Advice for the First-time Startup Founder — How Drop's CEO Learned Everything th...
source link: https://firstround.com/review/the-first-time-founders-guide-to-learning-everything-the-hard-way/
Go to the source link to view the article. You can view the picture content, updated content and better typesetting reading experience. If the link is broken, please click the button below to view the snapshot at that time.
This article is a lightly-edited summary of the key takeaways from Steve El-Hage’s appearance on our new podcast, “In Depth.” If you haven’t listened to our show yet, be sure to check it out here.
The earliest days of Drop began with what founder dreams are made of. In the first week after launch, the company (then called Massdrop) did $12K in revenue, and it continued on to do $25K in week two, followed by $50K in week three — all with only (as co-founder and CEO Steve El-Hage puts it) a “janky website.” The new business partners were even prominently featured in The New York Times, as one of the early founding teams living in a so-called “hacker hostel.” (As they started fundraising, they upgraded to a sparsely-furnished Palo Alto house, where our very own Josh Kopelman visited, sitting on a cardboard box as he explained how First Round could be supportive.)
El-Hage and his co-founder Nelson Wu had unearthed something special by tapping into enthusiast communities, which went nuts for its discounted group buy process on electronics products. That kernel of an idea generated tons of traction early on, which enabled them to quickly meet potential investors and raise venture capital.
But after stacking up a series of promising wins, the startup quickly toppled off a cliff, and revenue went down to zero — and we don’t mean that in a hyperbolic sense. “We chalked it up to, ‘Well, we’ve been busy with fundraising and we’ve been distracted. We’ll see next week.’ And then the week after we did zero again. And then the third week we did zero. We did zero for eight consecutive weeks and we couldn’t figure out why," says El-Hage. "The worst part was that we were working way harder than we were before, but we just couldn’t get anybody to buy anything. After we closed, we basically had to go to this group of investors and say like, ‘We promise we didn’t trick you guys.’”
Fast forward eight years, and you’ll find that Drop has since achieved a special alchemy of data-driven design and community validation to build products that people actually want. “Now we’re able to make and launch over 200 high-quality products at a time. 98% of our products launch successfully and pre-sell their initial production run,” says El-Hage. “Right now the company is about 100 people. We were able to scale to about $100 million a year in revenue. Everything's organic, we're profitable and have been generating positive EBITDA for a little bit now.”
Anecdotes like this one prove El-Hage may have one of the most under-appreciated founder stories to learn from in Silicon Valley. As he puts it, he’s had to “learn everything the hard way.” The twists and turns the company has faced offer a mountain of lessons that those polished stories of successful startups and visionary founders often lack. After dropping out of Stanford to become a first-time founder when he was just 22, El-Hage and his co-founder were short on cash, experience in tech startups, and the Silicon Valley connections that can make the bumpy early days much smoother.
There’s a problem when you start a company when you’re 22, and the problem is that you don’t know anything.
From resuscitating revenue and later pivoting away from Drop’s most popular business line, to the executive hiring blunders and severe team-wide burnout that needed to be remedied, El-Hage has tackled each early-stage company-building obstacle with a penchant for grit, putting his head down, and grinding it out. In this exclusive interview, he gets incredibly candid about the five critical lessons he’s picked up along the eight-year hustle and the growing pains first-time founder-CEOs face, with plenty of frank wisdom and helpful advice for current or future startup founders looking to build companies that can go the distance.
LESSON #1: LISTEN TO USERS TO RESUSCITATE REVENUE THAT’S FLAT-LINED.
To right the ship when revenue nosedived after early wins, the young entrepreneurs tried to recapture that initial magic that helped them take off in the first place. “It was a process of elimination — just replaying those amazing first three weeks. But everything was happening too fast for us to truly understand why those early successes were happening,” says El Hage.
To start sleuthing, they cozied up to those users who were so jazzed at the beginning. “We started talking more and more to our users and breaking down what they liked and why they got excited. The common theme was that we were listening to them and were responsive to them. We weren’t just another company trying to sell them shit. We were representing the community, and that was really important to them,” he says.
With these insights in hand, the company doubled down on the community side of the house, and started building out features to let users participate in listing and sourcing products. Although moving slower than they did in those first couple weeks, their cash flow began to recover. “The next month we did $10K in revenue, which is way better than zero, but way less than where we were the first couple weeks. It took maybe six to eight more months to get back to where we were in the earliest days, and probably another year to hit an exponential growth point, says El-Hage.
But throughout this critical phase, the company kept a close eye on their users — even if what they wanted wasn’t quite so popular. “We saw that our users had lots of thoughts on what brands should do, but the brands weren’t listening to them,” he says. “We wanted to build an onsite discussion system as part of the community shopping experience. A lot of advisors and people around us were super strongly against the idea. Why would we provide ways for people to openly hate on products and complain about what they don’t like? Brands and people that make products would say, ‘Haters gonna hate — you can’t listen to everybody on the internet.’ But we saw that it was insightful feedback.”
A lot of people that design products are in the mindset of, “I will magically imagine some perfect product and I will pass it down as a gift to my users.” But it's usually the other way around — existing users talk about what they wish brands would do, but that feedback isn’t incorporated into the product.
The company started presenting collaborations and partnerships with brands, with the idea of making a product together. “We’d say, ‘We’ll bring the design and specs and philosophy around how to make a product that achieves the community needs, and you guys do the engineering and manufacturing,’” says El-Hage. “That was tough to initially get people on board with, because it requires an admission that they might not be making the best things. It took some time.”
The persistence paid off. “Once we started actually making progress and ultimately launched our first product, it was our best-selling product of all time. It showed us what was possible,” he says. “We took the same community design methodology and applied it to the keyboard category, and it worked very similarly.”
LESSON #2: YOU’RE GOING TO SCREW UP KEY HIRES — IT’S ALL ABOUT HOW YOU COURSE CORRECT.
To get started on the long trek of scaling the new business, El-Hage and team set off on hiring without a clear trail map to follow. “We didn’t have a deep network that we could pull in as part of our first team members. We needed to meet and talk to a lot of people in a very short period of time. We had to screen and filter aggressively,” he said. Below, El-Hage shares lessons learned from hiring both early employees and later executives to help the startup scale.
Look beyond conventional candidates and ordinary interviews for your first few crucial hires.
El-Hage and his co-founders would stack a day with 80-90 interviews at just five to 10 minutes apiece. “We just wanted to start figuring out whether or not they’d be interested in working with the circumstance that we’re in,” he says. (For the first two years, the founding team and early company employees all lived in the same house in Palo Alto house together.)
The company honed in on three key values to screen for: “Our goal was in five to 10 minutes to roughly check off these boxes or not,” he says.
Enthusiasts: “We wanted to test how much they knew about enthusiast communities. It didn’t matter what the community was. We had someone that we hired that was big into red worm composting — but at least they were excited about it, and they could understand the philosophy behind these communities. Can you appreciate that we have an atypical group of users that are passionate and interested in these things?”
Work ethic: “We wanted to hear the hardest that somebody has ever worked in their life. It didn’t matter what the circumstance was that they decided to share. It could be that one semester you had five classes when you normally had four — I don’t care. But your concept of what the hardest you can work is, and how closely it aligned to our concept, was important to us.”
Autonomy: “We’re very explicit that this is not a normal job. We needed to gauge their attitude towards building something. We’re going to be aggressive on equity and we’re going to give people phenomenal amounts of autonomy. As an example, our engineering interns ship changes to the homepage on the first day. That’s not common for a lot of places.”
El-Hage and his team found that this approach meant they weren’t stumbling upon the usual suspects. “We interviewed people with hugely atypical backgrounds that hadn’t worked a white collar job before, but knew a lot about these enthusiast communities and had the work ethic we were looking for,” he says. “It ended up being a massive hiring advantage — we didn’t have to compete for the Facebook engineer that everybody’s trying to hire. We were able to identify somebody that had been missed but overlapped with the value system that we had.”
They also used the tactic of bringing top candidates on board for a couple days for a trial run. “If it was for a sales position, we’d get you on the phone and you’d spend one to three days making calls. We’d look closely at the progress they made during those three days,” he says.
But as El-Hage soon discovered, no process is perfect. “We hired a lot of people who didn’t work out, unsurprisingly, but the most important thing was we were able to address it very quickly. The second we realized somebody wasn’t working out we had an honest conversation and parted ways. It took us many, many hires to get to the first 10-15 that ended up defining what the company was going to be like,” he says.
A common theme in hires that didn’t work out is how they handled it when things got hard. It’s one thing to get on the phone and make sales calls. It’s another to be behind on your numbers.
Nailing executive hiring...the second time around
As the company continued to scale, El-Hage found that exec hiring is a different beast altogether — from sourcing quality candidates to building an effective interview process that illuminates the right person at the right time. “The first time around, I made a lot of mistakes. There’s a rule of thumb that you’re going to screw up 50% of the exec hires that you make. Mine was definitely higher than that,” says El-Hage.
“The hard part is that you’re going to hire someone for marketing or finance or whatever, and you’ve never worked in that function. You’ll be impressed by the fact that this person knows so much more than you — but that’s not really relevant. It’s not about whether or not you don’t know anything. The question is, how good are they compared to everyone else out there? How good are they for the company that you’re building?” he says.
One of my biggest mistakes as a first-time founder was executive hiring. It took us awhile to realize that the most important thing was that we needed to hire people who had already done exactly what we needed them to do — not a similar thing on a different scale.
But El-Hage didn’t miss an opportunity to turn these missteps into major lessons. “One of the things that helped me the most was running that team in the interim, which gave me a new insight on what exactly the team needs from a skillset and a leadership perspective, and then interviewing against those things,” he says. “Before I was just assessing overall competence and overall experience.”
Take this specific example: “We had a finance leader with a great background, and we were lucky to bring them on. During their tenure, there were lots of processes implemented and it was very controls-focused. But the impact was low, and we were getting really slowed down by controls and best practices. It was frustrating as a team that was used to moving fast,” he says. “Ultimately we parted ways, and I ran the team for eight months. In my next interview process, I knew I wanted a CFO that could grow the company, so that meant caring deeply about FP&A, the ability to model the business, and thinking beyond accounting to real fundamental indicator modeling. It was definitely a COO-esque CFO position, and we ultimately found somebody with that background.”
By focusing on checking all the boxes, you might hire somebody who’s the weakest in the boxes your company most critically needs.
“We’re focused a lot more now on hiring specifically for strengths. We’d say, ‘Hey, this person’s amazing at FP&A and operations, but isn't that good at accounting.’ And we would hire them knowing that we needed to bring someone on to complement them. That worked out much better because there was a set of things that were important to us that they were very, very good at, versus the first time around I might have dinged them too much for being bad at what I assumed was a core competency of a senior leader.”
To dive deeper, El-Hage shares a few tactical tips for hiring execs that fundamentally change the trajectory of the company in the best ways:
Choose your panel wisely: “Be very thoughtful about who’s in the interview loop, and make sure everybody in the loop has veto power. If you don’t care what somebody thinks, don’t put them on the panel. And if you do care what they think, make sure that you empower them to have responsibility in the process.”
Lean towards a working session: “One of the things that was most helpful was using the interviews like we were doing a working session in the same way that we’d work with advisors. We’d meet for an hour, spend 10 minutes getting them hyped about the company and what we’re up to, and then quickly jump into the biggest problems that we have, and how they’d solve them. First, we got to see how they would solve problems in a practical environment. Second, it made me willing to interview more people because I was crowdsourcing ideas and perspectives for how we could achieve our goals. I was merging interviews and my own work.”
Hold yourself to a number: “After I made a mistake for a hire, I would insist on not making another offer until I met with more than 30 good people — which is a lot, and it’s a big pain to find 30 C-level candidates. But this was my accountability to myself — I just screwed up the first one, I’m not going to do it again and hope everything’s fine. By person 10 or 12, you’re getting better at pattern recognition for great answers versus okay answers. By person 20, you’ve probably seen some answers that blow your mind and you’ve never thought about.”
LESSON #3: WHEN IT COMES TO ADVISORS, BRING ON MORE AND DEDICATE MORE TIME TO THEM.
With funding in the bank and a strong conviction in the company’s mission to spotlight enthusiast communities, El-Hage turned to grappling with the challenge of running a growing company as his first-ever “real job.” “Especially during our fast-growth years, we went from 10 people to 80 in just nine or 10 months, which is effectively going from never having a real job to managing a respectively-sized group of people,” he says. For a founder crash course, El-Hage needed to stack the bench with a group of experts for him and his team members to lean on.
“It started with looking to our investors and asking for the CEOs that had scaled. The next step was we went to those CEOs and asked them for the best people they know in every function. ‘Who is the single best VP of engineering you’ve ever met? Who’s the best HR person?’ I asked them for a list and to intro me,” he says.
“Most of the advisors that we were introduced to weren’t the most famous people — a lot of them were under-the-radar, and had more time to dig in. I did some mild filtering for who would be more or less helpful or willing to invest more time, with the goal of hitting our target of three advisors per major function,” he says.
Drop stacked the advisory board with 20-30 people, but cultivating a top-tier stable of advisors was only the beginning. Along the way, El-Hage had to constantly tinker with how he deployed these advisors to make the most of the time they had together. “A lot of people don’t structure their advisors correctly. Most of the time you have coffee with them once, you tell them what you’re up to, they tell you what they did, and then you maybe talk to them once or twice again — that’s it,” he says. “I would meet with my advisors for maybe 20 hours a week on average for a year — maybe even more in some cases,” he says.
A lot of advisors really want to help, and if you let them help and actually have impact, they’re willing to put in more and more time.
To build these robust relationships, El-Hage deployed a few key tactics:
Think workshop, not catch-up chat: “One of the things that was the most helpful was zooming in on exactly the problems that we’re working on now and seeing how they would solve it. We would effectively use these as workshops and working sessions — let’s look at the metrics and dive into what’s happening. It’s not a high-level strategy, it’s like, ‘Hey, we’ve got an hour today, we’re going to use this whole hour just on this one particular problem.’ We wanted to get them under the hood.”
Build an asynchronous sounding board: “Having two or three advisors per role was hugely beneficial, because we could effectively have an asynchronous meeting. We weren’t bringing in all three advisors at the same time, but one person would tell us what they would do, then I’d take it to the second and third person. Getting multiple perspectives on the problems that were high fidelity was important.”
Close the loop: “Probably the single most critical thing in terms of getting your advisors to be proactive and helpful and asking real questions is closing the loop. They’d tell us to do something and we’d go try it, and I’d always message the advisor and say, ‘Hey, you suggested this, we went and did it, this is what the result was. Thanks a lot.’ This is already 50x better than how most people interact with their advisors by making it clear that they could have impact here. I think that changed their commitment and that’s why we were able to spend so much time with them over that first year.”
LESSON #4: PROACTIVELY MANAGE BURNOUT FOR YOURSELF AND YOUR TEAM.
El-Hage admits that he works long hours and that Drop’s culture was intense in the early days. “I didn’t know anything when we started Drop, and I felt like if I wanted to maximize my likelihood of success, I needed to work 100 hours a week. If you don’t know anything as a first-time founder and you work 30-40 hours a week, you’re leaving a lot on the table, and you’re not maximizing the opportunity,” he says. “If you’re more experienced or end up hitting a very scalable product-market fit early, then you can do it with 50 hours a week. But given everything was back-and-forth between test, trial, iteration, trial, and iteration, it demanded a lot from me in the early days.”
In the midst of putting in extra hours to figure out his own role as a first-time founder and CEO, picking his head up and checking in on those around him rarely made the to-do list. “There was definitely a moment when all of the other top leaders at the company had basically burned out — and all of these people had an exceptionally high threshold for burnout,” he says. “I thought, ‘Wow, if these people are having a hard time with this — we’ve effectively hit the limit if I want them to stick around.”
El-Hage more acutely focused on the team’s well-being — including forcing time off on some hesitant leaders. But achieving equilibrium was a slow process. “Once people burn out, it’s very hard for them to come back from it. I think it took an average of nine months to get back to being in the zone for each of them,” he says. Here’s how he approached it.
Spot the tell-tale signs of team burnout, then make an action plan.
Over time, El-Hage got more attuned to detecting team burnout before things hit a boiling point. “There’s definitely some early indicators of burnout — particularly around excitement. If somebody is pumped about where things are going, they’ve got new ideas and are being proactive. But you’ll see they get in a negative cycle where all ideas are bad. They’re snappier in meetings. It’s one thing when somebody has a bad day, but it’s another to feel like this is an uncharacteristic steady state,” he says.
After spotting the tell-tale signs, the next step is to open up a conversation. “Usually by the time somebody is burned out, they know it. But it’s important to have the conversation and say, ‘I think you’re burnt out, this is why.’ And almost every time they’re like, ‘Yeah, you’re right,’” he says. “Sometimes it could be that they’re not working on stuff that they want to work on, or things are out of their control — whether it’s parts of their life or within work.”
Even if he’s missed early signs and is caught by surprise when one of his team members burns out, El-Hage has learned it’s important to not throw in the towel just yet. “I’ve had execs quit, and during that conversation, I’ve asked if it was because they’re burnt out, and they say yes. I would ask to make a proposal to address the burnout instead of them quitting. Sometimes it involves launching new efforts that I knew they’re passionate about, or the addition of a rec or two that’s dedicated to doing the stuff they hate doing,” he says. “But let’s work together and make a program, and if at the end of that you still want to quit, then quit. And pretty much everybody has been through that has stayed for years after,” says El-Hage.
If you want to quit because you want to do something else or it’s not for you anymore, that’s a good reason. People aren’t going to work at your company forever. But if you’re quitting because the environment is driving you crazy, as CEO that’s something I can control and shape.
Managing your own burnout as a company KPI.
El-Hage has also had to face his own burnout — although it hit him later than you might expect. “My burnout happened between years four and five of building Drop. After a monster Series B round we were in hyper-growth, which is a great place to be. Up until that point, I had been working pretty much constantly. We had made so many decisions that resulted in so much learning. At least for me, I needed a period to pause and synthesize and let that soak in,” he says.
He took his first vacation in years — and then took another one six months later. “I started spending time with friends that were relationships that had kind of drifted. I started exercising more, getting healthier — all of these basic things that you need in order to move into a more sustainable long-term phase,” says El-Hage.
I needed to take responsibility for my own burnout and make sure it’s actively managed, like a KPI of the company — and try to do the same for my team.
You can’t always drop everything and hop on a plane, so El-Hage has finely-tuned his daily practices to keep burnout at bay. “I’ve become a lot more proactive about constantly managing it, instead of letting your burnout meter blow the top and snapping. If the meter goes up a bit, and how do you pull it back down? For me, it was diversifying what I spent my time on. I started working on small side projects, which was a huge boost in long-term sustainability and freeing up some headspace,” he says.
One of the biggest risks to company performance is founder burnout. It’s the CEO’s job to present and communicate in a certain way our commitment and focus and excitement. If that’s not lined up, there’s going to be a lot of ripples, and it can be dangerous.
LESSON #5: SPOT LOOMING LONG-TERM PROBLEMS, MAKE UNPOPULAR CALLS, AND STICK TO YOUR GUNS.
Many years later, the learning curve is still just as sharp as when El-Hage was just 22. Recently in Drop’s journey, he’s faced some tough — and unpopular — decisions that bring to mind those choppy waters in the early days.
“In the last 24 months, the leadership team needed to change how we address early indicators of hitting a local maximum. The company was doing great, we had doubled the previous year from $50M to $100M — which is fantastic by all standards. But deep down, the founding team had concerns about the core model. It’s an odd point to question it, when things were arguably the best they’d ever been from us,” he says.
“At the time we had two parts of the company. We had this group buy model where people could buy third-party products at a discount — and that part of the business had scaled to this big team and big effort. The second, less prominent piece of the company was our own products that we made in partnership with the community in our design process. The vast majority of our revenue at that point was coming from the third-party discounted group buys. Our retention on that front was phenomenal. All our KPIs were solid — NPS, retention, organic growth, they were all great,” he says.
But looking closer under the hood, there was cause for concern. “Our unit economics for the discounted group buys were really bad, and by that point enough time had passed where we should have figured out how to improve it by now — and it wasn’t improving. The margins were very low. We would need to disproportionately hire to grow revenue. Our long-term value prop for the third-party products was built on price, which is very fragile and fleeting value prop. Our burn rate was fine, it wasn’t like we were hemorrhaging money, but we knew that longer-term, this would be a problem,” he says.
“Meanwhile, we’ve got these products that we’ve designed ourselves that are phenomenal from a quality perspective and users are super excited about them. Their unit economics are amazing and the community engagement around them is much higher than anything else on our platform,” he says. But despite the positive feedback, Drop’s own in-house products had never reached nearly the same revenue as the discounted third-party products.
Leadership saw the writing on the wall and took an unexpected, sharp left turn to walk away from their most popular business line. “We decided that we weren’t going to sell any third-party products at a discount anymore, because we saw it as a challenge to be able to survive long-term,” he says. “We very swiftly and aggressively made that shift to move over entirely to our own products. That was really tough. We got out of 35 categories to focus on consumer electronics, and that required parting ways with many people in the company.”
Drop’s C-Suite faced an avalanche of negative feedback — and a balance sheet that drastically dipped. “This was not a popular decision. Our users weren’t happy. Our investors weren’t happy. A lot of our employees weren’t happy. The short-term impact was horrible. We had just laid off a lot of people that were great and contributed a lot to the company. The first three to six months our revenue shrunk 30% in the first quarter, and another 30% in the next quarter,” he says.
But by that point, Drop’s history had already been marked by plenty of twists and turns — El-Hage and his team were no stranger to tough calls. “The fact that this happened after a lot of hard things had already taken place — like almost running out of cash multiple times — gave us the conviction to make a decision and act on it very quickly,” he said. “Even though the response at first was overwhelmingly negative, nothing changed about the underlying issues that motivated us to do this. We still believed long-term that this is where we needed to go.”
The leadership team stuck to their guns — and it paid off. “By month six, our revenue started bouncing back and by month eight our revenue was where it was before. Our gross profit was high, if not higher. By month 10, we were profitable and EBITDA positive,” says El-Hage. “Now, the company is in the healthiest position that it’s ever been. We have much higher focus as an organization. We have a clearer path forward that we feel we can grow. I don’t think I would have been able to make this tough decision four or five years ago. But now it’s one of the best decisions we’ve ever made,” he says.
Many companies that go under, especially in consumer, know what they need to do. But it’s tough because you’ve got to change the panels on the ship while keeping it afloat.
When weighing which route to follow when facing two imperfect paths, El-Hage implores startup founders to trust their gut.
“You effectively have two choices: You can either make a change as fast and aggressively as possible to get to where you think the company needs to be, or you can wait and see if your hunch is right, and that all these things that you’re worried about end up being a big problem. The issue is, if you wait and then you end up being right, you probably don’t have the ability to make the change anymore. You’ve wasted too much time,” says El-Hage
If we’re going to go under, it wasn’t going to be because I didn’t do what I thought we needed to. Or I didn’t do what I thought was right because it was too hard or other people might not have liked it.
Now that Drop’s come out on the other side, he’s got plenty of empathy for folks who are in the same entrepreneurship boat — and certainly knows it’s not the last tough call he’ll need to make from the CEO perch. But El-Hage’s found that each thorny decision brings more confidence and conviction.
“A lot of times when I talk to founders who need help, it’s that they’ve gotten into this headspace where they’ve tried everything, they’ve worked like crazy and it’s just not working. They’re depressed, miserable and they’re out of ideas. It’s especially hard for first-time founders, because you have less evidence of your own success and less momentum to lean on,” he says. “How you handle these moments will dictate whether the company is going to work or not. The goal is to figure out how to reset, recontextualize, and make a new plan. Get out of this pit and go give it another shot.”
Aggregate valuable and interesting links.
Joyk means Joy of geeK