Timing, experience and focus

Brewer Dan Gordon was the speaker this week at the Silicon Valley Center for Entrepreneurship speaker series. Although he talked about success in a low-tech business — the German brewery where he trained dates back to 1040 — some themes resonated with my high-tech startup experience.

Of course we had a full house for the co-founder of the Gordon Biersch brewing company and restaurant chain. (He and partner Dean Biersch sold the restaurants in 1999). This is even without adjourning to the nearby GB restaurant for product sampling.

His friend and host, angel investor (and SJSU adjunct professor) Steve Bennet introduced Dan by saying

I'm a strong believer in following your passion: do what you love and the money will follow.

Although Steve and I usually agree, I wanted to argue with him on this point — in part because of a story I read last week in the NY Times small business blog. In discussing a prospective retail startup, serial entrepreneur and NTY blogger Jay Goltz wrote something much closer to my own views:

The risk of entrepreneurship can be reduced if you understand how to take a calculated risk. But the mantra of “follow your passion” is not about calculating anything (even though it can sometimes be good advice). I have met plenty of people who went through the horrible experience of failing in business. They were passionate, too.

Instead, I synthesized Dan Gordon’s story into three general lessons:

1. Timing
2. Experience
3. Focus

This might not be how he outlined his story, but I think Dan Gordon would agree they were important in his case. I know they would have made a big difference in my own startup experience.

1. Timing
Gordon emphasized how his combined brewpub-restaurant was better than anything else out there at the time. Now we take for granted that a brewpub can serve good food (my personal favorite is BJ’s because they serve ale instead of GB’s German-style lagers.) But when Dan and Dean opened their first restaurant in Palo Alto in 1988, it was ahead of what would prove to be a wave of similar efforts.

He also reminded the audience that they started brewing beer when Samuel Adams (Boston Beer) was just getting started as a regional brew. So Gordon and Biersch were at the leading edge of two emerging trends of the 1990s: a willingness of Americans to pay a premium for good quality beer, and a desire for better quality food and atmosphere during social drinking.

More than 20 years later, I still remember my mentor Charlie Jackson saying: “I’d rather be lucky than good.” That is to say, timing is everything.

2. Experience
Gordon was quite emphatic about this point: being an entrepreneur (at least in restaurants or retail) is no place to learn on the job: “There should be no learning curve. It shouldn’t be the first time you’ve delved into that subject matter.”

In his case, he’d been a cook since aged 15, did five years of graduate study (in German) at TUM, studying Brauwesen at this Bavarian university. He’d also worked in machinery manufacturing, while his cofounder was an experienced restauranteur.

In tech startups, we are biased by stories of Bill Gates, Michael Dell and Mark Zuckerberg starting companies in their dorm rooms. We forget that many tech entrepreneurs (like Larry Ellison or Irwin Jacobs) were veterans in their industry, while the technical founders of companies like Sun, Cisco, Yahoo and Google were among the most technologically knowledgeable in the world (in a new and emerging industry).

As a freshman at MIT, my friend Mike Keagy told me that he wanted to start his own business but he was going to work for someone else when he graduated from college. When I asked why, he said he wanted to learn the ropes on someone else’s dime. (At 18 he was wise beyond his years.)

3. Focus
As a customer, I would like his restaurants (or his cases of beer at Costco) to include ale. I like my beers hoppy, which means some form of bitter ale. According to Gordon’s report, most of his beers have an IBU score of 18-25 while my preferred pale ales are 50+.

So during the Q&A, I asked Gordon why he doesn’t make an ale for people like me. He gave a two part answer. First, his personal tastes and experience are towards German beers (NB: See #2 above). He learned German, studied as an undergraduate in Germany, and trained in a German brewing college. So it’s not surprising that he has chosen to focus on German-style beer.

Secondly, he noted that the successful microbreweries tend to specialize in a particular type of beer. His personal favorite, the Oktoberfest-style Gordon Biersch Märzen, accounts for 68% of GB’s brewing sales. He estimated that Sierra Nevada (located in rural Chico) gets 90% of its sales from its signature pale ale, while New Belgium Brewing gets “98%” of its sales from Fat Tire ale.

Maybe if you want to be the next Cisco or HP, you’ll try to be all things to all people. But look at Qualcomm or Intel or Apple — even within their diversification, there is a clear and internal consistency to their choices. Even IBM — once the largest and most diversified firm in the computing industry — today is focused on its unmatched skills at integration and high-value services.

He also noted that GB is not a national beer brand. They were inspired for the combined restaurant/retail synergies by Ben & Jerry’s push into grocery store. However, the company is careful to only distribute its beer in regions where there are also restaurants.

All of these points tie to the coda of Dan Gordon’s restaurant career, which today is limited to attending restaurant openings on behalf of the restaurant tied to the coda. His day job is running the San Jose brewery that turns out the cases of beer while the restaurants were sold off in 1999.

Gordon tied the decision to a 1999 change to the California “tied house” law that permits brewpubs: the new law limited the beer output of a company that owned restaurants. (Answers.com says GB sold the restaurants to operators better able to expand the brand across the country.)

To hear Dan Gordon speak is to hear someone who after 25 years still loves his job, who clearly is living his passion and someone who’s continuing to seek new challenges after he long since mastered his craft. So living your passion is the dream of many entrepreneurs, but you need to have the right opportunity and know what you’re doing.

Segmentation and execution matter

My favorite meeting place here in Silicon Valley is any place named “Panera”: the food is fresh (if overpriced), the atmosphere is bright and cheerful, and — most importantly — the Wi-Fi is free.

Even now that Wi-Fi is free at Starbucks, I prefer Panera because they are less cramped and they have things that I actually want to buy to rent the table. There are three I use regularly near my home, in addition to several in San Diego and one in Santa Monica. I was at one last night and will be at a different one tomorrow morning.

Ron Shaich, founder of Panera, was interviewed this morning in the WSJ about how the created Panera and its predecessor, Au Bon Pain. He bootstrapped his first bakery chain, then merged it with a struggling supplier called Au Bon Pain. The merged company IPO'd in 1991.

To have something that was more suitable for suburbia he then acquired a small sandwich chain and renamed it Panera. To pay for the growth, he sold off Au Bon Pain.
So with his Harvard MBA, Shaich turned around and grew two existing concepts through superior execution. Although the competencies were similar, he found it essential to keep the two organizations (and concepts) distinct:

Q. After Au Bon Pain went public in 1991, you decided the company needed a new focus. How come?

A. The very thing that had made Au Bon Pain a success was limiting it. We could go to Rockefeller Center or World Trade Center and offer real food to people that could be served quickly, like turkey with smoked brie. It did extraordinarily well in high-density markets, but it wasn't mass-market.
…
Q. Why did customers like Panera?

A. We changed the environment [of fast dining] away from formica chairs bolted to the floor. And we changed the bread itself. We make fresh dough, every night. We have thousands of bakers. Those details really matter.

Chronic (aka serial) entrepreneurs seem to bore of old challenges and be always chasing the next big thing. But in this case, Shaich shows the importance of keeping the two businesses distinct, and not trying to achieve synergy (or brand extension) by blurring the lines.

Also, in Silicon Valley we tend to think of entrepreneurial advantage in terms of superior technology, IP or other formal entry barriers. In this case, both the Au Bon Pain and Panera concepts were something anyone could have had — the vision is much more incremental than Ray Kroc or Harland Sanders.

The success of Panera Bread Company (PNRA) was a function of willingness to bet on the vision, the ability to execute it consistently — and the ability to generate (or acquire) the capital necessary for expansion. As technology-based industries become more mature and more crowded, these previously underestimated success factors are increasingly important.

Timing is everything

Over the weekend, Apple bought music streaming company Lala for an unspecified price. The most authoritative report comes from blogger/reporter Peter Kafka:

Apple ended up paying around $80 million for the company, according to multiple sources. That’s less than half what investors valued the company at in 2008, but it’s more than the $35 million the company raised throughout its life. Which means that some investors could get their money back and more.

But not all of Lala’s investors. Warner Music Group (WMG), for one, ended up getting back about half the $20 million it put into Lala, I’ve confirmed with people familiar the company.

This account and others make it clear that Lala is being purchased for the knowledge of its staff and its technology. One thing it never did was create a viable revenue model, despite multiple iterations and support from both VCs and record labels.

This seems to be a common problem in Web 2.0 startups. The Dot-Com II era has not been creating viable stand-alone companies, but instead technology sandboxes that have to be bailed out by a good fit to a rich incumbent. In this case, Lala’s service nicely complements the market-leading iTunes. But relying on acquisition for exit has always been a small-numbers problem, particularly when the big boys have gobbled up your competitors (leaving you without a dance partner).

As it was, it sounds like the Lala investors (or founders) got a little greedy. Kafka notes that the investors thought the company was worth $200m at its peak. It‘s not clear if there was a willing buyer that was turned away. But if the owners were holding out for more, they clearly gambled big and lost big. As Charlie Jackson used to tell me, “I’d rather be lucky than good” — an admonishment that timing is everything.

Instead, timing is against the entire categlry. A lot of people thought digital technologies would transform the music industry, and thus garnered piles of VC in hopes of realizing that vision. As Kafka notes, the track record is not great:

The last big exit for a digital music company happened way back in the spring of 2007, when CBS (CBS) paid $280 million for Last.fm. But no one has gotten anything close to that for digital music since then. Imeem is being sold for spare parts, and News Corp. also bought iLike at a steep discount. Spiralfrog filed for Chapter 11 after burning through its cash.

Still, somehow Pandora raised another $35 million. Between the economy, the capital markets, the cratering of its sector and its similar lack of a business model, the wildly popular service with innovative technology has been darn lucky to survive multiple brushes with death. If I were CEO, I’d be looking to negotiate any exit ASAP.

Update Wednesday 9am: Other estimates put Lala's purchase price at $17 million — and a net price of $3m after allowing for cash on hand. Meanwhile, MySpace bought another music service with $24m of VC for “less than $1 million” according to various accounts.