know at the time it was the output of a biggest private company of all the timings but check out the sequence this is the way it is supposed to happen a planning phase followed by boot days followed by an adventure phase followed by start bays and at each point careful not to get ahead of yourselves one thing WhatsApp did that I completely believe in and you don't You don't have to have a nineteen billion dollar output to show that you raise money and call it luck call it planning call it whatever you want but this is the way they raise money in a company friendly way you can also raise money in an investor friendly way where sometimes you're going to get money sooner than you need it by giving up more of the company than you want so as you go here we can talk about what happened after the Facebook background and the use of security and how that's a fantastic advantage that what has faucet really sets it apart and you know when You talk about Facebook arguing with the government and Apple arguing with the government about security and you know how unfortunate that happened in San Bernardino the shooting that happened two years ago and how the government from the US wanted Apple to help them crack the phone so they could see what was inside that security is a big concern but also the reason why things like Snapchat where things disappear and cyber does the brand.

The Cuban company now simply called polvo is popular because there's no record of what's going on, well there's no record of what's going on as a close cousin of high security because it's about values, you and me, so the point of differentiation in safety is and their wild growth is what I gave them here because they have product differentiation but when you look at the sequencing from 2007 to 2014 in those seven years this is the way sequencing is supposed to work . k I'm in a planning stage and use my own savings and don't quit my day job I get to a breakout age where once I have something to prove to people I bring friends for friends and family. don't give up when my software fails because I see the promise I see the hope Don't wait too long in their case once they add status and make things explode venture phase that VCs are eager to invest in but I haven't than giving up too much in my series then i get follows in whatsapp case you or anyone else is not going to see this let's face it. it's a rare opportunity here, but could he see a series B where he raised 25 million, 20 million and maybe a hundred million dollar valuation? progression would be company friendly, but would still have a great opportunity for VCs to come in and make a return rn for their investors and their general partners, ultimately driving a great business with differentiation from the venture stage to exit , whether it's a merger and acquisition or an initial public offering like Snapchat and Twitter and Facebook did recently of course or you just go up and get bought like Instagram and whatsapp did but that's sequencing and sequencing is paramount and there's three things that are necessary to sequence a patience to more brains than just yours talk to people talk to people you trust who know what they are doing not just make a friend friends with people who have walked the path with you, point two and then point three, the truth of your numbers should speak loudly because there will be a lot of heart in there and a lot of faith in it and you are not going to be the first entrepreneur to sim just believe it's going to work you have to get friends with you who know what they're doing so make those new friends so those are the best there are three points to always keep in mind what you're talking about sequencing and I think this is a great

study

not only on what became a great company, a phenomenal product that gives you and me a communications product with security and everything that is, but also a great sequencing story on how the sequencing was developed sequencing in a company friendly way and that's this week and i need my pillow ok good the good i was good at sequencing they are good to throw please subscribe to rate tame it the best channel on youtube and and the internet everywhere looking for business content till the Next time.

I am Thomas Rath and I hope I have guided you in that.