Here's Why Your Product Needs to be 10x Better Than the Competition to Win

Last night I had the great privilege to interview Bill Gross, one of the Internet's true pioneers. To say he has had an impact on the web would be an understatement. His impact has even helped a small country gain admission to the United Nations. All of that are in this week's episode of This Week in VC. Summary notes, as always, provide below. It was a pleasure to write them myself.

Overture (Goto.com)

He invented the category of sponsored search. He presented the idea at the TED conference in the mid 90′s and was literally boo'd while he was on stage. I thing I've learned over the years is that technology purists hate advertising even when it is that revenue stream that truthfully drives much of our industry.

He created GoTo.com (later renamed Overture) out of a frustration with search. At the time when you did a search on Lycos, Alta Vista or similar for a category such as Cars you ended up getting 9 spam results and 1 proper website to meet your needs.

The idea actually came to him from the Yellow Pages business. He was a life-long entrepreneur and the first business he created out of college (actually, he founded it while he was at Caltech) was a company that manufactured high quality audio speakers. He took out an ad in the Yellow Pages (it was the early 80′s, pre Internet), which cost him $1,000 / month for a half-page ad.

He was skeptical of spending the money but astounded at what a transformational impact it had on his business. What he realized was that the full pages ads were displayed first (say for 3-5 pages) then the half page ads (another 3-5) then the quarters, the eighths. So the Yellow Page business was always "pay for placement."

Bill's rationale was the more serious your business was, the more you could afford to pay for placement and therefore the more likely it was for consumers. If it worked in the Yellow Pages, why not on the Internet?

So he launched a company with exclusively paid search. He said it was better than the Yellow Pages because he would provide pricing transparency. Users would know exactly how much was paid for each click.

Heresy.

Google was clear that they WOULD NOT go into this business. Amazon was planning on working with GoTo.com but actually pulled out just before launch. Not because they didn't want to do Pay-per-click (they are huge buyers of SEM) but because they didn't want other people to know what they paid for clicks! Funny story, after Bill presented at TED (back when Amazon was still a small company) Jeff Bezos was in the audience. He came up to Bill after the event and said, "clever idea, we should do that with you." Immediately thereafter Amazon became a large business.

GoTo.com went on to ink huge distribution deals with Microsoft, AOL & Yahoo! -- the biggest Internet portals of the day. They were a juggernaut and Google was a small company. Overture was sold to Yahoo! for $1.63 billion -- not a bad result, hey? But obviously Google won the war. Bill attributes to two primary reasons. Mostly, Google just had way better organic results ("the loss leader") so it was always preferred by consumers. Secondly, they had an owned & operated (O&O) website -- Google.com -- and Overture had shut down GoTo.com at the request of their very profitable and large distribution partners. That gave Google a huge cost advantage.

IdeaLab

In 1995 Netscape IPO'd and browsers started to become more prevalent. Bill had previously created a packaged software company called Knowledge Adventure the produced children's educational software. He wanted to build direct customer relationships to get product feedback but only 2% of customers would ever return their registration cards.

So when he saw the browser it instantly dawned on him that this would be the greatest customer development tool ever. He thought, "This way any product you launch you can talk instantly with and get feedback from customers." He had the idea that people would want city guides to tell them where to eat and what to do. So he founded … wait … CitySearch. Yes, long before Yelp or any similar service.

From here he realized that he was full of ideas and if he could attract people to come and run companies based on his ideas he could generate a lot more companies. So he founded IdeaLab with his wife Marcia Goodstein (he talks in the video about working with a spouse and also working with siblings). As an outsider who has observed them together in action I can say that they seem both very complementary in skills sets &temperamentsand to make it work they have to be very respectful of each other's opinions and skill sets.

IdeaLab has created 75 companies, leading to 8 IPOs, 35 or so acquisitions and more than 5 companies worth in excess of $1 billion. And when I say this I don't mean they funded billion dollar companies -- they literally created them. Some IdeaLab successes / brand names aside from Overture & CitySearch?

• eToys
• Shopping.com
• The Wedding Channel
• Commission Junction
• Cars Direct / Internet Brands
• Picasa
• Snap
• Insider Pages
• eSolar
• X1
• And now, of course, UberSocial, Bill's latest project.

And while they historically had come up with 100% of their ideas and created the companies themselves, they are increasingly open to funding people with great ideas who want to build businesses with IdeaLab provided the companies will stay be in LA (and preferably Pasadena). They are very hands on. In fact, IdeaLab employees around 50 people who are not necessarily dedicated to a single company.

IdeaLab has a philosophy that if they can get a centralized group of expert staff to help with legal, accounting, recruiting, PR, etc. they can build teams that really focus on building & marketing great products. This has been their formula for nearly 15 years.

If you want to hear a ton of other stories like this please watch this special interview with Bill. And if you enjoy the post or video a quick vote here couldn't hurt Testing HN efficacy / longevity.

Some other things you'll learn:

• Bill believes that most of the best business ideas come from people solving personal problems that they have in their every day lives. Almost every business he's ever launched has been this. I totally agree. I've talked about this often -- the biggest mistake I made in my first company was going into an industry for which I wasn't passionate.
• He made a comment that really resonated with me, "You need to make sure your product is 10x better than that of your competitors. First, you're probably exaggerating how much better it is. But also when you're developing so is your competitor. So if you shoot for 10x better you might hit 3x better and that's super important to win."
• Too many entrepreneurs focus on dilution. Bill thinks that most companies your success is usually binary. So the most important thing is to surround yourself with people who can help you succeed. Make sure they're as passionate about your space as you are (and have strong knowledge of your area). But over-optimizing for dilution is a bad attribute relative to focusing on creating a big & winning company. I further that. My point of view is that most Internet markets create "winner take most" outcomes where the largest player is super successful and disproportionally less for everybody else. Think YouTube vs. the rest.
• Bill's a huge believer in MVP. When he tells his stories from the 1990′s your realize that he was probably the original "lean startup." They would give companies $250,000 to launch their products. They would launch quickly and test whether or not there is any demand. If there was, they would green light the project and if not they were likely to shut it down & move on to the next project unless the team was super passionate about continuing. Almost sounds YCombinator-esque.
• Test monetization early. You can fool yourself into believing that there is inherent value in your product but you only really know when somebody has to get out a credit card and part with hard-earned money.
• Don't think about starting an incubator until you have real operating experience otherwise you don't really have anything to offer startups. Bill had been an operator for more than 15 years and had had 2 successful companies before ever launching IdeaLab. I commented that many young entrepreneurs I talk to these days have a desire to "go plural" and create an incubator. I think this makes no sense. When I look at the very successful people doing this like IdeaLab, YCombinator, TechStars or Betaworks -- they all have deep operational skills and prior successes.
• We talked about patents. Bill doesn't think you should over invest in them but he does believe in protecting ideas when you have a true invention and many of his companies have done so. I brought up the fact that I find many larger companies abusing the patent system to slow down smaller competitors which is actually anti competitive. We had a nice discussion on this topic.
• In the video Bill talks about how he started his first entrepreneurial venture at 12 doing a mail-order business (very Tony Hsieh of Zappos who did the same thing). His first "real" business came in college where he designed audio speakers. He sold so many that after Caltech he decided to open a retail store. It's still there 30 years later!
• He bought a copy of Lotus 1-2-3 (a predecessor to Excel for those youngens) and programmed his own accounting software for his business. Yet again, he was solving for his own needs. He turned his accounting software into a product he could see. He loved it because where speakers you could build a product for $400 and sell it for $500, with software you could build it once and have almost no variable costs going forward. Lotus loved it so much they bought the company and Bill went to work there for 6 years.
• Bill tells an excellent story about how IdeaLab became the first company to buy and own it's own TLD (top-level domain) when they negotiated to buy the .TV domain from the tiny island of Tuvalu. They generated about $50 million for the island, which was transformative in building hospitals and infrastructure. It also is how they financed their entry into the United Nations. This is a great story -- best if you hear Bill tell it.

Anyway, we discussed so much more. I don't have time to type out all the notes. But if you have some spare time and want to hear from one of the most innovative (in the truest sense of the word) people you'll ever hear from -- I think you'll enjoy watching this episode of This Week in VC.

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Reprinted from Both Sides of the Table

Mark Suster is a 2x entrepreneur who has gone to the Dark Side of VC. He joined GRP Partners in 2007 as a General Partner after selling his company to Salesforce.com. He focuses on early-stage technology companies. Follow him at twitter.com/msuster.