Building two marshmallow companies

March 26, 2013: 10:12 AM ET

By Steve Vassallo, contributor

profile-stevevassalloFORTUNE -- In 1972, a team of psychologists called children, one at a time, into a room at Stanford University's Bing Nursery School. In the room was a plate with a single marshmallow on it.

Each child was told they could choose to eat the one marshmallow immediately – but they were also told that, if they waited, they could eat two. The psychologists then slipped out of the room for 15 minutes, leaving the child alone with the marshmallow.

This, of course, was the famous "Stanford marshmallow experiment." Most children couldn't restrain themselves, and went for the first marshmallow.

A few children, however – about 30 percent of the study – did manage to wait. And years later, when researchers caught up with them, they found a distinct pattern: compared to the children who ate one marshmallow, the children who waited for two went on to score higher on their SATs, and grew up to be healthier, happier, better at their work, and less likely to have substance abuse problems.

[Full disclosure, a series of additional studies conducted at the University of Rochester last year indicates that the amount children delay is influence by their beliefs about how reliable the authority figure is, and the environments in which they live.]

These successful individuals became known as "high-delayers" – those with the ability to put off immediate gratification for a bigger payoff – and ultimately better outcomes -- down the road.

Yet, the most interesting implications of the Stanford experiment may not be for our children – but for our businesses instead.

"Two Marshmallow Companies"

There is no shortage of writers who have sought to apply business lessons to managing families.   For example, the recently published book, The Secrets of Happy Families, by Bruce Feiler was just excerpted in the Wall Street Journal. And while we've seen numerous similar titles emerge in the past several years, I've recently come to believe that there's real value in taking the opposite approach – in applying some parenting strategy to business so that entrepreneurs can start raising "two-marshmallow companies."

Why?

Well, I'm a father of three. But I'm also a founder of, and an investor in, dozens of startups. And from my perspective, successful companies are exactly like the Stanford experiment's successful children: They're the "high delayers" of the corporate world, willing to make long-term investments and do the work of long-term innovation.

This, historically, is what venture capitalists have helped startups to do, providing – along with managerial advice -- the kind of patient capital that has benefited not just the investors, but the world, sparking the digital revolution and jumpstarting companies like Intel, Microsoft, Apple, Google, and Netflix.

These are the very definition of "two marshmallow companies." And, today, venture-backed entities like them are responsible for 18 percent of U.S. GDP – not to mention, many of the generation's biggest breakthrough innovations.

We should, therefore, be doing everything to build even more of these two-marshmallow companies.

The Danger of Sprinting for False Finish Lines

The problem is, we aren't. In fact, we're doing the opposite.

Founders and CEOs may love their businesses like their children – but when it comes to growing them for the long-term, they're encouraging companies to go for one marshmallow, instead of two. Building a company that becomes something meaningful and successful requires flexibility, resiliency, and, yes, patience.

Sometimes it's tempting to let immediate results command your attention, when tenacity and grit are sometimes more worthy of celebration. Right now, my two and a half year old daughter (who is a student at the nursery school where the original marshmallow study was conducted) is into puzzles in a way that my other children weren't at that age. So when she completes one, my instinct is to high-five her, and when she's struggling, my instinct is to help her. But one of the things that studies and science are now teaching us is that celebrating the tenacity is as, if not more, important than celebrating the outcome.

The same could be said about the business world. Focusing too much on outcomes, rather than the characteristics of tenacity, tends to lead to a fixation on false finish lines, effectively places where you can stop, rest, and exchange a high-five for a job well done.  But the truth is that two-marshmallow companies are the ones that aren't seeing finish lines at all, but constantly driving towards the next milestone, product, or goal.

How many times have you heard that everything will get easier after we launch the product? False finish line. A product launch only hastens the need to move and react more quickly, to respond to bugs and feature requests, to be agile. Putting a product launch at the center of attention only serves to distract employees.

And then there's the IPO, a false finish line if ever there was.

Many people I know refer to IPOs as "exits." They aren't. A truly enduring company recognizes that the IPO is not the end goal or the last pay day – it's just another financing event.

When the first startup I joined went public, one of our lead engineers built a little desktop applet that tracked the company's stock price in real time (since Yahoo!'s 20-minute delays were too… well, delayed).

As it was distributed through the company, I watched a number of my colleagues become moths mesmerized by the light, falling into a trance watching the price fluctuate, wasting countless hours that instead should have been invested in our next generation of products.

We learned the hard way: The false finish line of going public and the quarterly earnings rat race it brought with it actually diminished the pluck and sense of purpose that got us to that point.

Setting the Right Example

Admittedly, part of this fixture on destinations is driven by an investor community that exists to see returns. But those returns are expected sooner than ever before. As one example, thirty years ago, stocks, on average, were held for seven years. Today, it's seven months.

The problem of course is that when everyone seeks immediate returns, long term investment, and the good, profitable, transformative businesses it can build, gets shortchanged.

Too many venture capitalists – historically the most long-term of investors – are shying away from investing in high-delaying, two marshmallow companies. Instead, they're pouring cash into "no delay" startups, companies that gun for short-term (even immediate) returns by rushing into overheated acquisitions.

My business partner and close friend Charles Moldow recently wrote about the trend of thinking small among companies that are receiving the most VC funding. Venture capital, he notes, used to pursue ambitious projects that, given time and support, can change the way we live. Yet today, we're seeing it increasingly drawn to small-impact inventions created to solve narrow problems.

Who can help buck this trend?   Again, just as parents model behavior for their children, leaders – founders, CEOs, and members of the investor community -- also need to model more sustainable behavior. Over Christmas break, my extended family stayed at a resort. When we arrived, the kids went wild – too wild. So I took my 10 and 7-year-old aside, and I encouraged them, as two of the oldest cousins, to demonstrate good leadership. My 7-year-old looked at me and asked, "What's leadership?"

"Consider what you're doing right now," I replied, "and ask yourself, 'if everyone was doing what I'm doing right now, would things be better or worse?'"

Neuroscientists and psychologists often refer to this notion of self-control and perseverance as the development of a child's "executive function." So too, a young startup must develop its own executive function – leadership that models behavior that is sustainable over the long term.

There's no better example of encouraging executive function while demonstrating leadership than the statement from Sergey Brin and Larry Page in Google's 2004 IPO founders letter.  In the letter, they note, "If opportunities arise that might cause us to sacrifice short term results but are in the best long term interest of our shareholders, we will take those opportunities. We will have the fortitude to do this. We would request that our shareholders take the long term view." That approach has paid off, to the tune of $250 billion in market cap.

Building a Culture of Resilience

Another ingredient of two-marshmallow companies, like two-marshmallow children, is a zest for self-improvement.

I've found that founders of these companies are the ones who have on their leadership teams people who stretch their thinking and challenge their assumptions.

These tend to be the teams that are better at responding to changing circumstances, and overcoming mistakes. After all, it's not as if great companies never stumble – rather, they understand how to competently manage failure without compromising the overall direction.

Celebrating tenacity and resilience rather than false finish lines, leaders who are willing to model good behavior and allow investments to bear fruit, embracing self-improvement and listening to those who challenge assumptions:  Those are the keys to raising two-marshmallow companies.

We may have to wait more than 15 minutes for that second marshmallow – but the pay off – whether it's tenacious kids or resilient companies -- will be all the sweeter.

Steve Vassallo is General Partner, Foundation Capital.

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