Make Aspirin and Relentlessly Prioritize: Kamal Shah's advice to entrepreneurs

One week ago, IBM subsidiary Red Hat acquired Kubernetes security company StackRox for over $100M, marking CEO Kamal Shah's third acquisition at the helm of an enterprise software company. Last night, TKS students had a chance to take in some of his wisdom about entrepreneurship, leadership, and acquisitions in a 45-minute Q&A. Here are a few key takeaways.

A CEO's job is to relentlessly prioritize

"How do you decide when you should move on from a problem, vs. continue throwing money and resources at it?" one student asked.

Kamal frames this problem as one of general capital and resource allocation. In approaching such decisions, he asks the following question: "What is the biggest constraint to growth in the business? How do you make sure you are investing in this constraint?"

When starting from an idea, Kamal gives as an example, there's no point investing in sales. The first step is to get product-market fit: find your first customers directly, without worrying about building a larger funnel; validate the pain points you've identified; validate the use cases for your product.

Once you've hit, say, 20 customers, you can shift your attention to capturing more leads and building out a marketing funnel. Once there are a good amount of qualified leads coming in, converting leads to customers might become the biggets bottleneck, in which case it makes sense to invest in your sales team.

"Focus on the three things that really matter," Kamal says. "Don't have a page of 50 priorities in 12 point font. Executing on the 50th priority won't move the needle: if it does, it should be top three."

Execution through ambiguity

Nadeem mentions that there are often multiple competing strategic decisions, without clear right or wrong ones. What do you do then?

You have to make a decision in one direction and double down on it, Kamal replies. He gives an example from his experience building StackRox, a security solution for cloud infrastructure platform Kubernetes. The decision to build around Kubernetes and not other platforms was a hard and ambiguous one to make: StackRox lost potential clients who used other platforms, or a combination of Kubernetes and others, and it wasn't guaranteed that Kubernetes would become the dominant platform in the space. "But we had to place a bet. We had to focus. You have to have conviction," Kamal says. "It could be a wrong bet, but it doesn't matter. You have to make the bet and live and die by it, and then re-evaluate."

"You don't have perfect information, that's the fun part about it," Kamal says. "That's why you make the big bucks: you have to make the call, and learn from it."

How do you know when you've achieved product-market fit?

Asked about the hardest challenges he's faced running his three companies, Kamal names achieving product-market fit as the first. When building Skyhigh Networks, Kamal gives as an example, his product was able to get good initial traction among customers, but many didn't continuously use it.

Kamal mentions two metrics to assess product-market fit. One is regular use, i.e. active user rate. Two is expansive use: are customers doing more with your product over time? When the end of the contract period comes around, are they willing to renew? Regular and expansive use signify product-market fit.

Crash course acquisitions

Discussion naturally moves towards Kamal's insights on acquisitions, having gone through three, and the answers we get constitute a mini-crash course on the subject.

You can either sell, or be bought

There are two types of acquisitions, Kamal says:

• "Distress sale": this type of acquisition happens when a startup isn't doing well, and goes out to look for buyers. The startup founders won't typically have the leverage to get any sort of premium here.

• "Bought, not sold": this type of acquisition happens when a buyer approaches a startup rather than the other way around, because the buyer sees strategic opportunity in acquiring the startup.

Why sell?

If your startup is doing well, why sell? It's a difficult case-by-case question, with the possibility of massive success looming large. Snapchat rejected a $3B offer from Facebook, for example, before growing to $100B.

Kamal brings up two reasons why a startup might want to be acquired:

• Distribution: StackRox would have to spend an increasing amount of resources keeping up with direct competitors on its own. Furthermore, Red Hat would have acquired one of StackRox's competitors if not it. In this case, the competitive landscape made it make sense to sell.

• Founders get tired of the journey: running a company is hard work. Sometimes founders just want to hand over the reigns and move on.

For how much?

Kamal brings up two principles for assessing how much a company should be acquired for.

The first of these is the "strategic multiplier." These are the multipliers that cause exorbitant price tags to come into being, and are difficult to quantitatively justify. Facebook acquired WhatsApp for $17B, for example, not because there was a clear quantitative case for WhatsApp being worth $17B, but because the much larger strategic context in which Facebook was operating in made the $17B purchase worth it.

For smaller acquisitions in the $100-200M range, revenue multipliers are more commonly used, i.e. 20x the revenue in 12 months.

Make aspirins, not vitamins

What problems are worth tackling at all? Kamal brings up a familiar analogy of aspirins and vitamins. Vitamins are nice-to-haves, providing mostly un-urgent and not critically necessary benefits. Aspirins, on the other hand, are must-haves, solving immediate pain points for which users are actively seeking alleviation. Aspirins make for good startups; vitamins make for much harder ones.

Another consideration for solving problems is how quickly value can be delivered and demonstrated. Kamal brings up the idea of the "aha" moment: for Dropbox, for example, it's the moment when a user transfers a file without worrying about email size limits or USB sticks and goes, "aha, this is amazing!" Your product should have an aha moment, when customers realize its value and become willing to invest in using it.

In a last binary, Kamal lists two broad categories of problems. The first is going after an existing market and building a faster, cheaper, or better solution than what already exists. The second is looking at trends to project a future market, and building a solution to capitalize on it. This kind of product is sensitive to timing: StackRox was launched when Kamal thought that the adoption of Kubernetes and cloud containers would be imminent, for example, creating the market for StackRox to capitalize on.

Conclusion

Much of Kamal's advice is rooted in ideas I'd heard once or twice before, but it takes the attachment of experience for knowledge to move towards wisdom: Kamal's Q&A was a chance to take in many valuable entrepreneurship frameworks, new and old, that I'll be remembering and referencing for my own pursuits!