How Entrepreneur Chris Evans Exited for $500M in 24 Months Without Being in Silicon Valley

 


Any good sports fan can tell you defense wins games. The reason is simple: if your opponent can’t score and you can, winning becomes much easier. Is the same true for startups? Chris Evans thinks so.

No… not that Chris Evans of Captain America fame. Instead, the Chris Evans I’m referencing is a multi-exit entrepreneur who, while building his first company in his 20s, learned the hard way that not having a defensive strategy — especially outside of Silicon Valley — made his company more vulnerable and, ultimately, less valuable to potential acquirers. He applied that lesson when building his next company, and it led him to an exit that would ultimately be worth half a billion dollars.

*Chris’s quotes and story are based on a podcast and interview I conducted with him on October 16, 2020.

How startups are taught to play defense

As someone who’s listened to thousands of startup pitches over the years, I can tell you I rarely hear entrepreneurs describing their defensive strategies, so it’s not a concept that’s particularly common among founders. The two closest concepts are perhaps IP strategies and so-called “land grab” strategies.


As most people know, IP — intellectual property — revolves around using legal structures to protect your business. The company files for patents on a certain technology or type of process and those patents theoretically prevent other companies from doing the same things. However, I’ve used the word “theoretically” because IP protection only works well as a defensive strategy in a very specific set of situations that don’t apply to many startups, especially the ones outside pharmaceuticals, healthcare, or, in some cases material sciences. Worth noting: IP is particularly weak in relation to software, which is, of course, where modern-day Silicon Valley really thrives.

The second strategy — the “land grab” strategy — is usually more applicable for software and consumer products and is very “Silicon Valley.” The idea is to get as many people using your product as possible before your competitors. Once you’ve done that, it’s easier to keep those customers through a combination of branding and feature lock-in. The best way to do this is to raise tons of venture capital, which, of course, is easier in Silicon Valley than anywhere else in the world.

Defensive strategies like IP and land grabs aren’t necessarily bad. They’re certainly better than nothing. But, unless that startup is well-funded, they tend to have limited long term value because they’re add-ons that get applied on top of whatever the startup already is. They’re not cored to the startup itself, which makes them expensive to implement and maintain. In a sense, they’re like the finishings in a house. You can upgrade the finishings of a poorly located house to make it more luxurious, and that might increase the value somewhat, but the nicer finishings don’t change the fundamental issue with the house that it’s not in a great location.

“Poor location” is a great way to describe Chris Evans’s first startup. He and his company built DaVinci Email, the first email client for the Windows operating system. By being the first email client on Windows, they had a first-mover advantage — something plenty of startup founders like to brag about — and they were able to onboard lots of users before anyone else. But, as Chris explains, there was still a big problem:

“We had this email program and it was the top reviewed email program, PC Magazine and InfoWorld and PC Week, and Network Magazine all reviewed all the email programs and said we were the best. So we were the market leader and top of our class. And that was in 1989. By 1991, we were competing with Microsoft, a company whose coffee budget was probably bigger than our revenues. And so Microsoft was essentially giving away their email for free if you would buy Excel and Word, while we were still trying to sell it. We had no leverage to compete against somebody with the likes of Microsoft.

Being first to market and the market leader didn’t matter for Chris and DaVinci's Email because their defensive strategy was easily defeated by a company with more resources. Simply put, if you’re not a well-resourced startup — and if you’re not a Silicon Valley darling, you probably aren’t — then add-on defensive strategies like IP and market saturation can’t protect you. If a bigger, more powerful company wants the market, they’re going to take it, and there’s nothing you can do to stop them.

How startups should play defense

Chris ultimately sold DaVinci systems, but it wasn’t a “never have to work again” type of exit. He had to get back on the entrepreneurial merry-go-round, but, on his next trip, he was much better prepared. He had learned a valuable lesson about startups:

“If you’re in a place like, for example, North Carolina… and build a really viral product, then somebody in Silicon Valley will read about it and say, ‘You know gee, that is a good idea.’ And, because they’re in the Valley, their father-in-law’s friend plays tennis with somebody who’s on the board of Google, and they can invite 10 venture capitalists who are going to put $10 million into the company overnight. And so within six months, you can read the press congratulating them on your great idea. It’s tough to get up over that edge if you’re not in Silicon Valley because so many ideas are interdependent on existing relationships with other companies.”

Chris kept this lesson in mind as he launched his next company, Accipiter. Accipiter was an enterprise ad management software for websites. In other words, it wasn’t the kind of product with mass consumer appeal like email. And while that might not sound exciting, it was a core part of Chris’s baked-in defensive strategy that he knew would be much more potent than what he’d tried to do with DaVinci. Chris told me that:

“When I started Accipiter, part of the attraction was Microsoft’s weakness in the space. Microsoft couldn’t sell any product that they wouldn’t be able to sell a million copies of… So an enterprise program like Accipiter was not going to be something that the big software companies were going to compete in because it was a large enterprise software program that you’d sell for a hundred thousand dollars to a thousand customers or a couple of thousand customers, not something that you’d sell for 50 bucks to millions of customers. So I was only competing with other startups of my size. I wasn’t competing with big mammoth companies who were going to use their leverage.

Do you see the fundamental difference between Chris’s two strategies? In his first company, he had no way of protecting himself from large competitors who would eventually get into his market. To avoid this issue in his second company, he launched something in a market that would simply never have those kinds of competitors.

In other words, while DaVinci tried to compete with a Silicon Valley-style defensive strategy of getting as many users as possible before anyone else, with Accipiter, the defense was built into the product itself. The result was that Accipiter ultimately sold to CMGI in less than two years in a stock transaction that would be worth $500 million. Not bad for less than 24 months of work.

Why built-in defense works better

To be fair, I often criticize entrepreneurs for thinking about their exit strategy before they’ve built anything useful. With this in mind, I want to be clear that I’m not suggesting you should be planning your exit strategy from Day 1 of your startup. I’ve met plenty of entrepreneurs who spend lots of time planning for a perfect exit only to never focus on what matters, which is getting customers. Those kinds of entrepreneurs never get close to the exit they spent so much time fantasizing about.

In contrast, Chris’s story is an important reminder that the very first decision you make about your company — the decision about what type of startup you’re going to build — will impact the market challenges you’ll ultimately face as your company matures. As a result, you can position yourself from Day One in a market that gives you more defensive options by choosing to build a type of company that has certain market-based protections. As Chris explains:

“You have to find the thing that you have access to that gives you the high ground that allows you to fight downhill. That allows you to fend off companies that you have to assume are going to be better resourced, wanting to take your good idea. And that’s the harder problem. It’s actually easy to figure out something to do that people would pay you money for. The hard part about entrepreneurship is figuring out how to be the one who makes that money.”

Chris is reminding us that certain types of businesses inherently have better protections than others. For example, if you’re going to build a consumer social media app, you’re inherently positioning yourself in a market with no protections. If the thing you build works and starts getting popular, anyone can copy it, and that’s going to make you susceptible to a strong challenge from better-resourced companies.

Sure, you might be able to beat out those better-resourced companies, but it’s going to be an uphill battle. Instead, can you find a business that inherently puts you in a defensive position where even the best-resourced companies will have trouble attacking you? Those are the kinds of companies that are most likely to reach the pinnacle of startup success.

To listen to Chris’s entire story, subscribe to Web Masters on Apple PodcastsGoogleSpotifyStitcher, or wherever you listen to your favorite podcasts.

Post a Comment

Previous Post Next Post