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Everything I need to know about startups, I learned from a crime boss

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GunThe door opened and into the room walked the most dangerous person I’ve ever met. He reached towards his belt and slowly pulled out his .45 caliber handgun, raised it and paused to evaluate my expression. “No disrespect, but it’s been pressing into my hip all day.” He placed the gun on the coffee table, relaxed into the leather sofa and let his guard down for the first time in a very long while.

This person, let’s call him Kobayashi (I’m a Usual Suspects fan), is one of the most interesting people I’ve ever met. He was a well-educated entrepreneur who ran a profitable business that employed dozens of people. He lived in a swanky downtown Los Angeles penthouse. His kids went to private school. He kept his fridge well stocked with imported beer and wine for guests even though he didn’t drink. He was, by all measures, a gentleman.

But Kobayashi ran an unusual business. He was in the business of organized crime. He started this venture quite young, expanded his operations, diversified revenue streams, and created very profitable independent business units. “I have two lawyers,” he once told me. “I keep them both because they hate each other. Neither one of them can get out of line because the other one is watching him. That keeps me safe.” Kobayashi was brilliant, witty, and dangerous. He was a friend and mentor to me during an interesting period of time in my early 20s.

Everything I need to know about startups, I learned from Kobayashi. While I can’t get too deep into specifics (would you?), I can share a few the things he taught me.

Don’t sell rocks when you can sell mountains

Kobayashi didn’t work with small packages. His business transactions involved risk at every stage – product acquisition, transport, and distribution. But the marginal risk on each decreased with the size of the transaction. Working in large volume reduced his overall risk and rewarded him with a shrink-wrapped palette of cash rather than a suitcase of cash.

As founders and early stage employees, we go to great lengths to mitigate risk. So why do we overlook the total marginal risk?

Building a profitable small-market company is difficult and carries a high risk of failure. Building a profitable large-market company is also difficult and carries a high risk of failure. But the marginal risk in building a company decreases as the addressable market increases. While a larger company may require more total work, the relative effort is less. Make no mistake: small-market companies still come with 18 hour days, flaky vendors, upset customers, and exasperated spouses.

Thinking small increases our risk. So let’s think big.

[Notes: “Large vs. small” is a different debate than “bootstrapped vs venture-backed”, though the two are often conflated. It’s also worth noting that serving a small segment and progressively expanding outwards to serve the larger market is a totally legitimate large-market strategy.]

Cut out the middleman

As Kobayashi’s businesses grew, he was in a position to start bypassing middlemen. Instead of dealing with distributors, he went straight to producers. Instead of hiring contractors, he purchased required equipment and moved people onto payroll. Everywhere he saw a third party making money, he figured out a way to replace that person or bring them in-house. He reduced costs at every step. He constantly encouraged me to do the same.

Interesting things happen when we cut out the middleman. In addition to reducing cost, we often end up creating an internal byproduct that can be productized and sold to a completely new customer. (Amazon Web Services is an example of this.) Sometimes the middleman’s market is so huge, that a freaking enormous business can be built simply by providing their customers a lower cost and more efficient option. Two-sided marketplace businesses are a textbook example of this type of disruption.

Don’t shit where you eat

“When someone’s doing something for the money, people can sense it, like a desperate lover. It’s a turnoff.” – Derek Sivers, Anything You Want

During this period of my life, I was running a couple businesses that overlapped around the edges. One business had loyal and enthusiastic customers. This business was glamorous, but hemorrhaging money. The other business was transactional and lacked any customer loyalty or love. This business was “anti-glamorous” and a bit closer to Kobayashi’s world than I care to admit.

As time passed, I felt increasing pressure to monetize customers from the first group. I began to overlap these businesses more and more. While they included the same customer segments, there were two completely different products. This pollution of something beautiful with something cheap was my act of shitting in the proverbial kitchen. I watched as revenues increased and looked away from the damage I was causing to the customers I really cared about.

Thankfully, Kobayashi pulled me aside and straightened me out.

The lesson for us is simple. Don’t screw with your users. They are your golden-egg-laying goose. Protect them from rapacious cofounders and investors. Don’t spam them. Don’t abuse them. Don’t be a douchebag.

If it don’t make dollars, it don’t make sense

“A business without a path to profit isn’t a business, it’s a hobby.” – Jason Fried, Rework

We can build an awesome product and then give it away for free. We can bolt advertising to it. We can turn it into a lead-gen property. We can even sell some virtual goods.

Kobayashi wouldn’t.

He would have built Birchbox rather than Pinterest and Airbnb rather than TripAdvisor. He would have found product market fit and a viable business model before spending money on development resources. Kobayashi stayed close to the money, close to a transaction.

Kobayashi was around for the late 90’s tech bubble. He knew many of the players and saw the writing on the wall long before they did. He talked about the first tech wave as if it was a fad that had simply passed, saying things like “when dot-com went out…”

“If it don’t make dollars, it don’t make sense” may sound like a gross oversimplification. But Kobayashi outlasted those late 90’s startup founders. And he’ll probably outlast most of us.

Closed mouths don’t get fed

I’ve written before about the importance of networking and moving from wallflower to evangelist. Kobayashi was adamant about the importance of this. “Closed mouths don’t get fed,” he would say. “If you want something, you have to either ask for it or walk up and take it.”

We can’t expect good fortune to fall into our lap. It’s our responsibility to create the circumstances for it and then capture that good fortune. The meek may inherit the earth, but they’ll be getting it from Kobayashi.

Be a badass

“There’s only one thing that will make them stop hating you. And that’s being so good at what you do that they can’t ignore you.” – Orson Scott Card, Ender’s Game

My friend Chris DeVore makes a comparison I love: pirate ships as organizational models. Pirate ships combine an “us against the world” mentality with a hunt for treasure. This crucible of chaos and ambition somehow allows unstructured groups of mercenaries to complete complex tasks without killing one another (very often). A pirate ship is a meritocracy where he/she who is most badass, leads.

I’ve met several “badasses” over the years, though Kobayashi is the most memorable. Each one of these people had a gravitational pull for talent and resources. The world reorganized itself around them as they passed through it. They were larger than life, energizing everyone in their periphery.

The one thing these badasses shared was the source of their power: influence rather than authority. This lesson is the most important and also the most difficult to implement. There’s no pill, book, or retreat that will turn us into badasses. But if we want to captain a pirate ship, we must become the most badass version of ourselves. Kobayashi taught that we lead only with the influence we earn.

Donald DeSantis is a developer and UX designer at TechStars company Giant Thinkwell. In his free time, he travels to faraway cities and helps make Startup Weekend events successful. You can find him on Twitter at @donalddesantis.

Image courtesy of Flickr user Abhisek Sarda.

73 Responses to “Everything I need to know about startups, I learned from a crime boss”

  1. This is a nice post.
    I like the concept “badass”. Being a baddass developer really helps mostly in a saturated market.
    We developers have to improve our skills mostly by doing daring projects :)
    Thanks Donald

  2. Elizabeth Horlemann

    I like Kobayashi’s saying “Closed mouths don’t get fed” Very many people have not really understood just how dynamic networking marketing and how it is shaping global business.

  3. George Soilis

    another way toget cash out of the idiots pockets.start ups?what are you talking about in this age?as fr the social model that is suggested ,you can live alone in your shit.capitalism at its worst..not that there s a good aspect in it but hey ,you are total barbarian.i wish you die p[ainfull death by your friend kubayashi..and then he shoots himself and we live on to not remember stypid asses like you

  4. Crime isnt hard as there is always a market for drugs,illegal firearms or stolen goods so this isnt anything new. How many successful crime bosses or drims live a long life or dont have to look over there shoulder. Try doing it legally then tell me a story. Been there done that. A life of crime sounds fun but its all bullshit.

  5. When you say, “Influence rather than authority,” what do you mean? May you please give an example or two demonstrating the difference between influence and authority.

    • Nicole Solis

      Hi, Nathan. That’s a good question. Basically, it means you don’t have to be the boss in order to get things done. If you have authority without influence, then you’re powerless. But if you have influence, then you have more of a say in what gets done and how.

    • Donald DeSantis

      Hi Nathan – good question. In terms of managing/leading teams, some people really lean on their position in the company (manager, director, dev lead, etc). They lead through enforcement. If you don’t do what they want, they have the ability to fire you. That’s often effective in the context of the organization, but only within that context.

      Influence implies leadership through respect, or recognized credibility. This is the ability to lead when a person has do direct authority or those they’re leading (there’s no penalty for not following along). This is the ability to lead teams based on their faith, trust, and loyalty to you.

  6. Jose Lugo, Jr

    I’m glad you took time to write this article. I’ve always held the belief that in order to build a successful company you must treat it like the dope game. I was fortunate to grow up on the wrong side of the tracks and learn business from an outsiders perspective. I was taught to destroy the competition, be smart, and always stay one step ahead. Contrary to popular belief business school isn’t the end all be all.

  7. Great post, Donald. Good insights, wonderful examples and phrases that I shall use. The pirate example reminds me of another quote I use often that came from the early Texas Rangers – “One riot, one Ranger”. Keep up the “badassitude”. Thank you for reminding me how much it matters.

  8. You should be ashamed of yourself… In this day and age of focusing on ethics and good business principles you want entrepreneurs to act and work like crime bosses and mafia?

    It’s these stupid oversimplifications that let executives believe that it’s ok to bend the rules a little bit. Articles like these (whether intended or not) loosen the moral fiber of young entrepreneurs. I know you’re trying to sensationalize your pithy advice by using the mafia analogy, but its just a bad one to make.

    • +1
      And who would want to work for a firm with this attitude — either as an customer or an employee. This is the worst kind of CEO.

      Crass, with little substance.

      • Oh, come on. How many people do you know are going to turn down a good job because they have moralistic angst over the firm’s “attitude?” There is absolutely nothing in the article to indicate that the firm does or wouild mistreat its workers. You know as well as I do that the 3 most important things in the world when it comes to worker satisfaction and loyalty are (in no particular order): 1-the firm doesn’t lie to you 2-the money is good 3-the checks don’t bounce. 99.999% of all workers won’t care about any “attitude” problems at the top.

    • Open your mind and maybe you’ll understand that the writer was not advocating crime as a business model; he was simply giving a point of view most have never contemplated. If you can’t handle real-world business, go back to your books and try to theorize a working business strategy that doesn’t include some form of shadiness. The rest of us will see you over a counter somewhere….with you serving us, because we have all the money. Good morals don’t make for anything but dead today (dead used as a metaphor in this case, but then again maybe not so much).

    • Kobayashi is an entrepreneur which has built a successful business in a huge marketplace. Yes, his product is completely illegal (for now), but should it really be this way? After drugs are decriminalized Kobayashi will be seen as a pioneer. :)

    • While he mentioned the business in question was a crime organization, what advice in any way told people to “bend the rules” or be unethical? I didn’t see any unethical (let alone criminal or law-ambivalent) advice above. And I didn’t see a single statement encouraging anyone into a life of crime.

  9. Dont understand the lesson about commerce vs media businesses you’re trying to make. Trip advisory made way more money than airbnb ever did over similar time periods