Blog Post

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

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. Octyo Media, LLC.

    Good read for sure. I took away a lot from this article that I will apply to my everyday small business and further progress as an internet badass while my ex-friends and peers stand and sneer in jealousy. Thank you for the positive article.

  2. Matt Sharper

    “When someone’s doing something for the money, people can sense it, like a desperate lover. It’s a turnoff

    Utter nonsense.

    read the next comment

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

  3. Danish Ahmed

    Nice to find this line of thinking enter the entrepreneurship domain from fields like psychology,philosophy and political science. I think those who find the comparison fallacious may be still in the domain specifity trap Taleb discusses in his book “The Black Swan”. but in the reverse. I am not an entrepreneur but still would ask what are basic
    At the very base what does it require for a person to be a successful entrepreneur . Intellect,knowledge,hard work,pragmatism and luck.

    In most cases, it is the chance of birth that dictates which way a person applies her/his abilities. Well it is technical blog so I won’t go much into detail. Instead I will ask a simple question.

    It is quite well known that Corporates do apply military principles and concepts (most even have War Rooms) so
    should Startups learn lessons from organized crime networks.

  4. Steve Anderson

    Bad advice all around…

    Cut out the middle-men? You slept thru biz school? How so IBM of the 80s, all so make and do everything in house, poorly and bureaucratically. Rely on preferred expert suppliers, and you need a Channel, VAR/Resellers and Distributors. Work the costs down, but cutting down is doom. Not a zero sum game, middle-men, can in turn provide growth.

    Thinking big, when you don’t have the infrastructure or the cash-flow or the wiggle room, is pure insanity. Thinking big, kills more, over managed growth. PlanetHolllywoodization.

    Asking for it, or taking it, only gets you nose-level items, being a partner, a helper, a mentor, gets you stuff yet undeveloped. And while they may give it to you, they always hate the bratty kid that steals all the toys. You will end up routed out.

    Dollars aren’t always made short-term, not making now, could produce later. No set rules, free here, leads to money there. Demanding takes before their time, file-under short-sighted.

    Narcissistic Personality Disorder Bad-Asses, don’t last, not even in Crime, Inc., always someone around to take the puffed-ego down, BadAsses produce enemies like so much rain.

  5. @SNA: Ethical and higher-ambition leadership is a raging trend whose basis has a surprisingly long history, long enough to end soon. Very good points on all sides, we live in a paradox. As soon as you commit to any particular course you become vulnerable. This article reminds me to hope for the best and prepare for the worst.

  6. Regarding “If it don’t make dollars, it don’t make sense,” I can’t figure out, given the speculative bubbles that have burst time and again essentially since the start of even primitive capitalism, how we keep straying from that one. The occasional Twitters notwithstanding, it’s never made sense to me how people create non-profitable models with no clear, immediate path to sustainable profitability.

  7. Amazes me that some of these commentors fail to understand the dynamics of success in the business world and criminal world are essentially the same –

    1) Know and Respect your customers – those to target and keep ( with services/products that are or have the potential to profitable), those to forget (those products/services and customers who will never yield a return on the effort)
    2) Lobby and Cultivate relationships with competitors and civil servants / regulators
    3) Successful organizations require a mix of personas which can cause friction (amongst themselves) and require leadership which guides the combination / organization through influence ( rather than command and control coercion).

    The ‘walk through the willies’ and ‘tummy rubbing warm and fuzzy’ feeling commenters who miss these points are either never going to succedd in running a business, fail and blame others or never try to begin with….

  8. This article was a “good read”, and while I squirmed a little at the idea of a law-breaker being the example-setter (societal conditioning – when you think about it in the societal world, even Christ was a lawbreaker). There is no way to take a side and make the lessons black and white — as many “legit” leaders would teach you these same lessons — and even the lessons, while good, won’t hold true 100% of the time, nothing in the material world does. What we honor is that lessons came through somewhere, through someone and we were listening enough to learn something. If you examine everything – every thought – every aspect – everything that is ‘influenced by’ – every influence – ever detail – every side-effect…of whatever practice, business practice… point of view, etc… well… it becomes very difficult to “hold” an opinion. I have discovered that “For every thought, there is an equally valid counter-thought.” and you can quote me, but use my code name, “Star”. Think however inspires you. Enjoy life and spread that joy to others! (And that’s my opinion, LOL!) As the cook in the John Wayne movie, “The Cowboys” said, when asked if what he said was true, “Well if it ain’t, it aughta be!”

  9. Berni Fareleni

    It is a sign of the times – and of the power of film and television – that Donald, GigaOm’s editors and many readers are star-struck by a man who makes his living via crimes that are far from victimless but are very much ‘victimful’ – make no mistake, the big money in organized crime creates many victims. It is almost a given that this man has committed serious acts of violence towards innocent and often vulnerable people. Donald’s naïveté is tragic. The editors of GigaOm are chasing our eyeballs. Shame upon us all.

    • Mark H Carolan

      I thought the same thing. The Hollywood romanticism of the “lovable rogue”. Anyway, I wouldn’t want to learn from a crook. Just take a good look at the lives and legacies of the most “successful” ones…

      • Why not learn from a crook or anyone? We’ve learned a lot from certainly dreadful people such as Hitler or Stalin, or from the more morally ambivalent such as Machiavelli. We learn not to do certain things, we learn how things work. We learn from bad examples. There’s a chasm between learning and admiring. And learning does not imply reckless use of what is learned – in fact part of learning is also learning the ethics and sense of responsibility in how to employ what we learn.

    • I don’t see this article as “star-struck” or as someone else put it “glorifying” crime. We don’t know anything – at all – about how this crime boss lives, what kind of person he is, and have no basis to admire him. The article only tells us lessons for success that are applicable in mainstream business (and, with no offense intended to the author, are much the same you’ll read in many other articles, even if simply phrased differently). I can’t see how anyone would reasonably walk away from this and say “wow, I wanna be a gangster!” This article gives no incentive towards that – in fact it doesn’t discuss any aspects of criminal organizations aside from business lessons learned whatsoever.

    • Donald DeSantis

      Hi Berni. I’d like to think that we can analogize something without glorying it (and that was definitely my intention). That said, I note and appreciate the feedback.

  10. Steve K

    Personally, I think the concept of being a bad ass is contrary to much of the other “wisdom” in the article. Being a leader in a meritocracy isn’t about being a badass, it’s about being recognized as the most able and having the ability to pull others along with you into performing better than they would on their own.

    I really do agree with the concept of vertical integration and cutting out the middlemen. There are far too many sub-contract manager types around these days who add nothing to the value of a product or business beyond lining their own pockets. And the idea that a product should have a basic value is all too often lost. I like the proposition that creating something, giving it away for free, and then bolting advertising to it to generate revenue is fundamentally a losing proposition. As I’ve said before, there are value add activities, and there is necessary overhead to support the business. But when the overhead is all that there is, you have a house of cards destined to fall. Like the current social media as a data collection for targeted marketing finagle. If you don’t have a customer base of working class folks ready to spend the money they made building washing machines or sewing clothes on your products, then all the computerized marketing in the world won’t make a difference.

    • Considering the definition of badass was being “great at what you do,” I don’t think it meant “be a bully who throws your weight around,” at least that’s how I took it. Of course, that’s the problem with using colorful colloquialisms, they lack clear definition; “badass” wasn’t really the most useful term.

      • Donald DeSantis

        Zornwil – good point, “badass” while colorful is ambiguous. But you’re correct on the message. You can swap out the word “badass” with “awesome” and get a closer representation of the meaning.

        The point was to be the most “awesome” (or badass) version of yourself. For many people, that may mean losing another 15 pounds this year, getting investment, or speaking at a their company meeting. It’s an aspirational, very personal, vision of oneself to reach towards.

  11. A very enjoyable read. I too have known some Kobayashi personalities and had no trouble relating to your delightful yarn. Would be keen to hear of Kobayashi (Part 2) in another ‘parable’ if the writer was so inclined.

  12. Akshay Aanabathula

    I do disagree with the point about TripAdvisor vs. AirBnB, but that’s just me. I can understand the overall message though. Either way, I wish I could meet your mentor! Great read, thanks for the article.

  13. Sure, there are parallels. There are always parallels. Romanticizing with these sorts of crime, well I get it but I don’t like it. The difference between badasses like Fried and the person you’re talking about is the street of dead bodies between them and their customers.

  14. Steve Bison

    that’s all great, but anyone who knows of your association and friendship/mentor with him. You know have given them an idea that this influential person in your life is a criminal. I hope he did not use any money from his crimes to start his legitimate business, he may lose it all, thanks to your need for attention. You are a joker.

  15. Ajay Bakshi

    Great article, i liked it. Thanks.
    Everything was good except for the part where you want to remove all the middle men and bring them on roll. This way you will have an army of employees, one need to stay focussed on core competency and leave rest to other professionals to get the job done. Cheers

  16. Mrunal Shah

    such a wonderful article !! really enjoyed reading it, especially the quote by Jason Fried – “A business without a path to profit isn’t a business, it’s a hobby.”

  17. As Kobayashi will know if you literally kill your competition and literally put a gun to your customers head it is very easy to be wise and all knowing. Admiring a criminal is pathetic. You talk about him as if he has honour, he is an arsehole who you think is a cool badass. your points are valid bt not sure you need to gloriy a criminal to do it.