This is part of my new series on what makes an entrepreneur successful.  I originally posted it on VentureHacks, one of my favorite websites for entrepreneurs. If you haven’t spent time over there you should.

I started the series talking about what I consider the most important attribute:Tenacity.

2. Street Smarts – OK, so you’re a tenacious person – you never give up.  Well obviously that’s meaningless if your startup idea sucks.  I don’t think it takes book smart people to build great companies – sometimes it’s a hindrance.  But you do have to be a smart person and I personally prefer street smarts.  I’m looking for the person that just “gets it.”  They know instinctually how customers buy and how to excite them.  They have a sixth sense for the competitors’ weaknesses.  They spot opportunities that aren’t being met and the design products to meet these needs.

Because they’re street smart, most great entrepreneurs tend to prefer getting out and talking with real customers rather than sitting in a cubicle all day doing beautiful PowerPoint slides.  And when they walk in my office and present you can tell that they know what they’re talking about.  You can practically hear the “voice of the customer” when they’re presenting their concept.

I often tell people that I’m looking for people that weren’t born with a silver spoon in their mouths.  I like people who aren’t worried about social consequences of doing something they’re not supposed to. That’s why I personally believe many immigrants or children of immigrants fare well in business.  It never occurs to them to play by the same rules as everybody else; in fact, I’m not sure if they even know what the “rules” are.  It leads many of these people to be more street smart than those defined by convention.

If I were writing about the most important attributes of a VC (hmmm) one of the things that would make my list is “ability to spot patterns.”  I see the same things over-and-over again and being able to spot things and compartmentalize them is important – it helps with short-handing analysis and learning.  Thinking out loud – I’m sure that’s important for entrepreneurs as well.

So I had written this whole series the week of Thanksgiving, but virtually every day I wake up and see examples.  Two quick stories from just yesterday.

On social conventions: Two years ago I was in New York and I called the little brother of one of my wife’s best friends from Wharton.  He was at a startup that was in a super hot sector.  I saw him again yesterday for the first time in 2 years.  He told me that when the markets soured they were no longer hot.  They realized that they were selling a bunch of cool products but none that had enough economic value.  They had wasted a lot of money because they had raised a lot of money and therefore hired a large staff.  A new and experiened CEO was brought in and cleared house.  The CEO helped identify the one key product that had huge value as confirmed via customer feedback and he built the organization around this.

He asked each sales / biz dev person to call customers and tell them they had to change their contracts.  He said, “call the customers, tell them the news and let them scream at your for 5 minutes.  Hold the phone far away from your ears.  When they’re done being mad at you and when you haven’t yelled back then they’ll say, ‘OK, so what are we going to do about this?”

I loved that story because it’s so true.  Only a real entrepreneurial leader would have taken this chance and encouraged his team to make these calls.  For anyone involved I’m sure the first call was mortifying.  The second one was embarrassing.  But by the fifth or sixth it was kind of fun.  Sort of a game. You had done something you knew society told you that you weren’t supposed to do but you knew you had to anyways.  And the world didn’t fall apart.  As I always tell people, “being an entrepreneur is a gritty business.”

I was once involved with a company (not mine and not one I invested in personally) that had a great product but had blown through tons of cash and was being run by somebody who is off-the-charts smart and charming but was not (is not) an entrepreneur.  How I got involved goes in the “no good deed goes unpunished category.”  The CEO was born with a silver spoon in her mouth.  Went to the right schools / worked at the right strategic consultancies.

We were heading into this most recent recession but it wasn’t fully known yet.  I just knew that our sales sucked wind and we were burning through tons of cash.  I advocated LOUDLY at the board that we needed to cut our burn rate.  We were SMOKING cash.  The CEO told me that we couldn’t cut people in customer support (where we had 7 people for just a dozen customers and sales were sub $1 million) because we had made contractual commitments to clients that required all these people.  We couldn’t cut product development (we had 23 people!) because we had made product commitments to a large customer who was about to agree to a nationwide rollout.  We couldn’t cut marketing because they were instrumental to the sale.  “OK, then let’s renegotiate with our customer!”  I was told that this was impossible or at least imprudent.

When I was at BuildOnline (my first company) and things went “pear shaped” we called all of our customers and said, “I know that we signed contracts with you.  The reality is that the market has changed and I need to change to the new realities.  We committed to product features.  I can’t ship those as promised.  I’m sorry.  Do you like our product & service?  Yes?  Ok, thank you.  Listen, I know that if you like what we do then you’ll want a healthy supplier / partner.  I need to be able to earn a profit and with the contracts we’ve signed I cannot.  I either need to cut product development staff (and therefore can’t ship products as promised) or I need to be able to charge you slightly more for our service or for features you want to see so that I can make ends meet.  Help me understand which you prefer.”  I lost zero customers.  In fact, we built tighter relationships.  I had no choice and as they say, “necessity is the mother of all invention.”

The problem for the company smoking cash was that it was beneath the CEO to make these calls or to make the difficult cuts.  We missed our sales targets that year by 66% and the next year by 45% and never really cut costs very much.  The company incinerated cash.  And I asked to leave the board.  Or I was asked.  OK, it was very consensual.  When your board is eating in the company dining room with silver spoons you certainly don’t want awkward old me at the party asking the tough questions.

On Street Smarts / Working with customers: I had coffee with another startup founder yesterday.  Really nice guy and clearly smart.  He was at a 3-person startup where he was a co-founder but not the CEO.  The CEO was the “ideas guy.”  My coffee date told me about the product they were building.  I told him that it sounded like an interesting feature but not something customers would pay for or adopt.  I walked through my logic, “well, if a customer installs your tool on his website he’s going to have to hire an entire staff to manage the project.  If the tool doesn’t grow his revenue then how is he going to cover the additional costs – especially in this market?”

I went through more examples.  I told him that he needed to go visit these customers and understand what problems they had today attracting and retaining customers at their websites.  He needed to brainstorm solutions with them to solve their problems.  He needed to ask whether they would be willing to pay if he could deliver features that would help him grow revenue or cut costs.  He confided in me that his team had built the product because it sounded like a good idea but had never validated it with customers.  My street smarts told me it was not going to fly with customers.

I told him not to be despondent.  The thing is – 80%+ of startups build products in a vacuum without really ever testing the business value with customers or listening to their needs.  Sure, they talked to one or two guys – but didn’t do it methodically.  If you don’t understand how your product adds value to your customer base it is unlikely that it will unless you come from that industry and already know the products from your own experience.

Why do people do this when it’s kind of obvious?  Because it’s far easier to get a bunch of smart guys to show up in a living room every night and do screen mockups, to riff off of other products you see in the market and to build, then show your friends your tools than it is to network like hell meeting potential customers that you think will be bothered by your calling them.  What I explained is that the middle managers at large companies often want to feel like they’re involved with startups and are more approachable than you think.  You just have to get out of your comfort zone.

Do you have similar experiences when you built your companies?

Next up in the series: Ability to Pivot.