At a time that many people building safe businesses and not enough startups trying to change the world, are we, as entrepreneurs, still supposed to dream big? Should we build a company that will go public someday? Or should an exciting startup define success on a $170 million exits?

While I am happy for Aaron Patzer, the founder of Mint.com, the world has just lost the Steve Jobs/Bill Gates/Scott Cook of this generation because of this acquisition. Many young entrepreneurs have to find another role models to look up to now.

Growing a company from a startup to IPO sometimes requires more than ability and knowledge. It also takes a strong will for an entrepreneur to want to build a lasting company. I am sure there are entrepreneurs somewhere building the next big things right now. And I hope this “Startup to IPO” blog post series (Part 1, 2, 3, 4) can inspire them to keep fighting for their dreams.

In this last post, we will look at how these four elite companies (Vistaprint, Rackspace, OpenTable, Salesforce.com) differentiate and market themselves when they just got started.

Pursue Customers that Competitors Hate

In the printing industry, companies usually hate to work with small business customers because of the low printing volume and low profit margin. They rather go after big companies which spend large amounts of money on printing. Yet VistaPrint had a different strategy. Their founder, Robert Keane, once said:

Our experience gave us confidence that there was a market with micro businesses. Other companies did not want to pursue them. Everyone else thought it was a horrible market. We happened to be in the right spot at the right time.

In order to achieve this goal, they have developed technology to automate desktop publishing and manufacturing so that they can sell products at low quantities and superior prices. However, there were another problem. Another reason their competitors hated the micro businesses market was because these customers are not easy to get to. VistaPrint solved the problem through direct marketing but in an unusual way. They gave their products away for free to generate buzz. According to Robert,

That became a runaway success. At the time, full-color business cards were selling online for $85 and $200-$300 at traditional printers. We gave them away free with a $5 shipping and handling fee. That offer was so successful in getting people to try us that it became an acquisition engine that drove our business. Our business model got to scale very quickly.

This free sample offer also built up the credibility of the company. So the customers will buy other things when they come back for the second time.

Do your company and competitors ignore a portion of potential customers now? In fact, even President Obama targeted a tribe (young people, minorities and the poor) that were usually ignored by traditional candidates during his presidential campaign. If you want to be successful in a crowded market, you have to be creative and do something very different from your competitors. Love the customers your competitors hate. They may just be the ones who help your company grow to the next level.

Must-Have Business

During tough times, if your company was a must-have business for your customers, I am sure your company will do pretty well. OpenTable happens to be that kind of business. Like AdWords and regular affiliate programs, OpenTable’s customers only have to pay for results providing an extraordinary lead-generation marketing tools for restaurants. Like one of their customers said:

OpenTable.com has given us new ways to understand who our guests are, and what they want. Their system is helping us utilize the Internet to communicate more easily with consumers, and makes it easier to cater to the desires of our regulars…52% of the reservations that OpenTable.com delivers to us are first-time visitors to the restaurant, which means that OpenTable.com is bringing us significant numbers of new customers, as well as giving our regulars an easy and efficient way to visit us.”

Their system revolutionized the way that restaurants are managed and marketed, and add depth to the way that they welcome and communicate with their guests. OpenTable allows their customers to see who is eating at the restaurant at any given moment. So the restaurants can treat some guests like regulars. Oftentimes, their reservation system is indispensable to the diner, too. Like a restaurant owner said:

Next to the name of one regular, who has a habit of bringing in women he is not married to, is an instruction to make sure the man’s wife has not booked a separate table for the same day…Of another, who takes many of his first dates to Town Hall, the instructions read, “Do not treat like a regular!”

The bottom line: is your product a pain killer (got to have it) or a Vitamin (nice to have)? If you could create values to your customers during downturn, your company will be in a great position to continue to outpace the competition after the bad times.

Specialize in Just One Thing

When asked the key to success for Rackspace to become the fastest-growing managed hosting company, Pat Condon, the cofounder, believes their customers have chosen Rackspace because of their sharp focus.

We specialize in just one thing – managed hosting. We’re focused exclusively on managed hosting with Fanatical Support, and as a result we’re very good at it. Think about it this way: If you needed to have brain surgery, what kind of doctor would you choose? A general practitioner or a brain surgeon? I’d know I’d choose a brain surgeon – a brain specialist.

Moreover, combining this focus with their Fanatical Support, they have created a brand with tremendous value. Whenever potential customers hear about Rackspace, they will have a positive impression of the company. In fact, 60% of their new business comes from referral showing their existing customers are fully satisfied with their services.

For Rackspace, some of their most effective marketing actually came from serving their customers fanatically every day. It’s no surprise that their customer turnover rate is one of the lowest in their industry. Their customers not only stay with Rackspace but also purchase more from them as well. According to Pat,

Our customer base grows organically every month, month-over-month. What this means is that even if we didn’t sell anything to new customers, our existing customer base would keep purchasing additional servers from us. This has caused the Rackspace business to grow at a fairly rapid pace and it is something of which we’re extremely proud.

Rackspace has proven that the most effective marketing strategy sometimes just doesn’t cost you that much. How do your customers feel about your company? Do they have a positive impression of your business now? Do they recommend your services to others? If you want to find out these answers, creating a customer development survey probably can help you get started.

Strong Relationship with the Media

Salesforce.com, on the other hand, uses a totally different approach in marketing. They do marketing on the cheap through public relations and creating buzz. The company has a reputation of being able to work the media very well, especially for the founder, Marc Benioff. He is very outspoken and not afraid to take on their giant competitors like Microsoft, SAP and Oracle. He once said:

Relationships with the media are really important. The media has a more important voice today than it has ever had. We don’t advertise. We only have one marketing vehicle, which is editorial, and our ability to get our message out and communicate it effectively.

Besides disparaging large competitors as dinosaurs, 20th century fossils and monopolists, Salesforce.com is very good at guerrilla marketing as well. They once hired actors to stage mock protest rallies outside a competitor’s conferences, which brought tremendous attention to their company. The reason of doing that? Like Marc said:

In both good times and bad, people are always eager to hear about challenges to the status quo.

After all, does your company have a position in the market? Are you trying to be all things to all people? Find the customers who share your vision and stop blindly follow your competitors in the industry.

Conclusion

After this post series, we have heard consistently that their leaders have defined success on a very big scale. And it seems they are all using similar but actually different approaches to achieve their success. So stop looking for the silver bullet now. There are million ways to scale your business rapidly. Find your dream and fight for it till the end (hopefully).

I would like to end this series with a quote by another highly successfully entrepreneur, Glenn Kelman, the founder of Plumtree and Redfin:

If first-timers don’t create public companies, nobody will.

“Telling young entrepreneurs that they’re not ready to be a Jedi yet, just because they’re young” is simply wrong. Fight on to victory!

Photo source: nickwheeleroz @Flickr

Part 1: Leadership & Vision
Part 2: Obstacles
Part 3: Growth
Part 4: Differentiation & Marketing

If you enjoyed this post, get free updates by email or RSS.

This is the second installment of the “Startup to IPO” series. Last time we talked about how Vistaprint, Rackspace, OpenTable and Salesforce.com have distinguished themselves as a very special and elite breed of institutions. Now we will look at the obstacles these companies have faced and how they overcame each of them.

As you can tell, leadership and vision alone won’t guarantee success. These four elite entrepreneurs have also gone through the ups and downs of a startup life. As Charles Dunstone, the founder of Carphone Warehouse, would say:

“It’s not supposed to be easy. If it was, then everyone would do it.”

Based on what I have learned from these four companies, I find out that, as an entrepreneur, you don’t have to do everything right all the time. You just have to keep asking questions and try different solutions. Never lose your heart. And above all else, don’t ever give in.

Transforming from the Mail Order Catalogue Model

When Vistaprint was founded in 1995, France was gripped by the largest strike movement in the past 40 years. Because of the strike and lack of financing, Vistaprint almost went out of business, forcing Robert Keane to restart his company again in the spring of 1996. Definitely not a smooth start for a startup.

In the beginning, Vistaprint was selling their products via direct marketing catalogue. Robert convinced Microsoft France to distribute their catalogues in every box of Microsoft Publisher. In this way, Vistaprint was able to reach their targeted small business customers with extremely low cost, 10 times cheaper than acquiring customers in a direct marketing model, allowing them to grow from zero revenues in 1995 to 2.5 million euros by 1999.

Yet the company saw a problem with their business model later on. Since Microsoft only wanted them to advertise to their new customers but not their existing user base, their revenue started falling and they could not grow as fast as they want. That was a love-hate relationship. On the one hand, Microsoft was a great partner leveraging their marketing effort, and on the other hand, Microsoft limited their growth.

The company knew that they need a new business plan if they want to grow larger. That was when the Internet came. Thus Robert decided to move away from the declining catalogue business to become an online marketer of small business printing.

To benefit from the near-zero cost distribution channel of the Internet, they decided to develop a web publishing program which makes you feel like the software you run on your desktop. Sounds familiar with all of the Web App Hype these days? And that was in 1999. :)

Robert later explained:

The idea was to give [the web publishing program] away free across the Internet and then utilize the Internet to conduct our direct marketing. We came up with a production technology where we aggregated orders together. Those three changes, in retrospect, were important in changing the trajectory of VistaPrint.

Not Getting VC Money

In fact, there is one more major strategic move contributing to their survival. Robert believes the fact that Vistaprint could not raise funding during the dot com crash actually saved the company. At that time, a lot of Internet bubble companies raised huge amount of money helping them to live until 2002-2003. When Vistaprint moved to the US in 2000, they could not raise money so they had to cut costs to keep profitability or they would go out of business. In other words, other companies did not have to face reality with their big venture capital money allowing them ignore operating costs and cash flow. Like Robert said:

“As much as I would like to say we were brilliant, I really think success is hard work combined with talent from a lot of different people, and some luck. We were lucky to not get venture capital because it forced us to work harder to get to profitability.”

Imagine you were in Robert’s position, will you have the gut to change your business model and leave your best partner, Microsoft, when facing crises? Or you will just stay put and give in? We can easily see that “change” is deeply embedded in Vistaprint’s corporate culture. They did not satisfy to be a merely profitable firm. They always want to survive and thrive in the long term. Without proactively looking for the next opportunity, Vistaprint probably would remain a small company working with Microsoft. How about your company? Do you want your company to survive in the short term or grow in the long term? Given the current economic crisis, may be it is a good time for your company to change.

Huge Consolidation and Commitment to True Profit

Similar to Vistaprint, Rackspace also went through the tough time during the dot com bubble. After some wild spending with big VC funding, Rackspace had barely enough cash to sustain the business for 3 months in the fall of 2000. Due to this experience, they have learned that, in order to survive, they have to stay lean and build the company organically.

While their richer rivals continued their wild spending on costly data centers, Rackspace had to grow cautiously, buying servers just enough to meet their customer demand, growing one customer at a time.

As most people know, the hosting industry is extremely competitive, causing a lot of consolidations, bankruptcies and failures. Besides providing their excellent “Fanatical Support“, Rackspace has developed a principle of achieving “true profit” which enables them to reach the top. They defines true profit as a company’s operating profit (after taxes) minus its total annual cost of capital. The management has decided that if a project generated lower than 15% profit margin, they would just shut it down.

Rejecting a $20 Million Deal

For example, Rackspace once sold a fast-growing, moneymaking subsidiary because it doesn’t meet the rule. They also passed a $20 million deal with Morgan Stanley which would put their little-known firm on the map. Their CEO explained:

“We could have made a profit on this deal, but not enough to risk our capital. Were we willing to let Morgan Stanley use our multimillion-dollar asset and make a profit of only $600,000? No. We are 100 percent committed to making a true profit.”

The company believes this strict financial discipline has helped them to avoid the dangers of rapid growth and stay in the reality.

If you was the CEO of Rackspace, would you pass the chance to work for a respected giant company? Is your company really creating real wealth or just growing for its own sake? Are you focusing on the right projects that give you true profit? If not, your company probably is wasting money. And the costs for fixing these missteps could be very high.

Slow Start

To many people, it is hard to believe OpenTable has survived the dot-com crash which put a lot of web companies out of business.

In 1999, not many restaurant owners could see the benefits of online reservation management, especially when they already had more business than they could handle. Consequently, the company took off very slowly. They have to hire an aggressive sales force to persuade each owners that online reservation process can actually increase the number of customers, improve customer service and lower their costs. Since they have to do that one restaurant at a time, it took a long, long time before this business model and concept were proven.

It took 3 years for OpenTable to serve its one-millionth user. Yet as their popularity increased, restaurants actually suffered if they were not listed on the site. They have to join OpenTable voluntarily, paying one dollar for each referred diner. Now the company seats an average of approximately 2.8 million diners every month.

OpenTable is a business that almost didn’t happen, constantly being told “no”, but getting things done anyway. Do you have the determination to prove the doubters wrong? Does your company have the patience to start slow and smart?

Last week, Marc Andreessen, the founder of Netscape and Ning, also talked about the fact that not many startups going to IPO these days. He urged venture capitalists stop whining about Sarbox and other factors that are hurting their ability to take companies public. So what is his solution?

“Build Companies More Valuable and You Won’t Have this Problem.”

It sounds so easy but is extremely hard to do :)

In the next post, let’s talk about the growth strategies of these companies.

Photo source: mikebaird @Flickr

Part 1: Leadership & Vision
Part 2: Obstacles
Part 3: Growth
Part 4: Differentiation & Marketing

If you enjoyed this post, get free updates by email or RSS.

During the interview of Chance Barnett, the founder of GIG.FM, at Mixergy.com, Andrew and Chance mentioned that many startups just think about how to make their companies more viral, how to build a cooler product, and how to get on TechCrunch. Yet Chance, as a successful direct marketer, has a different mentality. He always thinks of how to get a dependable source of traffic and convert it into real profit.

Andrew believes that there are two communities of people in the business world. On one side, we have the “Cool Kids” who are always on TechCrunch, always have the latest iPhone, and always build the latest apps for Twitter. And then, we have the “Internet Marketers” on the other side. They are the ones making real money online but never get covered in mainstream media. They only focus on optimizing landing pages, testing different keywords, and utilizing direct marketing on Google.

No More Larger-Than-Life Entrepreneurs

Knowing this fact makes me wonder if all those cool startups are doing business the right way. Today many young entrepreneurs aim to build companies with the goal to sell them. While looking for a quick exist strategy is nothing wrong, I seldom see young entrepreneurs who define success on a very big scale, like Steve Jobs, Jeff Bezos, Howard Schultz…etc. I am talking about those who believe they can transform society and build great, lasting companies.

So why does that happen? Why so few startups go public nowadays? Is that because everyone is afraid of the costly regulations of the Sarbanes-Oxley Act? Do they just want to be inventors but not company builders? Or the problems they are solving are too small? Or they simply don’t want to grow large?

In order to answer those questions, I think it’s a good idea to learn from the past successful entrepreneurs who’ve successfully took their companies public. I want to find out why they were able to transform their companies from startups to IPO, from good to great. Like Jim Collins said:

…the best way to understand how great entrepreneurs become great company builders was to take the greatest companies of the 20th century and then rewind the tape of history to when they were start-ups.

Considering that both Built to Last and Good to Great focused on giant public companies, I want to talk about smaller companies which are founded in the past 15 years. Since I don’t have a 21-person research team like Jim Collins, I can only hand-pick the following 4 companies and see how they have distinguished themselves as a very special and elite breed of institutions. The reason I choose Salesforce.com, Rackspace, Opentable and Vistaprint is because they were not heavily covered in mainstream blogosphere despite their accomplishment. To get a better picture, all of these companies combine showing up on TechCrunch 1425 times in 2009, compared to 4730 times for Facebook and 4930 times for Twitter.

Although they are in different industries, I have founded that these founders share a lot of similarities which contribute to their successes.

I am going to divide this series into 5 parts which will focus on (1) Leadership & Vision, (2) Obstacles & Leverage, (3) Growth & Financing, (4) Differentiation, and (5) Marketing.

Let’s talk about leadership and vision today.

Building a Multi-Decade Business Institution

Vistaprint was founded in Paris after its founder, Robert Keane, graduated from business school in 1995. To many people, Vistaprint is just a typical online printing company. However, Robert has a much bigger vision. When asked about his company’s five years plan, he replied:

If you don’t mind, I would like to modify that to 15 years or 20 years. Great companies like FedEx, Swatch, eBay or Dell are built over decades. We are still only in the middle of our second decade. We have the aspiration to build a world-class and truly transformational business institution.

He believes that his company is more than a printing shop. He wants to make everything a small business needs in marketing, including low volume business cards printing, promotional T-shirts printing or even website building software. As long as a small business wants those services, his company will build them with great quality at superior prices. He wants to transform the small business marketing industry like what Southwest did to the airlines industry over the last 30 years.

Using advanced technologies to group similar orders in large groups, Vistaprint is able to provide short-run, low-cost, and low-volume production to small companies, a market opportunity of over $25 billion. Not until 14 years later, this huge potential of opportunity has finally been recognized by giant retailers, such as Staples and OfficeMax, but Vistaprint still remains as one of the leaders in this area.

I suspect not many people believe there could be more innovation from an industry like business card printing, yet somehow, Robert and his team have made it happen.

What is the larger purpose of what your company is doing? Do you compromise that your industry is too small and saturated so you can’t make a difference? Consider when Vistaprint just got started. Thousands of printing stores were already existed. Robert was just selling their services through direct marketing catalogues, one customer at a time. And today his company is worth $1.84 billion with $400 million in revenue.

World-Class Service

Similarly, even though Rackspace is already a leader in a crowed and competitive industry, their founders believe they are more than a hosting company. Pat Condon once said:

Our vision is to build Rackspace into one of the world’s greatest service companies striving to offer world-class service alongside organizations like Nordstrom, the Ritz Carlton and Federal Express. These companies are known for their unique customer service experience and we want Rackspace’s Fanatical Support to be similarly recognized. While we think we’re the industry leader in service, we are constantly striving to be better. I think this is one of the defining characteristics of a truly world-class service organization.

Because of their ambitious goal, one of their founding principles is to focus on serving customers with what they call “Fanatical Support“. They always believe that managed hosting is a service business and not strictly a technology business. This philosophy is deeply embedded in their culture from the very beginning. Rackspace wants to become the back office IT department for their customers, enabling them to focus on their core business but not hosting.

At that time, most of their competitors only focused on the technology end of hosting, but much less on service and support. By contrast, Rackspace believes they are in the business of providing their customers a pleasurable experience, and constantly pushing themselves to do that.

How about your company? Have you turn good customer service into your competitive advantage? Do you just follow what your competitors are doing today? Since 1998, Rackspace has grown more than 50 percent a year and there are currently 1800 Rackers (their employees) around the world serving their customers with their award-winning support everyday. Their dedication to great service enables them to grow their business from a small startup to a $1.65 billion public company today. Yes they did that in 11 years only. If they can do it, so can you.

Never Lose Faith

During dot-com boom, most people doubt that a company like OpenTable will succeed. It is a capital intensive business and difficult to scale. Chuck Templeton, the founder, wanted to create an online real-time restaurant reservation service for consumers and later added a comprehensive reservation management system to replace existing paper reservation systems in every restaurants.

Yet, in order to do that, OpenTable has to conquer territory market-by-market, restaurant-by-restaurant. Also, local market is one of the hardest and most expensive things to do well on the Internet. Doesn’t sound like a good Internet business model. Regardless of what the naysayers said, Chuck never gave in:

When we founded OpenTable.com, one of our goals was to make great restaurants…easily accessible to people who enjoy dining out…It has created a fair amount of jobs both directly and indirectly. It has provided both restaurants and consumers with a much more efficient and effective way to enjoy a meal at most of the world’s finest restaurants…All in all, it’s pretty cool.

Due to his determination, Opentable has grown to have a customer base of over 10,000 restaurants in 50 states and multiple countries, with $635 million market capital. And it is still keep growing one restaurant at a time.

The Business of Changing the World

Salesforce.com is known for its concept of the “end of software” model and successfully transforming software from a product to a service industry. Similar to Vistaprint, OpenTable and Rackspace, this company believe nothing is more important to them than making sure every customer is successful in their service.

However, Marc Benioff, the founder of salesforce.com, did something unique that every serious company builders should pay attention to. To be truly successful, Marc believes companies need to have a corporate mission that is bigger than making a profit, a concept that he learned from the Art of War. In other words, people can’t be united or focused unless they share a common philosophy—a philosophy that gives their effort a greater meaning.

He wants to make sure everyone in his company understand the importance of this idea so he created the famous “1-1-1″ model, a philanthropic program.

We try to follow that at salesforce.com, where we give 1% of our equity, 1% of our profits, and 1% of our employees’ time to the community. By integrating philanthropy into our business model our employees feel that they do much more than just work at our company. By sharing a common and important mission, we are united and focused, and have found a secret weapon that ensures we always win.

Meanwhile, some people argues that how they can provide the best services to their customers when their employees are volunteering outside. Marc simply replied:

You have to be able to go to San Francisco Homeless Connect and you have to be able to run your computers. Both of those things have to happen. A successful company can do that, and we do that, of course.

In fact, this model has become a critical part of their business, making them a more competitive company. Salesforce.com ranked No. 7 out of all the companies in the world in a magazine called Business Ethics that charts the work of companies that do corporate social responsibility. As a result, many corporations like their company and are actually more likely to buy services from them, although this is not their original intention. How many entrepreneurs would think that philanthropy could become an asset to the company and their ability to work with customers and recruit employees? Sometimes doing the right things will give you tremendous results that you didn’t expect.

Besides your core business, does your company have a core value that is shared by every employees? Do you know helping others can become your secret weapon in the business world? According to Marc, one of their biggest accomplishments is that Google has copied their 1-1-1 model exactly, creating a $1 billion non-profit foundation, compared to their own $30 million foundation.

For future entrepreneurs, how would you define success? Having a good lifestyle or inspiring millions to help other people or transforming an industry to make others more successful or becoming an entrepreneur people aspire to be? That’s your choice.

In part 2, I will talk about the obstacles these four companies have faced in the past and how they were able to overcome them.

Photo sources: (Robert Keane) @PIworld, (Chuck Templeton) @facebook, (Pat Condon) @rackspace, (Marc Benioff) @flickr

Part 1: Leadership & Vision
Part 2: Obstacles
Part 3: Growth
Part 4: Differentiation & Marketing

If you enjoyed this post, get free updates by email or RSS.