Interview with Kevin O’Connor
Kevin O’Connor is co-founder and former CEO of DoubleClick. DoubleClick is the world’s largest Internet advertising technology company and was recently acquired by Google. Prior to DoubleClick, Mr. O’Connor founded and developed several successful Internet businesses and is now the principal of O’Connor Ventures, a venture capital firm that provides funding for startups. For this interview we met with Mr. O’Connor in Santa Barbara, California to explore his thoughts on Internet entrepreneurship, venture capital, and success in life.
Kaizen: Before you went to college, you were a young man with an experimental turn of mind. Some of those experiments went well—and others didn’t?
O’Connor: Well, there was the one when I tried to build a hot air balloon and it was too windy, so I launched it in our garage and it caught on fire. It was about six o’clock on a Sunday morning, and all the hot ashes flew up in the rafters and almost burned the whole house down and killed the family. So I had to put everything out before anyone woke up.
Kaizen: What was your parents’ reaction to that?
O’Connor: My dad actually helped me build a new one, and we went out and launched it, but it was too windy and it burned up again. But it was outside. He was always very good on that. And the other time, I think I was building a rheostat and it was very, very hot and it caught the carpet on fire. I tried to hide it and somehow my dad always found everything I did. He was totally cool with it; he was fine. He liked the story and he was glad I didn’t kill anyone.
Kaizen: So rather than dampening your experimentalism, they took the risks and—maybe keeping an eye on things the way parents do—encouraged you down that road?
O’Connor: Yep. He never even kept an eye on me. I don’t know why. They were fairly conservative people, but I think my dad had a bit of a hidden wild streak in him.
Kaizen: So by the time you went to college you had years of fun experience with technology and great parental support?
O’Connor: Yep. My dad used to go out with me every garbage night. We’d go out and collect TVs and radios and anything with electronics. He used to help me do that.
Kaizen: How far back can you remember being interested in electronics?
O’Connor: Twelve or thirteen maybe.
Kaizen: Do you remember what first launched that?
O’Connor: My dad was an electrical engineer, so there’s always that. But a good friend of mine from down the street was into building motors and go-carts, and got me interested in building stuff.
Kaizen: Did you start college knowing what you were going to major in?
O’Connor: I knew I was going to be an electrical engineer probably since I was thirteen or fourteen.
Kaizen: And you had a pretty good conception of what that was by the time you went to college?
O’Connor: I thought I did, but college was nothing like it.
Kaizen: And this was in the early 80s?
O’Connor: I graduated high school in ’79.
Kaizen: Right on the cusp of the big computer revolution.
Kaizen: You graduated from the University of Michigan with an honors degree in electrical engineering, but you quit graduate school the following year to start your first entrepreneurial enterprise. What was that?
O’Connor: I was accepted into the Ph.D. program. I begged and pleaded with the EECS chair to get early admission, and the day he gave me early admission, I had talked to a buddy and decided to go and start a company rather than get a Ph.D.
Kaizen: That new entrepreneurial venture was Intercomputer Communications Corporation (ICC)?
O’Connor: Yes, ICC. I think it maybe was the springtime—he’d already had a consulting company down there—I started working on the product in college, started designing the product.
Kaizen: “He” is Bill Miller? And Michael Schier was in on this as well?
Kaizen: They were in Cincinnati. How did you connect with them—at the University of Michigan?
O’Connor: I did an internship with Bill Miller down at Texas Instruments in Houston, so I met him a couple years prior. He and Michael Schier were old high school buddies.
Kaizen: They had come up with the idea and talked with you about it and you signed on?
O’Connor: They were tying Apple computers into Burroughs mainframes, emulating the MT-983 terminal. I had worked on one of the first IBM PC projects, which was a 5250 terminal for the IBM system. So I had communications and terminal emulation experience and I had worked on one of the first PC projects, so I knew the PC. The plan was to tie the PC into the Burroughs mainframe.
Kaizen: And this came out of your internship at Texas Instruments, where you met Bill Miller, and he was working independently with Michael Schier?
O’Connor: Yes. And the next year I’d gone to Austin to work with IBM on a secret project, which was developing software for the newly launched PC.
Kaizen: How did you raise the initial capital?
O’Connor: They had a consulting business—they were doing contract programming—and then Bill’s parents put in like $25,000.
Kaizen: $25,000 doesn’t sound like much in hi-tech. How far did you think you’d get with the $25,000?
O’Connor: We thought we’d get all the way with it.
Kaizen: Was the idea that the $25,000 would take you a certain distance but by then you would have your product in place and enough customers to make it self-sustaining?
O’Connor: Yes. Then it would take off.
Kaizen: Which is what happened. You had the right idea at the right time, but in these early days of computer connectivity, did you have any special challenges with selling your product?
O’Connor: Yes, it was hugely difficult. I thought it would be easy. I thought the PC was obvious, that the PC would take over the world, and that every business would want one. But the first hundred people we talked to—MIS [ed.: "Management Information Systems"] managers—would say there’s no way in hell a PC would ever come into their company.
Kaizen: They were committed to mainframes?
O’Connor: Mainframes. Over their dead body would a PC come in.
Kaizen: Why were they so vehemently opposed to it?
O’Connor: Loss of control. They had the mainframe in the room—that only they could control, they could program, they could touch—it was behind locked doors.
Kaizen: So this was a turf issue, essentially?
Kaizen: It wasn’t that they didn’t understand, necessarily, the value of PCs, even PCs hooked up to a mainframe?
O’Connor: Didn’t understand it at all.
Kaizen: Because they saw the turf issue and stopped thinking at that point?
O’Connor: Yes. And in their defense, there weren’t a lot of applications for the PC. The PCs actually started coming into corporations under the radar. They were bought as calculators, they were bought as typewriters, word processing systems, but they weren’t bought as PCs.
Kaizen: So it wasn’t a matter of having to do a sales job, it was more this grassroots type of approach, and then the MIS people had to give way at a certain point?
O’Connor: Yes. Then they’d call us back and say, “Hey, my CFO [ed.: “Chief Financial Officer”] just bought a PC and he wants it tied in.” So there’s a lot of end-user demand.
Kaizen: You mentioned you talked to a hundred people or so and got “No’s.” How did you finally break through? Because, if you’re waiting for grassroots and the various stealth ways, it’s not going to take too long before you run out of your $25,000.
O’Connor: You just keep pounding. You buy call lists and you call and call and call, and finally get a “maybe” and a couple “yes’s.” We had very, very low overhead.
Kaizen: But a lot of cold-calling?
O’Connor: Yeah. So I learned early on that technology does not sell itself.
Kaizen: Even in a high-tech, tech-friendly culture, it’s still a hard sell for the new thing?
O’Connor: Yes. Even today, nothing sells itself.
Kaizen: Seven years later, in 1992, ICC was acquired by DCA and you became Vice-President of Research. What were your new responsibilities?
O’Connor: I was Director of Research and then shortly after became VP of Research. DCA was sort of a stagnant growth. Their big product was the Irma 3270 emulator to the IBM mainframe. So we were all in what was once a very exciting market and was now a stagnant market. It wasn’t exciting anymore. So I had to come up with new growth.
Kaizen: That is, new technology areas that would be growth areas?
Kaizen: How many people were you managing?
O’Connor: I think at that time just a couple. Dwight Merriman was one of them.
Kaizen: And you went on to do other things with Dwight very soon. So your management skills are not called on too much because this is still relatively a small research team. Were there any management-type issues coming on board at this point?
O’Connor: It was probably my first time managing, even though I was VP of Research at ICC, I generally worked by myself. I developed many of the products by myself. I coded them; I supported them; I wrote the manuals. There was very little management of other people. And these guys at DCA were all top developers, so management was different. It was more about inspiring—I had to inspire them to come up with new product ideas. I was a terrible manager.
Kaizen: You left DCA after it was acquired and went on to help founder Chris Klaus and Tom Noonan build up Internet Security Systems (ISS).
O’Connor: Chris was by himself at the time. He was looking for some help. His lawyer had turned me onto him. I was an older and more experienced entrepreneur and here was a guy who was twenty years old, had a product and a few customers, but he didn’t know how to build a company.
Kaizen: How old were you at this time?
O’Connor: I was 33. So we connected. I had a little bit of money from the sale of ICC so I invested some money in it and helped build the company. And I had known Tom Noonan. So I started recruiting some people to come join the company.
Kaizen: What was ISS doing?
O’Connor: They were doing Internet security scanning.
Kaizen: What was your contribution to building up ISS?
O’Connor: I worked there full time in the beginning. They wanted me to run the company. Chris and I had talked about that but I really wanted to do my own thing eventually, because I was working on coming up with product ideas. So my main purpose at ISS was to help build the company. I was selling, trying to recruit people, write the manuals, do the marketing.
Kaizen: ISS became very successful and was sold to IBM in 2006 for $1.3 billion. Did you still have a financial stake?
O’Connor: Yes. I was on the board all the way to the end.
Kaizen: Going back to 1995, you were in Atlanta and working out of your basement, where you and Dwight Merriman got the idea for the company that became DoubleClick. How did you get the idea for DoubleClick?
O’Connor: We knew the Internet would be big. It was still in a nascent state. It wasn’t clear what the economy of the Internet was going to be: what was going to make money, how are people going to make money. So the original idea was actually a network of subscriptions, very similar to the way CompuServe used to work. So, rather than having subscriptions to a thousand sites, you would buy a master subscription from us and we would allocate money, depending upon how much time you spent on sites. We knew that subscriptions were going to be very big on the Internet but there was going to be tens of thousands of websites out there, so it would just be unmanageable. As we studied the Internet and the market, we came to the realization that the subscriptions idea was not going to work. So we looked at the other alternative, and that was advertising. We took almost the exact same idea and networked the websites for advertising.
Kaizen: So the advertisers in effect were your market, and you were selling subscriptions, so to speak, to them?
O’Connor: Someone had to pay for the content, so you either paid for the content through subscriptions, or someone else pays for it through advertising. So we felt that advertising was going to be the big moneymaker.
Kaizen: And you’re functioning as a middle man between the advertisers and the end user?
O’Connor: Between the publishers, the websites, and the advertisers. And the end users were ultimately the ones that we’re delivering the ads to and measuring how they respond.
Kaizen: What was your initial division of labor with Mr. Merriman?
O’Connor: Dwight’s an unbelievable coder. I used to be a coder; I stopped being a coder about when we moved to Atlanta. So my division of labor was: I was organizing the company and designing the product, defining what the product would be, how it would function, raising the money, and figuring out the market.
Kaizen: You were doing strategy, raising money, and sales, I assume?
Kaizen: At what point did you start adding more people?
O’Connor: In Atlanta we added two more people. We added a programmer and an actual salesperson.
Kaizen: So you’re still in Atlanta, and DoubleClick has potential, and you’re now up to four people, and are you putting the financing in yourselves?
O’Connor: Yes. It was all my money at that point. People were working for free or minimum salary.
Kaizen: At this point you also made a key decision to move to New York City rather than, say, Silicon Valley or the Massachusetts 128 corridor, which may have seemed more a natural choice for an Internet-based company. Why New York?
O’Connor: A little more story behind that. Our concept was take technology, unite a whole bunch of sites together, and be able to deliver highly-targeted and measurable ads. We didn’t see anyone else doing it out there.
And then all of a sudden I run across a story in an advertising magazine about an almost identical idea from a company up in New York. The company, which was really just a group of media sales people working for an ad agency, was called DoubleClick. So we called them and it turns out that it was just purely a concept. They didn’t have anything. I was talking to Dave Carlick, who was the head of the group—they were selling advertising on behalf of Netscape and Excite. So they were probably the biggest media sales group out there, and they had an identical concept. What they didn’t have was any technology. And we had the technology but didn’t have the media sales experience. That company was just four people, so it was their four people, our four people. We kept their name, DoubleClick, because it was clearly better then our company name—Internet Advertising Network.
So we looked at where we could move it to. Atlanta wasn’t an option. At first New York really wasn’t an option; it was clearly Silicon Valley. You’ve got to go to Silicon Valley as a technology company. But most publishers and most advertisers are out of New York. At that time we thought publishers would be far bigger and more successful on the Internet than they actually ever became. But most advertising is bought out of New York. So we said, “We’re going where our customers are located.”
Kaizen: So it’s in part how you conceptualize the company. You’re an advertising company first?
O’Connor: We’re a vertical technology company—we provided a solution to the advertising industry.
Kaizen: In terms of the geographical position, if you think you’re a technology company, then you think Silicon Valley. If you think you’re an advertising company—delivering the Internet support for that—then you go where the customers are?
O’Connor: Maybe. Our feeling was that Dwight and I are very strong technologists and that we knew we could hire the right technology people up in New York. Some of the most reliable systems in the world are built out of New York. You just don’t see them or hear about them—financial systems and programmed trading and everything. And so we felt that our weakness was going to be understanding the advertising and the publishing market, not the technology. And the move to Silicon Valley would be too parochial, too isolating.
Kaizen: With 20/20 hindsight it was a great decision to go to New York?
O’Connor: Yes. We found that a lot of our competitors in Silicon Valley really didn’t understand advertising. When there was a perfectly good existing term to describe something, they would make up a new term because they didn’t know what the term was. They didn’t understand advertising or direct marketing. I spent all my time researching traditional advertising: What were all the terms? And what were all the things that they were looking for—reach and frequency and CPM? And we couched everything in traditional advertising terms, whereas our competitors tended to make up stuff, which really alienated their potential customers.
Kaizen: So part of this decision is recognizing where your weaknesses are and not letting your strengths dominate the decision? Finding the way to solve the problem in the areas that you’re weak?
Kaizen: In New York you recruited Wenda Harris Millard as executive vice president because of her extensive marketing experience and contacts. How critical was that hiring decision?
O’Connor: She was very instrumental. She came from the publishing side. We had to be able to attract publishers and we had to be able to attract advertisers. She came from the publishing world and she had spent twenty years selling advertising and managing publications. She came from the traditional world. She gave us a lot of credibility. Back in those days, the problem was all the dollars were controlled by 50- or 60-year-old people who were used to buying TV, radio, print advertising. They weren’t using the Internet, had never even heard of the Internet, and didn’t want to talk to anybody.
Kaizen: So again, it’s a hard sell. Is it not like the hard sell you had at ICC where it was turf control, the MIS people not wanting to hook up PCs to their mainframe or let PCs in? In this case it’s a matter of people not understanding the product because they’re the older generation?
O’Connor: I’d say it’s almost an identical problem, because you’ve got people who resist change. The Internet was by no means a slam dunk. When I got to New York, there was a core group of people who believed in, lived, and breathed the Internet, but 99.9 percent of the people didn’t and had never been on it.
Kaizen: This includes the big advertisers you were trying to tap?
Kaizen: So how did you meet Ms. Millard?
O’Connor: I can’t remember. I don’t know. The group that we had merged with, they were a part of Bozell—BJK&E—a big advertising agency, which was a big problem for us. So even though we were an independent company, they still owned a big chunk. So they had a lot of vested interest. I think they probably made the introduction. They wanted the company to be successful. I think I remember going in and asking, “Who do you think are the top publishers or the top media salespeople or media buyers that we should talk to?”
Kaizen: In 1997, DoubleClick landed $40 million from West Coast and Boston VC firms. Surprisingly, you found it difficult to raise venture capital in New York?
O’Connor: The history of DoubleClick is complicated. So BJK&E owns a big chunk of us, let’s say 50 percent, and they were funding us—they kind of gave us a blank check. And we were spending the money. As the Internet got hotter and hotter, our association with them was negative because we were selling to other agencies, and other agencies don’t want to benefit a competitor. So I was constantly trying to separate ourselves, and all of a sudden, as the Internet’s taking off, these guys realize one of the most potentially valuable things they have on their balance sheet is this DoubleClick stock. So they want to sell us. And so we start going around to publishers. We had a deal with Yahoo—it was so close—Yahoo was going to buy us for $95 million. And BJK&E really wanted to sell us bad, and so I went out and had covert conversations with one of the investors in ISS, which was Greylock, and then they brought in Bain Capital. And Bain came in and said, “We’ll buy those guys out and put money in the company.” So the trouble was less raising the money than listening to what my main shareholder was telling me to do.
Kaizen: The $40 million was partly from Greylock and then Bain Capital?
O’Connor: I think 25 was to buy out BJK&E and then 15 came in the company.
Kaizen: The next year you took DoubleClick public. Was that unusually fast?
O’Connor: It was fast. We had a lot of revenue. I think maybe at the time we had $80 million of revenue.
Kaizen: In one year?
O’Connor: Probably two years. So we were one of the fastest growing companies out there. I knew that going public—it was a hot market—getting access to a large amount of capital would put us in a huge competitive advantage.
Kaizen: How big is your staff at this point, from the initial eight?
O’Connor: I don’t even remember. 250 maybe.
Kaizen: At this point you are running the show and now you are definitely in the managerial seat as well?
O’Connor: Yes. You know, it had to be bigger than that, because in 2000 we were 2,500 people worldwide. So probably 400 people, because we were doubling, tripling every year.
Kaizen: You were DoubleClick’s CEO from 1996 to 2001 and Chairman through 2005. Being CEO involves a fuller skill set than being an inventor and managing researchers. What was the hardest challenge for you in being CEO?
O’Connor: I’d had executive positions for fifteen years, so I knew how companies worked at the highest levels. I’d sold before. But probably my best management training was being a wrestling coach—getting seventeen-year-old boys to do something is difficult. That actually was the defining moment that turned me from an individual to helping other people develop themselves to their maximum potential. So I matured a lot. I had one kid and another kid on the way. So I think maturity was probably the biggest thing. I had the mental capacity to figure it out.
To me, in a company, the most important things are product and strategy, and those are two things that I was reasonably good at. And inspiring people, getting them motivated, getting the mass of people pointing in the right direction and telling a coherent story—I was good at that. But the president, Kevin Ryan, who was sort of the COO, he kept the train on schedule.
Kaizen: You mentioned inspiring people. What goes into that? How do you get them all going in the same direction and fired up about what you’re doing?
O’Connor: A lot of the stuff that’s in my book [The Map of Innovation] are strategies I had developed over time. A couple of things. One is, I absolutely believed in what we were doing: I believed that we’d become a huge company. Kevin Ryan, in our interview, he asked me, “What’s your goal?” At the time I think we were eight people. And I said, “I want to be broken up by the Justice Department. I want the company to be so successful that they break us up.” And he laughed. And then, ironically, it came to fruition. I really, really believed that we would become one of the world’s leading Internet technology companies. And that’s infectious. We had a very focused strategy to do that; we could show people how that was going to happen. And people believed it.
Kaizen: So having a good vision, a realistic vision, and being able to communicate it clearly, and then people can see the payoff, and that gets them excited?
O’Connor: And focusing. Really, really focusing. We ended up jettisoning some things. When we merged with DoubleClick, they were selling Netscape and Excite—they were acting as a rep firm. Those companies didn’t want to use our technology; they didn’t want to join our network, so I sort of resigned that business. That was a $10 million business. People thought I was completely insane. But I said, “This is not strategic for us. We’re not a media sales rep firm. We’re building something where the technology is essential.”
Kaizen: In your book that theme comes across very clearly—to focus on the absolutely essential thing, and block out everything else.
Another major event: DoubleClick went public before the dotcom bust. Were you affected by the bust?
O’Connor: It was the spring of 2000. We’d just raised a bunch of money. I think about fifteen of our top twenty customers disappeared.
Kaizen: Just overnight like that?
O’Connor: Yes. So we were $600 million in revenue and it just kept dropping—freefall.
Kaizen: How do you survive that?
O’Connor: I remember going to an event—Silicon Valley Reporter had a Top 100 people event. And every year it was, people are so successful, and it was just a big celebration. That year we went to it, and it happened right after the crash, and it was like going to a funeral. Most of the companies were gone, bankrupt. We were there. We had a lot of capital. That saved us.
Kaizen: You had money in the bank, so you could ride it out?
O’Connor: Yes. But we made a lot of changes. We cut the company in half very quickly. We jettisoned a lot of business—we jettisoned our original business, which was the network, selling ads.
Kaizen: How long did it take until things turned around again for DoubleClick?
O’Connor: Three years. The problem we had was that we actually created a very, very profitable company, but with declining revenue. So our margins were going up—we were increasing profits and everything—but it was a tough restructuring.
Kaizen: It sounds like you developed most of your managerial skills as you went along. Did you do any formal reading of management books or anything like that?
O’Connor: I read some. But we had a lot of really incredibly smart people around us, a lot of Stanford and Harvard MBAs, some really super-talented people.
Kaizen: You learned a lot from them?
O’Connor: Yes. People were always asking me, “How did you learn advertising?” If you can do a Fourier Transform in electrical engineering—that’s complicated—you can do most anything in business. Technology is very, very complicated. A lot of business is just not that tough; it’s just not that complicated.
Kaizen: So it’s a matter of having the smarts and making the decision that you’re going to do it, and then you can work it out?
O’Connor: Yes. And listening. Knowing when you don’t know something and listening to people that you respect.
One of your earlier questions—I might have skipped over it—which was, how did we survive and what made us different from other companies? From day one I said over and over again, “We’re in business to stay in business. We have to create a viable long-term business which is based on profits.” And the Internet was not like that. There were billions of dollars being poured in. Ironically, people were subsidizing it. It was this weird economy. Everything was being subsidized. People were being paid to take products and services. So the whole thing was upside down and we really had to resist doing that.
Kaizen: You’re saying there’s a double-edged sword here. On the one hand you really have to believe in your product and you have to be psyched about it genuinely so that communicates to other people. At the same time you have to have a ruthless awareness of your weaknesses. How do you combine those two? You psyche yourself up for something without blinding yourself to potential weaknesses.
O’Connor: As someone said: The paranoid survive—part of it was just being paranoid. And I remember sitting with Kevin Ryan—this is early 2000. I said, “Kevin, this has just been too easy. It’s been a lot of hard work and everything but we’ve been on a rocket ship. Raising money was easy; getting great people has been easy, getting great customers has been easy. There have been challenges, but on a relative basis it’s just easy.” I said, “The shit’s going to hit the fan here. We’ve missed something. Something bad is going to happen, because it always does. ”
Kaizen: Something bad with respect to your company in particular or the whole upside-down Internet economy system you’re talking about?
O’Connor: I thought something was going to really hit the Internet, that it was an unsustainable market. But I also thought something would hit our company. I didn’t know what. I didn’t know it was going to be privacy that smacked us between the eyes.
Kaizen: So only the paranoid survive, and you’re imagining all these things that can go wrong. There’s an element of realism that has to creep in there as well, picking out the ones that are realistic things to worry about, as opposed to the more speculative things that aren’t likely actually to happen.
Kaizen: In your strategic thinking, do you, in a calculated way look at the possible downsides and have hedges in place for those?
O’Connor: We always looked at what the risks could be and how we could correct those risks.
Kaizen: So the dotcom bust might be a good example, because you said almost overnight you’re losing 75 percent of your revenue. That could happen again. How would one hedge against that?
O’Connor: It really comes down to reacting quickly. We wrote off a bunch of real estate. We took a lot of very fast actions. And we probably cut a lot of meat with the fat. We got rid of some businesses that, ultimately, two years later, turned out to be incredibly valuable. We wrote off $50 million of New York real estate, and New York real estate came roaring back. We would have made money on it if we had sat on it. But it wasn’t our business. We had to move quickly, planning for the worst and hoping for the best.
Kaizen: So, some anticipating likely scenarios and when one materializes, being able to recognize it and move quickly?
Kaizen: DoubleClick is one the great Internet success stories—you sold it in 2005 to a private equity firm for $1.1 billion, and it was recently acquired by Google. Why did DoubleClick succeed when so many other Internet marketing firms failed?
O’Connor: It was really our obsession with providing our customers with solutions—everything revolved around that. It sounds a little hokey—customer, customer, customer. But it wasn’t just a customer; it was figuring out their sore points, their pain points and providing a solution to fix that problem. With our competitors, there was a famous CMGI sales meeting and they put up a picture of me, I guess, and he said, “We will destroy them. Our goal is to destroy them.” At our sales meeting we rarely even talked about the competition. I said, “We’ve got to respect the competition, we’ve got to learn what they’re doing well, but we’ve got to just be obsessive about our customers’ problems. If we provide the best solutions to our customers, they’re all going to come to us, and in effect we’ll destroy our competitors.”
Kaizen: That can be a cliché, to focus on your customers. But it is true of many technology companies that they are more into their technology than they’re into the business of actually meeting a need. So you actually have to take seriously that point?
O’Connor: We were both. We tempered it. My whole thing was that if you apply the right technologies to a big problem, you come up with the best solution. So you’ve got to identify the big problem, but you’ve also got to pick that right technology, and a lot of companies pick the wrong technology solution.
Kaizen: Was it hard to give DoubleClick up? You had been a founder and now were turning it over to others.
O’Connor: To stop being the CEO was the much tougher one. The job had completely changed. I was dealing with politicians, lawyers, the media. Everything that I hated doing, that’s all I was doing. I wasn’t dealing with products or customers anymore. So that was harder. Selling the company was somewhat hard, but not completely. I don’t get possessive about companies. To me they’re not mine. I was a big part of it, but after ten years I had moved on in my life—I was doing other things. You want to make sure the company goes into the right hands and it’s going to be successful long-term. But when you’re a public company, it’s kind of hard to do that. You run an auction and you’ve got to take the top dollar. And it just so happens that the best home for the company was also the top dollar.
Kaizen: So with your personal temperament and interests, you were ready to move on anyway to some new and interesting project. You also mentioned the job had changed by 2001 when you stepped down as CEO.
You mentioned the Internet privacy controversy that brought you in contact with politicians and activist groups and so on. What was that issue?
O’Connor: The issue was that, because our technology was delivering ads to so many different websites and search engines, the drive was to get more and more information on who was seeing those ads. That was the whole drive in the industry. We had bought a company that was an offline company that had a lot of purchase information, like did you buy a blue sweater? What we didn’t foresee is that information could be used for evil. Information could be used for bad things, like somebody wrote in an article on that in USA Today, that we could see that you’re searching for cancer treatments. We could sell that to your insurance company and they could deny you insurance coverage. And the whole privacy issue just exploded. Privacy is a very sensitive thing with the media. They believe that they can infringe on anyone’s privacy, but, boy when it comes to privacy, they’re very, very pro-privacy. So it just struck this chord that no one even saw and it exploded.
Kaizen: Internet privacy was a brand new set of issues.
O’Connor: There were no rules.
Kaizen: And at the same time people are putting their information out there and they’re not sure what’s going on with it.
What kind of guidelines do you think are appropriate for Internet companies for dealing with information that would be valuable to them, but nonetheless, as you say, could in the wrong hands be used for evil?
Kaizen: Could you say what the essential tenets of it are?
O’Connor: Sure. There were two types. There was PII, Person Identifiable Information, and Anonymous. With Anonymous you should still be able to opt out, but it’s anonymous so there’s not a lot that you can control there.
But PII should be based on consent; easily be able opt out; and notification—this is what’s being collected, this is what it’s going to be used for. And then staying away from sensitive information. Part of the problem is, people just forgot about it. You ask them, “Do you care about that you bought a yellow sweater?” “No, I don’t care about that.” What do they really care about? They care about financial, health, and sex. So really just stay away from those areas.
I don’t know if you’re interested in this story, but it’s kind of a cool story, and it concerns a professor. So when the chat rooms were real big on Yahoo, there was this guy who was pumping up DoubleClick stock, and he was detailing product plans—what our future was going to be. And we thought it was an inside person; people thought it was me. It was really disturbing. We couldn’t figure it out.
So we launched an investigation to find out who this was. It turns out it’s a professor of something like hieroglyphical studies at University of Connecticut. And this guy was just seeing where we were and where he thought we were going to go and where we should go, and the guy was brilliant. We tried to hire him. We brought him in and he became like a hero in the company. We actually had him come off to the executive retreat to talk to the company—to give his views. And I said, “How did you figure all this stuff out?” He said, “If you can do hieroglyphics, you can read through SEC reports and figure out what a company’s going to do.” So he came and spoke to us. And there the privacy thing had just started. We asked him, “What do you think is the biggest threat?” And he said, “Privacy.” And everyone was kind of in denial. And the guy was like, “It’s going to be privacy. I’m telling you. Do not underestimate it.” This guy called it perfectly.
Kaizen: How far ahead of the actual privacy issue was he making the call?
O’Connor: A few months. Any kind of issue you never know. It was out there, we thought it was just going to die away. We figured it was just going to be a hot story today, gone tomorrow. He said, “It’s not going to go away.” So he called it pretty well in advance.
Kaizen: That is a cool story. Your major project now is O’Connor Ventures, which provides seed capital to startups. When did you start doing venture capital work?
O’Connor: I’ve been doing it on the side for thirteen years. I did it with ISS, I did it with HotJobs, I did it with a few other companies about a year after I stepped down as CEO. So, in 2002 I focused solely on being a VC.
Kaizen: So the chairman position was not filling up your schedule and you had enough capital and so you started taking on other interesting projects. What do you like most about being a VC?
O’Connor: I love products. I love working with people who are just jazzed about providing a solution to customers and building a great company.
Kaizen: Raising money is intimidating to most people starting out. Suppose I have a good idea? What is the first thing I should do?
O’Connor: Come up with ten more good ideas.
Kaizen: So I come up with ten more ideas and go through the winnowing-out process …
O’Connor: Then you should go develop the product. And go sell it to a customer. And get money from yourself, or your parents, or somebody. But it’s almost impossible to raise money, especially if you’re never done it before. It was reasonably easy for me to raise money because I had built a company from scratch and people love that. If you’ve built a company and have a success under your belt, it’s much easier to raise money. But that’s 0.1 percent of the population. For the rest of the folks it’s nearly impossible.
Kaizen: So if they’re starting small scale, though, they should build a product and go and sell it. At that point one is writing a business plan for one’s own strategic thinking, and working it through.
O’Connor: Right. But then to raise money you’ve got to have one hell of a sexy executive summary that tells people very concisely what you do and why you’re going to win and why it’s such an important product.
Kaizen: So the business plan is a strategy document. When you first write it out, it’s for clarifying your own thinking for your own planning. That should also help you sort out, even if you’ve got your ten ideas, which one you think is the best. You follow that strategy, and then you get your product out and sell it. Then you make the plan sexy and try to raise more serious money?
O’Connor: The one thing that most successful entrepreneurs never even consider is whether it’s going to happen. It just doesn’t enter their mind. It is going to happen and I’m going to make it happen. Not to parse your words. The number one question people would ask me when DoubleClick was such a huge success was, “Did you ever think it was going to be successful? Did you think it was going to fail? What was your alternative?” My response was, “Huh? I always thought it would be huge.” Not to sound arrogant or anything. But they’d ask, “Did you ever consider failure?” No. Never.
Kaizen: So it’s a strong feeling that that is going to be successful, but it’s not just a strong feeling. In some sense you’ve got the thinking and planning behind that. It’s a grounded certainty. Would that then be a warning signal for people who are thinking about entrepreneurship—if they have significant doubts, they should back away?
O’Connor: Yes. Well, you should maybe back away from the idea. I’ll show you the list of characteristics because I thought it was a pretty decent list. And that’s one of them—very determined. I will make it happen.
Kaizen: There’s that line from one of the Star Wars movies, Yoda saying: “Do or do not … there is no try.”
O’Connor: Yes, and there’s the line I always quote from Titanic: “I make my own luck.” It was a good line. Of course, that’s when he took the gun and threw the little kid out of the boat.
Kaizen: Some of the studies, though, are interesting because when they look at risk-judgment and risk-tolerance among entrepreneurs compared to other people, entrepreneurs are more risk tolerant than the rest of the population. But one of the studies also shows that entrepreneurs tend to underestimate significantly the actual amount of risk.
O’Connor: Yes. I thought that was one of the flaws in it. Because one of the studies that came out says it turns out that they are actually very risk-averse. How do you figure that? They’re both right. In the entrepreneur’s mind, it’s not risky at all. What they’re doing is certain.
Kaizen: Well, the tricky thing is if you look at the eighty percent of entrepreneurial start-ups that fail, a significant number of those people also felt sure ahead of time that it was going to work out. They knew it was a good idea. Although it could be that the idea was good, but the execution was poor.
O’Connor: I don’t think anyone has studied that. Most of the studies I’ve found were entrepreneurs, people who started their own business. Eighty percent of them fail. So what you’ve really got to look at, I think, is what’s the difference between those who succeeded, those who tried and failed, and the general population. Are there some predictive factors?
Kaizen: There are fun studies with made-up scenarios where they’ll say, “I’ll give you an envelope with $10,000 in it. It’s all yours.” Then the person comes back and says, “I’ve got two more envelopes here. One of them has nothing in it and the other one has $100,000, but we’re not going to tell you which one is which. And you can either keep that envelope with $10,000 and walk away, or you can give me that envelope back and pick one of these other two.”
O’Connor: It’s Deal or No Deal.
Kaizen: Yes, that sort of thing, though these studies were done long before the TV show came along. And it’s fascinating. If you calculate the odds, you have $10,000 and if you trade that envelope in you could get $100,000, which is ten times your earnings, or you could lose 10 grand. So it’s a ten-to-one payoff. But there seems to be a difference between people who say, “Wow, I could make ten times my money on this deal,” and those who say, “Wow, I could lose $10,000.” And the more risk-averse people, even if the odds are explained to them, they’ll back away from it. So is there some element of risk-tolerance?
O’Connor: But one of the problems with that is that’s assuming that entrepreneurs do it for money, and I’d say it’s the opposite, that money doesn’t even factor in to most entrepreneurs’ minds. That blows people away. In fact, that’s a red flag to me, when people start talking about exit plans. Boom. Why are you talking about exit plans? My experience is that entrepreneurs rarely do it for the money.
Kaizen: The successful ones do it because they’re passionate about what they’re doing.
O’Connor: Controlling your own destiny, making an impact on the world, and doing it your way.
Kaizen: There many books and articles out there about the exit strategy thing and it does seem to be positioning yourself for selling out.
O’Connor: It’s the stupidest thing I’ve ever heard of. If I see that in a business plan, I tell them to take it out. It’s wrong. Investors want to know that there’s going to be some liquidity option.
Kaizen: But it makes sense that if you actually have a good product and a good business plan, you’ll have an exit strategy at some point.
O’Connor: Well, you’ll have options. You’ll have all sorts of options. And you don’t know what it’s going to be. The worst one is, “We’re going to be acquired by Google.” What happens if it doesn’t happen? Well, then you’re screwed.
Kaizen: In your book The Map of Innovation, you say that a good business plan can be ten pages long.
O’Connor: Ten pages or shorter. The shorter, the better.
Kaizen: So for the major sections—What’s the need? What’s unique about your product? How are you going to create it? How are you going to fund it? How are you going to sell it? And so on—that would then be less than a page on each, and the Executive Summary would be just the first page?
Kaizen: Suppose I’ve done my homework and have a working business plan—now I need to get funding. For most small businesses that will come from personal savings, family and friends, and local banks. How big should my idea be before I think in terms of angel investors or VC firms?
O’Connor: It’s always tough. This is like, “How do you get your screenplay in front of a Hollywood producer?” If you’ve got product, customers, revenue in a pretty sizeable market, people are going to see you. You’re not going to have any problems. That sets you apart from 99 percent of the business plans out there.
Kaizen: When you say people are going to see you, does that mean they’re going to come knocking on your door or that they will be aware of you when you try to knock on their door?
O’Connor: They would be aware of you or you’ve got to tell them in an email: “I’ve got product, I’ve got revenue, I’ve got customers. It’s a really interesting product. I’d love to have you take a look at this.”
Kaizen: How does an entrepreneur find out whom to approach? Word-of-mouth, or are there formal networks online or elsewhere?
O’Connor: Around here there is TCA, an angel network you can approach. A lot of the time, it’s just networking. Maybe your customers love the product and they know somebody. The web is great—you can find anybody, anywhere. There are databases of VC’s: how big they are, what kind of companies they invest in.
Kaizen: So, doing your research online will yield a lot of information. Getting yourself out there. Word of mouth. Networking. That’s the way you do that.
O’Connor: Yes. One advantage of bringing in an angel is they typically have contacts.
Kaizen: Are there other differences between angels and VCs? Such as angels are smaller, typically doing it on the side, while VC firms are larger, and targeting a certain ROI cutoff?
O’Connor: It’s a big difference. Angels tend to be—I saw some statistics on this one time—they made money in some other industry and a lot of them are drawn to the sexiness of technology and a lot of times they don’t bring a lot of benefit to you. If you’re lucky, you get someone who’s done pretty well in your particular area, has some money, is helping you out, acting as a mentor, and has some good contacts with venture.
Kaizen: So in addition to thinking of angels as a source of revenue, you should think of them as a source of mentoring, if you can get that?
O’Connor: Absolutely. My best mentor at ICC was an older guy who was a friend of Bill Miller’s dad, and he ran a steel company. He had nothing to do with technology, but he was just a great man, a great executive, a great mentor.
Kaizen: A recent issue of Entrepreneur magazine listed 142 venture capital firms—58 in the northeast (most in New York and Massachusetts), 68 in the west (most in California), and many fewer in the Midwest and South.
O’Connor: That was probably numbers, not capital.
Kaizen: Yes, this was just counting numbers of firms. In terms of capital, the New York and Boston-based firms still had more. Does that geographical distribution pose a special challenge for Midwestern and southern entrepreneurs, or are there ways to deal with that?
O’Connor: It’s a huge problem. ISS was probably the second company in Atlanta ever to attract venture. It was really, really hard to find people willing to do it. I think it’s even harder now. It’s harder and easier. It’s easier because there are VC firms not located in the southeast that are looking for some of these companies. It’s harder for the east and west coast guys because they don’t want to travel anymore. They’ve got so many opportunities, so many proven options or better options and they don’t have to travel.
Kaizen: Why is it a travel commitment for the VCs as opposed to the entrepreneurs coming to them?
O’Connor: A lot of firms make them move the company to Silicon Valley because they want to be close—time is money.
Kaizen: So I have a business plan and a venture capitalist has agreed to hear my pitch. The VC will be assessing the plan’s viability, but he will also be assessing me. What character traits do VCs look for?
O’Connor: The best ones that I’ve ever seen are the ones who pre-empt the most obvious questions. And if there’s bad news, you better cover it and not wait for a question. So that’s probably the number one thing.
Number two is that they’re looking at how well you understand your market, how well you understand your competitors, how well you understand your threats. But they’re looking at your character. So if you don’t know an answer, just say, “I don’t know the answer and I’ll get back to you.”
Kaizen: So pre-empting and honesty, as opposed to just trying to bluff your way through.
O’Connor: You know, I started asking someone about gross margins one time, and the guy had no clue what a gross margin was, and he started just making up stuff. And I said, “You don’t know what a gross margin is.” And that’s fine. If you’re a great engineer, I don’t really care. But don’t make stuff up. You’re lying to me now. If you’re going to lie about gross margins, what else are you going to lie about?
Kaizen: What’s the VC making the judgment based on? You look at the business plan, the business plan looks good. The guy comes in and, however long the pitch and the ensuing conversation takes, you’re committing a large amount of money based on a judgment that this guy can make it happen. So what are you looking for that gives you that confidence?
O’Connor: I look at three big things: Have they found a big problem in a big market? Have they solved the problem in what I believe to be the most effective way? And are they able to pull it off—are they smart, are they aggressive, are they honest, and hard-working?
Kaizen: Smarts you can tell partly in conversation, partly from academic track record. Aggressive—how would you tell that? Track record?
O’Connor: Yeah. Are they competitive? In the companies they were in, did they move up quickly or did they bounce around from company to company? Job-hoppers are the worst.
Did they put themselves in competitive situations? Going to Stanford is a good sign. If a guy chooses to go to a city college—why? Maybe he’s very, very smart—some of the most successful entrepreneurs are dropouts. But did he just go to a local school because it was easier and he’s not aggressive, not competitive? Maybe he had a great reason. Maybe his dad and mom died and he had to raise his three brothers and he’s an incredibly smart guy.
Kaizen: Are these things that you probe during the pitch or are these things that, prior to the pitch, you do some research on the people?
O’Connor: During the pitch. Start drilling them. I call it sometimes—one thing in engineering is, if you don’t know what’s in the black box, you send an impulse function into it and that tells you what’s in there—so I do a lot of impulse functions. Smacking them between the eyes with a two-by-four and see how they react.
Kaizen: So you turn up the heat, and it’s calculated to see what they’re made of?
Kaizen: So what kinds of things might you be asking them that would count as impulse functions?
O’Connor: They’re mostly just based on what’s in their content. So maybe something about a competitor. Maybe something about why they left their last company. Why did they make that stupid decision? Stuff like that. Maybe probing a weakness in their business plan and just hammering on that. Or, I know this competitor and this competitor’s a lot better than you’re telling me.
Kaizen: A number of issues can come up in the negotiation process. The VC will hopefully be putting in a big chunk of money. How much should the entrepreneurs expect to be putting in?
O’Connor: Most entrepreneurs don’t have money, so it usually comes out of taking low salaries. So that’s a big one. I’ve had companies where they want $300,000 salaries—no interest. I like giving people salaries so they can stay alive, but not much more. I want them committed.
Kaizen: If they do have some money in that bank, are you asking them to put that in?
O’Connor: That’s a big question. If a successful entrepreneur comes in and sold the last company for $50 million, I ask, “Why are you in here talking to me? You should be able to fund this.” If you haven’t funded a lot of it, then I’m pretty suspicious.
Kaizen: So there’s a lot of range that’s possible?
O’Connor: Yes. But most entrepreneurs don’t do that. If someone’s done well, then they’re not usually talking to me. They’re going to be at Kleiner Perkins or some of the really big firms. They’re going to give them top evaluations.
Kaizen: Both parties know that if the business is successful, it will face challenging scaling-up issues. The entrepreneur who has technical interests now is becoming a manager and other jobs. But not all entrepreneurs, or even many of them, have the skills to be CEOs. Is it right that most don’t?
O’Connor: Most don’t. Almost none do.
Kaizen: What is the best way to approach the control issues? Knowing that when the company reaches a certain point, the entrepreneur may have to accept outside talent or even step aside as CEO when the VC judges necessary.
O’Connor: I think it has to be clear up front, so there aren’t surprises later. Take Chris Klaus at ISS. Here’s a twenty-year-old guy who dropped out of college to develop his project and was living with his grandma. He was a very great technical guy, and it just wasn’t realistic for the growth of a company that he was going to be able to be CEO. So you’ve got to get people’s expectations set.
But you don’t want to limit them. If you’re a really smart guy, you’ll do whatever you can; but if you’re not able to keep up, we’ve got to make a decision and you’ve got to be comfortable with that. And if you’re not, then that’s a big red flag. But I always told my investors, “I never thought of myself as a CEO. I know I can do the job. I’m going to do my best, but the day that I’m not the best guy, tell me and I’ll step aside.”
Kaizen: But at the same time, as you were saying, you are open to the guy’s being a smart guy who could grow into the position?
Kaizen: So it’s simply a matter of monitoring the various benchmarks as the company is growing. See if the person is growing, and if not, make the adjustments that are necessary and it should be clear ahead of time that this will be part of the process and the entrepreneur has to be happy with that up front?
O’Connor: They’re never happy.
Kaizen: Unless they’re serial entrepreneurs and they like to do something for a little while and go on to the next thing?
O’Connor: Yes. Some people don’t have any expectations: “I love technology, I’m a geek, I don’t want to sell.” And that’s fine. It’s a fine line. Some people say, “I want to run a company and I believe I can do it.” And you love that self-confidence. But then you’ve got to really probe, looking for weaknesses. Is this really realistic? Is this person just a control freak? You get a lot of control freaks; people who love to say, “I’m the founder.” I ask them, “Why should you be the CEO?” “Well I’m the founder.” “Who cares?” People sort of get obsessed with that founder title. They think it’s them and that people work for them. And that’s the wrong attitude. I always try to never use “The Founder” on my cards or anything. It’s our company. Yeah, I happened to be the first guy and yeah, I think I’m contributing quite a bit, but so are the other 2,500 people.
Kaizen: So if the person’s expectations for running the company turn out to be unrealistic, how do you in effect force them out? Is it financial?
O’Connor: We wouldn’t put money in the company if that was the case. But you usually have controls where you can force a person out. You have enough outside people on the board. And that becomes a trust thing too. If people get nervous, they want to have control of the board. If you’ve got independent people with money in the company, a vested interest in the company, and if four out of the five people decide you’re not the right guy, then you’ve got to be comfortable with that decision. And if you’re not, there’s something wrong with you. Nobody wants to force a CEO out. Nobody wants to force anyone out of a company. People who put money in a company want you to be successful and want you to run it.
Kaizen: So realistic assessment on both sides has to be there and that makes the trust possible and so those things get sorted out.
O’Connor: People get paranoid and think, “The VCs want to come in here and run my company.” That is so far from the truth. It’s the complete opposite.
Kaizen: Some entrepreneurs worry that their good business idea will be stolen if they reveal it when shopping it around for venture capital. Is this a legitimate fear?
O’Connor: I think it’s paranoid.
Kaizen: So entrepreneurs should think is of VCs as allies? They’re providing capital, they’re providing the mentoring, they’re providing various other skill sets, advice, and so on, all the way down the road.
You have also said that an entrepreneur should try to “raise three times more money than you think you could ever possibly need.” Why so much?
O’Connor: It’s a SWAG [ed.: "Scientific Wild Ass Guess"]. Two times, five times … You can’t figure out all the things you need money for. Usually you overestimate your revenue and underestimate your expenses, and you don’t want to be in a situation where you run out of capital. Then you’re desperate and you’re screwed.
Kaizen: Was your experience with ICC—when you came within one week of running out of money—the main source for this advice, or is a common problem for startups?
O’Connor: We actually thought we were out of funds and it turned out we made a banking error. We had a little bit of money; we had a couple of weeks left. But I’ve seen many companies fail because the economic climate changed radically—like the dotcom bust and right now for example—and they can’t raise any money.
Kaizen: Is it standard advice to ask for three times what you need? If so, won’t VCs know you’re asking for more than you need? Does this raise an issue of the entrepreneur’s honesty and credibility?
O’Connor: You put together a plan where you try to be realistic; then you ask for more.
Kaizen: You say upfront, “Realistically, a number came up for this, but we would like you to give us this much more?”
O’Connor: Yes. You would look like an idiot if you didn’t. If you said, “Our cash flow estimates show that the most money we’ll ever need is a million dollars,” people would think you’re kind of an idiot for not having any kind of safety cushion.
Kaizen: And if you have a cushion factor two or three times what your realistic assessment is, VCs are okay with that? And they will also make their own estimate what the right cushion should be?
O’Connor: Your most “realistic” assessment will over-estimate revenue and under-estimate expenses. You need to get very conservative with your model and you’ll find you’ll need 2 to 3 times more money then your “realistic” assessment.
Kaizen: There’s a judgment call here—the VC has an interest in making sure the startup has enough money to do what it has to do to be successful, but also an interest in the startup’s being lean and mean. Are there any rules of thumb here?
O’Connor: I think it’s been probably the biggest problem with companies, especially back in the Internet days, when people thought they were successful because were able to raise money at huge valuations. And then they would go and spend the money on stupid stuff. There are a lot of controls now. In most deals, the board has to approve any kind of real estate deals and anything that’s core big expenditures. They control payroll. Back in the 90s a lot of those controls weren’t there, or they just didn’t care. There was also the mantra “get big fast” so popular back in the dotcom days.
Kaizen: But the companies should try to internalize the lean-and-mean attitude themselves.
O’Connor: Oh, absolutely. If you look at their projections, when they expand their space are they looking at Class A, high-end real estate, where everyone gets 100 square feet per person? Or are they looking at cramming ten people in an office in Class C?
Kaizen: So the signs are there?
Kaizen: You also recommend raising money when you don’t need it, which at first sounds counter-intuitive. Why?
O’Connor: I like that line. It’s kind of a stupid line in some ways, because you obviously need money. Part of it is sort of a mental attitude: you’ve got to go in there projecting that you don’t need the money, that you’re not desperate. But the last time you want to be raising money at any time is when you absolutely have to—you can’t make payroll next week unless you raise money.
But people will think that raising money is going to be easy: “It’s going to only take me a few weeks, or a month.” It could take you three months, four months, five months, so you better start planning six months out in advance to raise the money. Because they’ll ask you for your balance sheet and your P&L statement and they’re going to look at it and they’re going to say, “This guy is bankrupt. I can stick it to him.”
Kaizen: Also the vagaries of the capital market, the availability of funds …
O’Connor: Yes. One of the companies I was an investor in was going to go public and be successful, and the crash happened two weeks before their scheduled IPO—they’re gone.
Kaizen: And successful startups should expect to fundraise regularly. Why so?
O’Connor: At least somebody’s thinking about it. That’s the other reason you try to raise two or three times the money, is you don’t want to be on the fundraising trail. Because when you’re on the fundraising trail, you’re not focused on product and customers and sales.
Kaizen: Nobody likes to hear “No.” Should fund-raising entrepreneurs steel themselves to be rejected regularly? As you said in The Map of Innovation, great batters hit only one time out of three.
O’Connor: You should expect to hear “No” all the time. Usually people don’t say “No”; they tell you they’re just not enthusiastic, they just don’t believe in what you’re saying. But people aren’t going to understand your market, they’re not going to believe the market is going to be there, or they’re not going to believe that you’re going to be able to pull it off. So, you rarely hear “No’s”.
Kaizen: So it’s more that people will let it die and there’s no follow up.
O’Connor: They’re not enthusiastic, yes. But you’re going to hear it all the time. The “one hit out of three” statement was just an analogy—I don’t particularly like baseball—even great players don’t get many hits; they strike out more often than they get hits.
Kaizen: The line I like is about cheetahs. Apparently the cheetah only catches its prey one time out of ten—the fastest land animal in the world, but it’s still tough work there.
It still takes guts to ask for money, even if you know that you have a good idea and that you have what it takes to make it happen. Now that you know venture capital from both sides, what advice can you give about courage?
O’Connor: I’ve seen all extremes. You’ve got to ask and you can’t be arrogant. People who are completely arrogant about it, you don’t even want to deal with them; you’re going to miss this opportunity. You’ve got to be persistent, you’ve got to be confident, you’ve got to sell yourself and the company and the concept, but you can’t be arrogant and you can’t be timid.
Kaizen: Is it practice makes perfect? The more you do it, the more you’re comfortable with it?
O’Connor: Yes. But VCs think about who you are; they’re very tolerant of nerds. People developing computer software aren’t the most dynamic people in the world.
Kaizen: Public speaking is one of the great fears, and public speaking when you’re asking for money. So one helpful thing would be knowing that the VCs are going to be tolerant this way; that can give a person a certain amount of relief.
O’Connor: Yes. And those guys, they should really ask their advice. And one very effective thing to do is you ask people their advice: “I’m not coming in here to raise money from you. I want you to take a look at my business and tell me what you think. I want your advice. Help me figure this out and how we might go out and raise money.” That’s a great door-opener to get in to see people.
Kaizen: If one gets an offer of venture capital, are there standard terms, or are there as many term sheets and contracts as there are kinds of businesses?
O’Connor: I think a lot of VCs’ first drafts are pretty fair, pretty reasonable term sheets. The founders may not see them that way, especially when they ask you to take some of your stock and invest it over a period of time.
Kaizen: Or the various controls that you say have come in place in the last few years after the heydays of the 90s. They might not be anticipating some of those.
Kaizen: Since strategy and forecasting are very difficult, what role does the business plan play after one has been funded? How important is it to execute the business plan as written and how important is it to be flexible to changing conditions?
O’Connor: We’re starting to get into running a business on a day-to-day basis and then you start diverging from the business plan. I always say that a business plan is not the Bible, it’s more like the Constitution; it can be changed. It’s not written in stone. You should be able to change it, but it should take effort.
Usually your forecast section in your business plan is one page. It’s just a basic model: “This is the widget, this is how much it’s going to cost me to make it, and this is how we scale it up”—just a very back-of-the-envelope kind of forecast. The most important thing—you see this more and more in businesses—is the dashboard: the key metrics that you can measure that will help you predict what the next month is going to be, what the next year is going to be. And a lot of people miss that on the sales side—things like pipeline or customer churn. What’s my win-loss ratio to competitors?
Kaizen: I like the Constitution metaphor. It should be flexible but it should be a pretty major thing before you step outside your strategy.
Kaizen: What kinds of entrepreneurship is O’Connor Ventures most interested in now?
O’Connor: I like big markets, product, revenue and web based products.
Kaizen: What’s a big market to you?
O’Connor: I’m willing to go to a smaller market—a hundred million dollar market. Traditional VCs are going to be looking at billion dollar markets. I’ll get involved with a smaller company that is around my interests, like Surfline. I love surfing, I love the ocean, I love what they do, it’s a great site; it’s a hundred million dollar market. Another company I’m involved with, Procore, is in a huge construction market, it’s a multi-billion-dollar market. So I like vertical industries: people going in and using technology in a traditional industry like construction and trying to make it run smoother.
Kaizen: From surfing to construction, that’s a wide range of businesses. What they have in common is they’re of a certain size, they have certain growth potentials, and they’re technology-driven and web-driven.
O’Connor: Yes. I don’t do movies, real estate, energy. I get those all the time.
Kaizen: You’re sticking to your core competence?
Kaizen: How often do you say “No”? And how often “Yes”?
O’Connor: It’s probably fifty to one. I have a lot of people pinging me—“What do you think of this?” Or “Here’s my business.” Some of them are so bad.
Kaizen: How many pings do you get in an average month?
O’Connor: Maybe I’ll get ten a month?
Kaizen: Are these full business plans or people with just an idea in a paragraph?
O’Connor: It’s usually a little bit beyond an idea, but not much beyond a paragraph. Most of them are ideas. Most of them are, “We’re going to build this company.” They’ve got a business plan, but it’s still a concept. And those are pretty easy. A lot of them are outside the area. I want to find Southern California based companies that I can be involved with directly.
Kaizen: They’re in the area and they’re past the idea stage—they’ve got something operational?
Kaizen: You know from your own entrepreneurial experience: you are smart, you have good judgment, you work hard, and you are passionate about your projects—and while you have mostly been very successful, you list a number of your business failures on page 11 of your book. What did you learn from those failures?
O’Connor: I need to do a better job of that. One failure was a tightly-controlled market, so the number of potential buyers or customers was very small. Or not even customers but people you depend on: that can control distribution or a certain aspect, maybe it’s a piece of technology you need that’s controlled by a handful of people. It’s not a hundred thousand companies. You’re not tied to somebody. That’s probably the big one.
The second one I just do not understand: FoundValue. FoundValue was a great concept. Sequoia even came in and put four million bucks in it—a top tier VC. And it just didn’t work. There was nothing wrong with it. I can’t point to anything other than you don’t always understand what consumers are going to want, and you get it wrong.
Kaizen: So the first one sounded like too few eggs in the basket?
O’Connor: Yes. Your success depended on just a few people. Other people were determining your future and not you. And the other one is you just get it wrong. And people—you make the wrong assessment of the team.
Kaizen: You hire the wrong people?
O’Connor: Yes. The original founding team turns out to be dysfunctional in some way. I think the biggest one is you just get it wrong. Good concept, good team … It’s like when you think a movie is going to be great and it’s just a total flop. It just doesn’t strike a chord.
Kaizen: You mentioned a smaller market for you is $100 million now. That’s still a larger amount of money.
O’Connor: That’s a $30 million company. When I say “market,” that’s an addressable customer market.
Kaizen: So you put in $30 million?
O’Connor: No. That would be where the company could grow. Let’s say the number one company would be a $30 million company in revenue. So I’m typically looking at companies that need one, two, or three million dollars to become profitable.
Kaizen: How do you handle the psychological pressure of the possibility of losing that much money? You’re a demon for planning and judgment—yet, as you say, forecasting is always wrong. So each time you fund a startup, you face the possibility of making a multi-million-dollar mistake.
O’Connor: I hate losing money. I just deal with it. I take a certain amount of our assets, and it’s like gambling; I’m willing to lose it.
Kaizen: You have the confidence that you probably won’t, but you are also looking at the downside and you just deal with it?
O’Connor: Yes. I know I’ll lose some of them, but hopefully I’ll make ten or a hundred times my money on some of the other ones.
Kaizen: The ones that are successes will pay for the ones that don’t work out, so that helps?
O’Connor: The ISSs and DoubleClicks pay for a lot of failures. But those are really hard to come by. You have seven- to ten-year cycles where something revolutionary comes along and creates opportunity, and we haven’t had that since the web.
Kaizen: Or in the cases where you actually lost your whole investment, how do you handle that?
O’Connor: Some of them I probably should have written off. I forget about them. I repress them. A lot of the businesses just go into dormant mode. I probably should have written off more of them. I hate admitting failure. I hate losing money.
Kaizen: Is that the way it usually goes, though? You just don’t hear from them anymore?
O’Connor: They kind of go under the doormat, or it’s down to one person running the company. Or sometimes they merge with another company, and it’s a stock deal, and that company merges with another company and then you’re not even sure what you have anymore. Or they get recapitalized and they’re gone and your stock is worthless.
Kaizen: What has been O’Connor Ventures’ biggest success?
O’Connor: We sold Flexplay, which we talked about. I wouldn’t say that was a huge success. And the other ones haven’t had any liquidity. A few close ones. I have a very long timeline for my companies.
Kaizen: And what has been your most fun project?
O’Connor: Surfline is probably my most fun one right now.
Kaizen: The techniques you detail in your book have worked for you, and you have achieved great success. With that success have also come fame and honor—you were named by Forbes ASAP as one of technology’s “Wealthiest 100,” you have given many guest lectures at universities including your alma mater Michigan, Harvard, NYU, Columbia, MIT, UC Santa Barbara, Colorado, and Westmont, and you have an honorary doctorate from Lawrence Technological Institute. How much do all of those honors mean to you?
O’Connor: I’m not sure they mean much. I don’t really like honors. I love speaking to universities and I guess I’m humbled that a school would want me to come in and talk to them, and I like that. It’s fun. I like being challenged by students. I don’t tend to live in the past. If you go into my office, there’re no honors hanging up. I can’t even remember where the—I was going through a bunch of stuff and I found the doctorate thing. That was cool because it was my dad’s old school, so I did that for my dad. But I don’t like honors.
Kaizen: So it’s nice in some ways but it’s not a huge deal?
O’Connor: It doesn’t drive me.
Kaizen: The main thing is you did what you wanted to do and made it work?
O’Connor: Yes. I’ll accept an honor if it makes someone close to me happy, if it’s important to them.
Kaizen: The business opportunities you’ve pursued have led you to move around a lot—from Michigan, Cincinnati, Atlanta, New York, and now Santa Barbara. Have you enjoyed that aspect of your career?
O’Connor: Yes. I like it.
Kaizen: You have been successful financially and presumably you could retire. Yet you continue to work actively in developing new businesses. Why?
O’Connor: I spent twenty years working 100-hour weeks. Maybe I work twenty hours a week now, so I don’t even feel like that’s work. I have so much time to pursue my other interests. A lot of my job now is pursuing things that I never had time for over the last twenty years.
Kaizen: Making up time for outside-of-work activities?
O’Connor: Yes. I’ve pursued technology because I was really passionate about it. I probably became less passionate about doing companies after DoubleClick. My passion left after the experience. It was just too stressful, too everything. So I wanted to really find other passions in my life. And I told [my wife] Nancy I think something good always comes out of your passions. Surfing turned into a passion and now I did 9Star, I did Surfline. I’m really enjoying it and I’m passionate about it.
Kaizen: In addition to your VC work and sitting on many boards, you have a full family life and other activities such as being on the Board of Trustees of the Crane Country Day School. That seems a lot. How do you fit it all into a reasonable schedule?
O’Connor: I spread myself so thin at DoubleClick that everything else got pushed aside. There I was working 100 hours, easily, a week. It’s just so easy now. On a relative basis it’s not a problem. So to me it’s just making commitments. Make too many commitments, especially travel commitments—those are tough. That’s why I won’t invest in companies that are going to require three days’ travel just to go to a board meeting—that’s twelve days out of the year I’ve got to take away.
Kaizen: What recommendations would you give to beginning entrepreneurs about how to handle work/rest-of-life balance issues?
O’Connor: I always tell young adults, when I speak to kids in college, do it in your 20s when you’re not married. And make sure you marry someone who’s going to be accepting that. You’re the smartest and you’re capable of working the most hours when you’re young. I can’t do it anymore. I’m not nearly as smart as I was when I was twenty. I’m probably wiser—maybe I’m smarter in that way. But I’m not solving unique problems. And it’s tough when you have kids.
Kaizen: So do it when you’re young, do it when you’re energetic. What about people who are entrepreneurial in middle age?
O’Connor: But the other thing is, I’m not sure you can turn it on or off. You’re either obsessed and driven, or you’re not. One of the reasons I stepped down was because I was no longer obsessed. It was at that point I knew I wasn’t the best. Things were changing and we needed someone like a Kevin Ryan who could do more of the tough things. And I knew that if I’m not obsessed anymore, how am I going to get people to believe and leave and follow me? That was the toughest thing.
Kaizen: The self-reflection and knowing you’re not obsessed anymore and then being able to turn it over to Kevin?
O’Connor: Turning it over was easy. It was just like, “Why am I not obsessed? Why is it gone?” I kind of knew why it was gone, but not being able to turn it on. Who knows …
Kaizen: In closing, what piece of advice would you give to entrepreneurs just starting out in their careers?
O’Connor: You’d better have more than one idea, and you’d better be passionate. Because the odds are that you’re not going to be wildly successful, so you’d better love what you do.
Kaizen: So love what you do. It might not work out, and if it doesn’t work out, that fact that you tried and it didn’t work out but you loved it—that will be the consolation?
O’Connor: You’re pursuing what drives your passion. It’s tough for me to say it won’t work out. I believe if you’re passionate about something and you’re a capable and realistic human being, you’re going to be successful at it. But what’s success? Money? Maybe not.
Kaizen: Doing your thing, doing it your way, that’s success?
O’Connor: Yes. If you’re in it for the money, you’re probably not going to be successful.
Kaizen: Do what you love and the money follows?
O’Connor: Yes. Look at the Forbes Top 400 list. Why are these guys still working? It doesn’t make any sense at all. I know guys in New York who are 75 years old, worth $6 billion, and they’re still working. To me that’s completely insane. That’s somebody who’s lost.
Kaizen: The examples I use in my classes are athletes and writers. The author has written the great novel and it did well. Why is that guy working so hard on his next novel? Or you’re the athlete and you won the championship—but the next year you’re out there again. You do it because that’s your thing; you love it.
O’Connor: Rockefeller had a great quote: “Whoever thinks a million dollars is enough will never make a million dollars.” Which is another way of saying, “It’s not about the money.”
This interview was conducted for Kaizen by Stephen Hicks. To learn more about Kevin O’Connor and O’Connor Ventures, please visit www.oconnorventures.com. For more information about venture capital activity in the United States, check out the Money Tree Report by PricewaterhouseCoopers and the National Venture Capital Association. The 2008 report is available here (PDF).