Steve Ballmer’s 3 Tips for Start Ups

Ideas matter, stick with it, and figure out the right measure of success

Steve Ballmer

(Source: Youtube)

STEVE Ballmer spoke today at Oxford’s Said Business School, the world’s leading business community creating ideas with global impact.

A few hours later, he spoke at the Oxford Union, the world’s most prestigious debating society.

We were fortunate to attend the second talk, and wanted to communicate the three tips for start ups that Ballmer shared with the audience.

As you know, Ballmer is the recently retired CEO of Microsoft, which is not by any measure a start up. It turns over more than $70 billion in revenue and generates more than $20 billion in profit each year.

And so, you might be skeptical about what kind of advice Ballmer might have for start ups.

Ballmer preempted our doubts by explaining that things have not always been this way. When he dropped out of Stanford to join Microsoft 34 years ago, it had only 30 staff. And while this may be larger than most start ups, it was still early days. It was the beginning of a long road for Microsoft, which today has over 100,000 employees.

Ballmer is an energetic speaker, at the same time boisterous and self-effacing, charasmatic and plain-spoken. Under his reign as CEO, Microsoft’s revenues tripled, and its profits doubled. Ballmer admits to making his fair share of mistakes at Microsoft, but his business success is rivaled by few.

Here are Steve’s three tips for start ups:

1. Ideas Matter: Good ideas are hard to come by. Don’t pursue a lousy idea just because you’re desperate to do a start up right now. Try to find a good enough idea that it will be really worth pursuing. Steve’s advice may sound like common sense, but it flies in the face of the currently popular “lean start up methodology” that encourages entrepreneurs to just get started by building a minimum viable product. While it can be easy to get started, is the initial idea good enough?

2. Perseverance: Success is unlikely to come quickly. Ballmer directly challenges the rhetoric that start ups should succeed quickly and fail fast. He tells us that really great start ups don’t fail fast, they stick at it, and modify their ideas as necessary. If you have a great team, which is excited and working in a fertile area, then you need to be willing to keep going until you make it. It can often take more than a decade for a company to hit its straps.

3. Profitability: Will someone pay for it? Ballmer’s third piece of advice is particularly relevant in the context of Facebook’s recent $19 billion acquisition of Whatsapp. Whatsapp has around 470 million users but only earned around $20 million in revenues last year. Did Facebook pay too much? In today’s environment, Ballmer explains that there are lots of ways to measure success. Sometimes having a lot of users is a really good indicator, and sometimes it’s a false measure. You need to figure out the right measure of success.

Balancing the Scale

Scale improves productivity but also increases bureaucracy

Scale can help a company to produce more output at lower average costs.

However, production at scale also leads to unhelpful bureaucracy. As production rises, more employees are needed and executives implement more rules to keep things under control. Increasing production tends to lead to higher cash flows, and managers who were previously focused on production, innovation and bottom line results start to shift their focus towards turf battles and extreme careerism.

If this reminds you of a certain tech company (Microsoft) then you would be right. Ballmer announced this month plans to restructure the company with the aim of overcoming its slow moving and bureaucratic culture.

Building flexibility into business planning

ONE of the take away lessons from the CFA curriculum is that the conventional method of valuing an investment is to determine the present value of expected future cashflows.  One way of doing this would be to use the constant growth dividend discount model, which estimates the value of a stock by assuming that dividends grow at a constant rate … forever.  If the present value of expected cash inflows exceeds the cost of the investment, then we should invest.

I hope this model of investment valuation concerns you. It certainly concerns me. It basically tells us that we should make an investment decision based on the most likely expected future.

If we are happy to agree that (1) it is not possible to predict the future and (2) past performance does not guarantee future performance, then this colour by numbers method of investment valuation leaves much to be desired.

The businesses that will prosper in the Global Financial Crisis are the ones that have flexible business plans. These are the businesses that looked into the future and saw uncertainty. These businesses understood that the state of the world in ten or even one years time is not only uncertain, but unknowable, and planned accordingly.

One company that comes to mind is Microsoft, which has a cash stockpile of some US$25 billion.  In the past, Microsoft has received considerable criticism for failing to either invest its vast cash reserves, or distribute them to shareholders.  Microsoft’s “conservative” approach now puts it in a strong position to acquire competitors who “strategically invested” their cash reserves in more prosperous times.

To quote the McKinsey Quarterly:

Corporate leaders might consider [using] robust business models incorporating some slack and flexibility instead of the models most common today, which aim to optimise value in the most likely future scenario and thus leave companies exposed when conditions change dramatically.