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Guy Kawasaki: Starting a Business: Answer to Lost Jobs?

Guy Kawasaki is the co-founder of Alltop.com, an “online magazine rack” of popular news topics, and managing director of Garage Technology Ventures, an early-stage venture capital firm. In addition, Kawasaki is a writer and speaker. He is the author of 10 books including Enchantment, Reality Check, The Art of the Start, Rules for Revolutionaries, How to Drive Your Competition Crazy, Selling the Dream, and The Macintosh Way. He is also a speaker on a range of topics including technology, entrepreneurship, and life.

His first job, while still in graduate school, was counting diamonds at a fine-jewelry manufacturer called Nova Stylings. Before starting Garage Technology Ventures, Kawasaki had two stints at Apple Computer. In the first, from 1983–87, he was Apple “evangelist,” working with third-party developers to grow the suite of software available on the Macintosh. The second, from 1995–97, he was brought back to the company as an Apple Fellow to “maintain and rejuvenate” the Apple cult. He has a B.A. from Stanford University (1976) and an M.B.A. from UCLA, as well as an honorary doctorate from Babson College.

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This Conversation took place between Guy Kawasaki and Al Erisman at the home of Guy Kawasaki in the Silicon Valley area on August 12, 2010.

Al Erisman: We are in the midst of an economic recession with 10 percent unemployment. At a time when it is difficult to find a job, do you think this is a good time to create a job by starting a company?

[Now] is the cheapest time to start a company.Guy Kawasaki: It is the cheapest time to start a company. To start a tech company, you need software tools, but with open source every tool is free. You need people to help you, but there are lots of good people available who do not have high demands these days. You need technology infrastructure, but with the cloud, using something like Amazon or Rackspace, you don’t buy servers anymore, so that’s cheap. You need marketing. Now you can use Facebook, Twitter, and blogs, so marketing is free. You may need some office space. Commercial real estate is cheaper than ever, but you probably don’t even need commercial real estate because most companies are operating virtually. There is no reason to rent an office when nobody is coming in.

It would better if it was not a recession and people were spending more money. But every product takes a year, so you can start the work now and be ready when the economy improves.

For a young person getting out of school, your parents worked their whole lives to support you. Why shorten that experience for them? Take full advantage of their love. Live at home. This helps you address your expense-side.

What would you do if you just graduated from college and couldn’t find a job?

If I had just graduated and couldn’t find a job, I would be an intern or volunteer. I would do whatever it takes, so that some day when the recession ends and people are hiring again, I could say that I worked for some startup. That says a lot more than you slept till noon every day for a year and then sent off a résumé.

Who Can Be an Entrepreneur?

It sounds like you are suggesting several paths, from starting a company to internships to volunteer work. Are there certain kinds of people who could start a company and others who couldn’t? Muhammad Yunus, for example, says that everyone is an entrepreneur.

If you believe that an entrepreneur is born, then you’ve either got it or you don’t, and it becomes a matter of labeling. So if you label yourself as “I am not entrepreneurial,” then you will not be entrepreneurial.

A better perspective to hold is that everybody can be an entrepreneur, and you go for it. I think there is an entrepreneur in everybody, and sometimes the role is thrust upon you. Sometimes you get overwhelmed and enchanted by a certain product or service idea and it sucks you in.

What about people who don’t have a tech background. What do they do?

I don’t believe that everybody who has a tech background will be successful and everybody who doesn’t will be a failure. There are lots of companies you could start: a restaurant, a glass-blowing business, whatever. Many of the cost savings issues around technology, like marketing the business, still apply.

Getting Out of the Recession

What will it take to get out of the recession?

It’s not easy to pinpoint the factors leading to a recession or what it takes to get out of one. If anything, it may just be that life is cyclical, and the economy doesn’t go to infinity and beyond. So you go through periods of irrational exuberance and you go through periods of irrational depression.

We happen to be in a period of irrational depression. Previously we were in one of exuberance. If you ask me, it is more mental. One day you wake up and read The Seattle Post-Intelligencer or The San Francisco Chronicle or the Wall Street Journal and you see that the Department of Commerce says that the recession is over. Yesterday you didn’t think the recession was over and today you read it is. Are you going to have an entirely new perspective about life just because of that?

One should not look at the macro-economic statistics. These statistics are great for political agendas, for these broad-brush perspectives, but at the end of the day you know you are looking out for No. 1. The Department of Labor statistics say we have 10 percent unemployment, a record high since 1933, right? But all that counts is if you have a job, not if it is 10 percent.

It is the same way in the venture-capital business. You read these reports that say Q1 of 2010 was the lowest amount of venture capital invested in the last 10 years. I am just making this up, but let us just say it is down from $5 billion in the first quarter of 2009 to $3 billion in the first quarter of 2010. You know, it was down 40 percent.

One way of looking at it is, “Now I can’t start a company because funding is down 40 percent.” The way I would look at it is, “What do I care if it is down 40 percent? There is still $3 billion dollars for investment. I am only looking for $300,000.” If we went from $5 billion to zero, OK, you are entitled to worry. Even then, because it’s so cheap to start a company today, you can still do it if you believe enough. It is all attitude.

Ideal Investment Candidates

Suppose an entrepreneur comes to you with an idea and wants to talk to you about venture capital. What are you looking for?

First of all, I am not proven as a good investor. So maybe you should hear what I am going to say and then do the opposite! I am looking for is the product or the service or the idea that captivates me. It either makes sense or it doesn’t. Honestly, most venture capitalists say they are looking for the team. The problem with that concept is you could only recognize a great team looking backward.

People are looking for so called proven teams and the data that they use to decide proven or unproven is obviously work experience. Let us say we find someone who is vice president of Microsoft. Most venture capitalists would say, proven. Vice president of Google, proven. Vice president of Apple, proven.

The problem with all those three is that correlation does not equal causation. Is the vice president of Apple, Google, Microsoft, or Yahoo proven as an entrepreneur? Let us take an extreme case, you are vice president of the part of Google that is in charge of provisioning Wi-Fi in cities. So you put in free Wi-Fi for Mountain View. You put in free Wi-Fi for San Francisco. So, you pull it off in 50 cities, and now Google Wi-Fi is the standard in all of these metropolitan areas. You are a huge success. You are proven. That is one way of looking at it.

The other way of looking at it is that you worked for a company with infinite brand awareness and infinite money, and you stood on street corners handing out $20 bills. You were successful at doing that. Wow! That’s great entrepreneurship. So now are you going to go from Google with infinite money, infinite brand, handing out $20 bills, and start a company with no brand, no money, selling stuff. Is that the entrepreneur you want? I don’t think so.

The richest vein for tech entrepreneurs is two guys in a garage, two girls at a garage, engineering backgrounds, building the product they want to use. This question is best put to a guy named Mike Moritz at Sequoia. He will tell you is he is looking for two engineering students building a product they want to use because that describes any number of companies.

Look at Cisco, Apple, Yahoo, Google, and YouTube, none of those companies had proven teams.Look at Cisco, Apple, Yahoo, Google, and YouTube, none of those companies had proven teams. On the flip side, let’s take Webvan as an example. Webvan had a proven team. The leader was from Accenture, Harvard M.B.A., ran a huge consulting firm, knew everybody. He got lots of funding. Where is Webvan today?

Ideal Startup Leader?

If it is not a proven team from a large company, what about someone who has already done one startup? Is that person an ideal candidate for another startup?

Suppose a successful entrepreneur cashes out and is going to start his next thing. So now unlike the VP of Microsoft, Google, Apple, or Cisco or Yahoo, this person is proven as an entrepreneur. This person has built the company, has been successful, and has cashed out. This is the trifecta of tech startups, who has done everything right. Now, this person is as proven as you can be. The question is: Will this person be successful in the next startup? So let us look at the differences between startup 1 and startup 2. In startup 1 there is no capital, scratching, clawing, focused on shipping and selling. Startup 2, because you are proven, VCs [venture capitalists] threw money at you. You have $25 million in the bank based on a PowerPoint presentation because you are proven and you are going to do this again. So should I say that the pace is more leisurely? If the pace is more leisurely and now you have $25 million, instead of two rock-star programmers, you hire 250 rock-star programmers. With the assumption that the more rock-star programmers you have, the faster the development will go, which is a fallacy.

There is a book on that, isn’t there?

Yes. The Mythical Man-Month. So, you have money and you have more people. With startup 1, you had no life. Startup 2, you have a house in Sun Valley, you have a house in Atherton, and you have a house in Hawaii. Startup 1, you were not only single, but you also had no social life. Startup 2, you have your trophy husband or trophy wife, who wants to go to the opera, who wants to make donations, who wants to do all sorts of things. So, you get defocused. Startup 1, you weren’t even having sex. Startup 2, you have three kids. Now, you are not the world’s greatest parent because you are always in your Gulfstream and all that, but still you have three kids. You can’t make the case that with three kids, you have more time than without.

There is another factor here. With startup 1, you have positive reinforcement about doing certain things. Maybe with startup 1 you relied on the tiered distribution model. You created your widget and sold it to a wholesaler, and the wholesaler sold it to a retailer. That is how you built startup 1. Because it worked for you so successfully in startup 1, guess what? In startup 2, you are thinking tiered distribution because that worked in the past. Why would it not work again? The problem is, this might be a different kind of widget and it is a different world. So maybe the way to do things now is to go direct to the consumer. But because you were successful with a tiered distribution, startup 2 is going to use tiered distribution again.

Some people are capable of making the change, but that is rare. Whatever you think of Steve Jobs, you have to admit that he can change. With startup 1, Apple, they had a tiered distribution and sold Apple tools to wholesalers. Startup 2, Apple store, they control the store, they control the merchandize, they control the product, they control everything. They went from tiered distribution to direct, a completely different model. In the old world, anybody could write software for Macintosh and sell it on their own with Apple’s blessing. That was my world. Apple 2, we own the store. We don’t like your app, it is not going into the store. Even if we like your app, we are taking 30 percent of the revenue for putting it in the store, a completely different paradigm. You have to hand it to Steve that he is not a creature of habit.

The positive side of the ledger is that you truly know how to build a company. But, with startup 2, you have money, you are less hungry, you have distractions like spouses and kids and you are accustomed to a certain lifestyle. You are used to staying in the Ritz-Carlton or The Four Seasons. You are used to flying first class — if not the corporate jet. You have certain overhead that you came with that you never had in startup 1. So startup 2 is a very, very different thing.

Is Passion for Wealth Enough?

If you encounter an entrepreneur who has a passion to be really wealthy, do you think that will be enough to create a great company?

No. I think that it will be better to find someone who is passionate about a technology or passionate about a market segment or passionate about building the best airplane in the world than it is to say I am passionate about making money. If you are passionate about making money, go work on Wall Street. Press buttons all day and look for quarter-point arbitrages, then you can flip stuff and make money. You do not have to do anything, but I do not think most of those people made the world a better place. You have to say Steve Jobs has made the world a better place, right? He is making computers better, make phones better, making e-books better. He has made the world a better place.

Picking a Leader

In summary, what I think you are saying is that if you were a vice president at Microsoft, that does not make you a good candidate for a startup. And if you were a very successful startup leader, that might not make you a good candidate, either. So how do you pick a leader?

I haven’t done an objective statistical analysis of this, and I have read articles that proved me wrong. It is a stereotype that entrepreneurs are these young people, who are changing the world. In fact, it is 40- to 60-year-old people who start the most companies. But I have to tell if you look at the truly, truly huge successes such as The magic is absolutely still here in Silicon Valley.Apple, Cisco, Yahoo, You Tube, Google, Twitter, and Facebook, all of those were started by young people. Well, Cisco was started by a professor, but that person was hardly a proven business leader. In example after example, not to be sexist, but it is two guys in a garage or a bedroom or a dorm who built the product that they wanted to use. Steve [Jobs] and Steve [Wozniak, founders of Apple] wanted a personal computer, Larry [Page] and Sergey [Brin, founders of Google] wanted a better search engine.

The same was true with Bill Gates and Paul Allen at Microsoft.

Right. We are seeing a trend here. And yet VCs insist on saying they are looking for proven teams when in fact the huge hits are all unproven teams. Now there is a reason for that. As a venture capitalist, you have to raise money from pension funds in order to put that money into play. The venture capitalist is a great scam. Even if you prettied up this package, you cannot go to a pension fund and say, “Our investment thesis is that we invest in young people, who have no management experience, who have no idea what market will be, have no idea about the business model, and have no idea of whether they can actually finish a project because they have never finished the project in their 20 years of life.” That is not a palatable investment thesis.

A pension fund will not say, we are giving you $10 million, let’s roll the dice. You have to say you are looking for a proven team and whatever else. At every venture-capital conference, there is this panel where venture capitalists say what they are looking for, and every venture capitalist says team. You want to say, you would not have invested in Google, Yahoo, Cisco, Apple, YouTube, Facebook, and Twitter right?

Lies Everyone Tells

In your book you said entrepreneurs frequently think they are being conservative in their financial estimates when they are not. They say, “This is a $10 billion market and I only need 1 percent to be successful,” for example.

Every entrepreneur lies that way. I have never met an entrepreneur, who said, “I pulled this projection out of the air. I really have no clue. I am just trying to basically tell you that there is a big total addressable market and I need a small percentage.” No one has ever said that to me. Everybody says this is conservative. You know, we took it down to the absolute bottom. They say they have a worst-case scenario and then they miss that by 99 percent.

Another common lie is, everybody says we are a proven team. Nobody says “We are clueless,” even though they are. They all say, “There is a proven market and we have world-class technology.” Every team says these things. One big warning signal is when they use the term “rock star.” Lots of entrepreneurs say, “As soon as you give us money, we have these three rock-star programmers who are just waiting to join us.” There is a 50 percent probability that in six months they will say, “Yeah, that guy was a real idiot.” So what happened to the rock-star thing?

One company told us they would hire the Northern California sales manager from a large company. He is a rock star at enterprise software sales. Six months later, the rock star was gone. What happened? Without the name of the large company behind him, he could not sell. He did not know how to make an appointment. He was used to a large staff.

I am painting this dismal picture, but, as far as I can tell, the biggest single factor that correlates with entrepreneurial startup success is luck. It is better to be lucky and smart.

Other Success Factors

What else does it take to build a good company?

At the highest and earliest level, one should build a company with the assumption that you are never going to leave it or sell it. This way you will build a company that is stronger and will last. If you build a company that is strong and will last, there will be exits, but if you try to package something to force upon the public markets, you probably will fail. And right now there is no public market anyway.

Are you looking strictly at the exit strategy in order to make money for yourself, or do you look beyond that to building good companies? One venture capitalist I talked with said it was only about the money.

The world needs more great companies, and not more great exits. If a venture capitalist invested in an investment bank that goes public and it makes gobs of money for him, hallelujah for him. That does not mean the world is a better place with one more investment bank.

So, you have a broader view of business than just making money?

I hope so. Money is a way to keep score, but that is not the only way. Money is a natural outcome of a great company, but it is not necessarily the sole purpose of a company. It is safer to build a great company and see what happens than to plan a great exit.

Access to Talent

Another challenge for companies today is access to great talent. There are some very talented people from China and India, for example, but there are immigration policies that make it difficult to get work visas for them. On the other hand, there is some excess talent in Silicon Valley because of the economy. How do you see this issue of “America first” vs. open access to talent?

I have the advantage that I don’t care if people vote for me. From a company’s perspective, the goal is to find the best employees it can as cheap as possible. If they can find inexpensive talent overseas, hallelujah.

The purpose of a company is not to create jobs. The purpose of a company, to use Peter Drucker’s words, is to create customers. If you create customers, you will also create jobs, and you will also create exits. But if you start off saying, “I am going to start a company so that I can employ a lot of people,” you are measuring the company by how many people it employs.

One way to employ more people is to operate really inefficiently. So is that the goal? If you build a great company and it succeeds, you are going to grow and you are going to hire more people. That’s the right perspective.

A politician may say we need to create more jobs, but not an entrepreneur. Ideally, an entrepreneur would have as few people as possible, making as much money as possible with as much greatness as possible.

I just don’t believe in monopolistic barriers and all that kind of stuff. I really believe the earth is flat and that it is your job as an entrepreneur is to find the best people as cheaply as possible.

Immigration Priorities

What about the non-tech people? In this country, hotels, farms, and construction sites would not operate without immigrant labor. What do the combination of high-tech labor and low-tech labor have to say about immigration policy in the U.S.?

My theory on immigration and entrepreneurship is that first-generation immigrant comes to America and says, “Wow, I can get a business license in one day. I can get a phone in one day. I can get infrastructure in one day. I can sign a lease. I can do all this stuff in one day.” The first-generation person opens up a dry cleaning store, a taco stand, a lawn-care service, or something like that.

The first generation kill themselves by working 72 hours a week. They are trimming grass, they are making tacos, and they are dry cleaning. They are doing whatever it takes. They save money, and they send the second generation to college. Second generation is in college and says, “I am not going to clean yards the rest of my life. I am going to study, and I am going to start a company or go to work for Google.”

But by the third and fourth generation, people have a sense of entitlement. They think they should be living in Atherton and have a BMW as their car. They believe they should have clean air, clean water, and nonfat food. They are entitled to good education. Because they believe they are entitled to all of this, they have lost their edge.

My belief is that we should welcome people from other countries. What does America do better than any other country in the world? We educate people. My plan would be to create a reverse brain drain. We suck in all these great minds from all over the world. Some large percentage of them will start great companies here and never leave.

We need more people with this hunger. I know I could not run and get elected on that platform. I do not see a lot of people from Connecticut whose ancestors came over on the Mayflower starting companies anymore. They may have trust funds in Harvard and Yale and Stanford, but they are not starting companies. Maybe they are working at Goldman Sachs.

Having more open immigraton would also lead to a more peaceful world. Instead of them thinking of Americans as imperialists and conquerors of the world, they may not like everything, but they would have a much better understanding of this country. And we would have a much better understanding of their cultures, religions, and values.

The Role of Silicon Valley

Is there still magic in Silicon Valley?

The magic is absolutely still here in Silicon Valley. I am not saying that Silicon Valley will last forever. There are two major reasons why we have an advantage. One, in Silicon Valley people are expected to start companies. If you work for a company for 20 years, a lot of people will wonder why you never started a company. In most of the world, if you quit after 20 years, people wonder what went wrong.

Second, failing isn’t that big a deal in Silicon Valley. The odds are bad that any startup is going to succeed. In other parts of the world if you fail, you bring shame and damnation to your family for the next five generations. Of course, in other parts of the world, you know you could say that my father’s father’s father’s uncle’s brother served with Napoleon. You can live off that for generations. In Silicon Valley, nobody cares.

Business Ethics

What is your assessment of the business-ethics climate today?

I am flabbergasted. For me, it started with Richard Nixon. When you watch what happened to him, you would say, “How can someone be so clueless as to be in such a position with such responsibility to condone such criminal action?” You would think everybody would say, “Richard Nixon, wow, that is a lesson.” But it just keeps happening over and over again.

There is something about power and money that just corrupts people. What would cause an executive who makes $15-$20 million per year to pad his expense report for a few thousand? These emperors are truly naked, but they believe they are clothed.

Pressures on a CEO

Perhaps some of it is because when you are an emperor you are attacked. You are attacked by your competition, you are attacked by the press, you are attacked by whomever. So, in order for you to have some semblance of a life, you need to put in these barriers between you and your attackers. There are people who function as barriers and these, generally, are people who just suck up to you. You notice many CEOs travel with their entourage. In a typical entourage, you have Tricksy, who is an Oriental art history major from Wellesley and she is in charge of public relations. You have your personal assistant [PA] and your personal assistant is so busy that he has a personal assistant himself. You have your security people.
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In a real world example, you plan to make a speech and because you are so busy and because you are so powerful, you believe that people would just hang on your every word. So you don’t put much effort into the speech, you don’t rehearse the speech. You believe that you can just go up there and wing it because you are the CEO of a large company. You use PowerPoint and 60 slides and 12-point font, and it is totally boring. You do not say anything and you basically stand up and you say, “We have patent pending, curve jumping, Noble Prize potential technology and you know blah, blah, blah.” Then afterward you get all this applause from all of the sycophants in the audience, you leave and then as you are in your limo, you turn to your Tricksy and you turn to your PA and your PA’s PA and you say, “How was I?” and guess what? They say you were wonderful.

Now you believe you are wonderful. Pretty soon you say, I have really been making this company successful and I am probably under-compensated at $2 million a year and $10 million in options. I have brought billions of dollars of value to this company. My time is so valuable, this company needs to buy me a Gulfstream because I cannot be in San Francisco International Airport (SFO) walking through security lines. I can’t be flying Southwest Airlines. If you divided my compensation by the number of working hours, I make probably $10,000 an hour. Can I afford to be waiting in SFO for a flight? It is my corporate responsibility to get a corporate jet. It would be immoral if I didn’t. I would be ripping off the shareholders.

I have to entertain people. We have to buy crystal and we have to eat at the finest restaurants because we have an image. Now the dinner costs $10,000 dollars and it goes on from there. It is just something that takes over your brain. I would say it is a reptilian brain, but I do not want to insult reptiles.

Personal

Can you give me some examples of some companies that you have been associated with that you feel really proud of?

I am very proud of my work at Apple, even though I can hardly claim success or claim any credit for the amount of success it has had. In fact once I left, it really took off. My claim to fame is Apple. I am living proof that if you do one thing right in your career, you can coast on that for a long time. I was Apple’s software evangelist. So it was my job to convince people to write Mac software. I was the proselytizer of the Macintosh Way to the third-party development community and broader, basically the Macintosh cult.

We have companies like Tripwire that does data integrity. I have started a company called Alltop, which aggregates news by topics. It is too early to tell how successful these companies will be, but I also enjoy starting new companies.

Tell me about yourself. How did you get on this path? You had your career all laid out for you, right?

Are you kidding me? I still don’t have it laid out. I am from Honolulu. I went to Stanford. After Stanford, because I am Asian-American, I did what my parents wanted and went to law school. I lasted two weeks in law school and hated it. The next academic year, I went to UCLA to get a business degree because I wanted to start a company.

While at UCLA, I went to work part time for this jewelry manufacturer. I bought an Apple II and I loved it. One day my college roommate told me he wanted to show me something. It was a Macintosh and seeing it was a truly a life-changing experience. The scales were removed from my eyes, and I fell in love with Macintosh.

I believe in unproven people today, because I am one.I interviewed for two jobs in the Macintosh division and got the second one as a “software evangelist.” And the rest is history. On paper, there is no reason in the world Apple should have hired me: I had a psych degree and a marketing degree, and never took a computer class in my life. Only Apple would hire an ex-jeweler. I believe in unproven people today, because I am one.

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