When the Founder/CEO gets defensive ...

The year was 2005. It was the 2nd year into my startup job and I was touring around to meet potential clients in Taiwan, Japan, China and South Korea to demo the prototypes of the product line that I was leading.

Unlike most mobile- or web-based applications, semiconductor products are driven by standards — usually there were standards first then the products slowly get accepted by the consumers and eventually reach mass adoption.

The product line I was leading back then was based on the HDMI standard. Today it's a household name — all TVs and TV peripherals such as media players, set top boxes, game consoles and even Apple TV have HDMI connectors as they designated interface. However, back in 2005 we were among the early players in the world. All of us in the industry were fighting an uphill battle not only in clearing all the technological roadblocks in interconnectivity, but more so in getting the OEM manufactures and brands to adopt the technology.

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Here's a summary of the status of my startup's offering at that time point compared to most web- or mobile-based startups today:

  1. It's a real product that solves a real, decade-old consumer problem — replacing the clumsy cluster of cables between TV and TV peripherals with a clean, one-cable interface that could support raw high-definition (up to 1080p/60Hz) content that was starting to emerge in the format of broadcasting and Blu-ray discs
  2. It has a unquestionnable huge market — the TV market
  3. It is a viable technology — driven by a standard which was based on the DVI display standard that had been proven in PC industry for several years

If you have ever created your own web- or mobile-based startups, you immediately notice the differences here — rather enviable differences for you actually. Indeed, when we were touring with our prototypes, showing off jaw-dropping HD videos on clients' LCD TVs drawing "ouh..." and "wow..." everywhere we went, the most uncertain parts of a start-up endeavor had been made certain. As entrepreneurs we had in our hands a product offering with a technology that was quickly gaining recognition among the clients and highly sought after by those that were more prescient.

And it wasn't like there were many companies back then that had the solutions. In fact, including the well established world-class semiconductor firms, I could count no more than 5 or 6 that already had prototypes on demo, fewer even with products that were rolling out. And as the only Taiwanese startup that had a solution in demo, right in the center of the world-wide eletronic supply chain, my schedule was full of meetings and demos with the 5 largest OEMs in the world and plenty of other medium to small ones. Our sales people were returning with tons and tons of request for samples and design-in support, so much so that we had to decline requests from smaller potential clients. Our venture investors were putting pressure on us for raising a series B with more cash that we didn't yet need before other venture capitals came knocking on the door (I will talk about the distorted behaviors of VCs in Taiwan back then maybe in another article).

What could possibly go wrong?

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Well, technically speaking, nothing went wrong. Till this day I am still proud of the execution my team was able to pull off and the clients that we were able to satisfy given such limited resources. And without doubt our endeavor was not really a failure as we still sold the company 2 years later to a public firm with a price tag that generated 4.1x cash-on-cash multiple for series A investors — for series B investors it was a more debatable topic.

In fact, the last time I checked with my former colleague who was still with the acquiring firm, the product was still selling in volumes. For a semiconductor product this is an unimaginably long shelf life. But in my view, one thing went so wrong that we failed to hit the ball out of the park as entrepreneurs.

We got denfensive.

As we helped the clients design in with our samples, one thing became clearer and clearer — the HDMI interface would better serve the industry and the end consumers if it's integrated in the main system chips. As a startup we have superior technology and great standalone offerings, but integrated solution seemed to be the ultimate form of HDMI.

First the questions came from the clients, who were being informed by system chip vendors, mostly giant semiconductor firms in US and Taiwan, about their own HDMI development and integration roadmaps. Then our marketting people started to pose the same questions to the founder team. Eventually the investors started to ask the same questions.

If the market is doomed to favor integrated solution, what's the future of standalone products?

Facing friendly questions that pointed out the fundamental problems of our current offering, we got defensive. Looking back, the fact that most clients were still designing in our products or even starting to sell TV sets and DVD players with our products inside only served to delay that much needed introspection among us. Instead of reflecting on the product roadmap and possible strategical moves, we brushed off all such questions and dispensed our energy in search of clients that needed standalone products.

If you're a serial entrepreneur or a first-timer in the middle stage, you probably already know what this smells like.

As entrepreneurs, we all at some point feel so proud of our technology and products that we refuse to see that the market has shifted. Confirmation bias kicks in and we start to filter out critical information that could determine the fate of our endeavor. And since the technology and the market moves very fast, such defensive attitudes almost always lead to failure or at best sub-par results as the market move away from entrepreneurs and their startups.

As I said, our start-up turned out ok. It was not a homerun exit but most investors were happy with the results. But with the 20-20 hindsights, if we had not gotten defensive we probably could have changed our strategy and captured a much larger part of the value chains. For example, we could have focused on licensing the technology to large semiconductor firms that were not capable of developing the technology themselves.

In fact, the largest deal we have ever struck with this product offering before we got acquired in 2008 was a huge licensing deal with a big Japanese semiconductor firm. The revenue it brought was more than the annual revenues of all the other projects successfully closed with the clients. If we had switched to licensing as the main deal, we could have not only earned more revenues but also saved the resources that we had used to help customers design in a product that would have short life span. We could also have refocused and devoted the talent of the R&D team to new projects that could better capture the profitable part of a value chain.

But since we got defensive and tried to protect our own babies, we largely missed that. Or in b-school language, we allowed the sunk cost to affect our business decision going forward and as a result realized less than optimal return on investment or worse, forsaking better opportunities.

This sunk cost issue is not unique to startups. In fact, it's prevalent in all businesses. The difference is that in large established corporates, the sunk cost mentality is more associated with the managers climbing the corporate ladders and also with politics. In the startup scenario, however, it's more emotional and personal. I often liken it to a failing marriage or relationship, where the involved parties are so caught up in the time and passion they have devoted so far to it that they refuse to see the apparent negative NPV of the relationships going forward. Likewise, it's hard for entrepreneurs to admit that their value proposition is problematic, after dispensing such a huge part of their life and sacrificing so much to reach the stage where they could demo the prototypes.

Nonetheless, only when an entrepreneur is willing to recognize this sad fact does he or she become a real entrepreneur.

Note that in my HDMI experience, even with a real market and real customers, by refusing to change our strategy and move to a different part of the value chain we missed out on better returns and, worse, alternative opportunities. Hence if you're an entrepreneur working on an offering that doesn't even yet show a market fit, you have to be by far more open-minded.

To be sure I'm not advising calling it a quit the moment you sense something wrong. But rather, it's more about keeping an attitude that is healthily flexible, that you're willing to cut the tie with your baby products and shift resources to the next promising trend when you have enough information pointing out the inevitable.

And as a VC, we definitely prefer to work with entrepreneurs who are equipped with this flexible mindset. It's such an integral part of our job to monitor the market trends and provide feedbacks to you as an outsider. It's not that we are always more right than you are. In fact, quite often VCs are ridiculed for missing an obviously great investment opportunity — in this case though the critiques usually benefit from a 20-20 hindsight — but we are nonetheless a valid 3rd party voice with vast industry experiences and a cultivated market sensitivity. Ultimately the end consumers will determine the fate of your products, but as an entrepreneur you probably don't want to wait until that stage to call it a quit and switch direction.

Last but not the least, do demonstrate this flexibility when you come in to pitch at a VC. I lost count of the entrepreneurs who turned defensive when I questioned their value proposition and inquired about competition. It's important to know that even if you don't run into these questions with me, you are bound to face them somewhere else, if not with another VC then with potential clients. Getting defensive doesn't help your chance of gaining access to capital. On the other hand, showing the willingness to change or adapt will definitely score a point on our evaluation card. After all, the market won't even care about your attitude toward your own products. If the market doesn't like your offering, it will simply walk away. As an entrepreneur you should treasure all the opportunities of being questioned or even interrogated, whether it's in a startup competition, on a crowd-funding platform or during a road show of fund raising. You're getting pertinent feedbacks for free after all. Why not keep calm and enjoy it?

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