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Another 99 Pieces of Unsolicited, (Possibly) Un-googleable Startup Advice

diving, deep end

Voila, the fourth installation of 99 soundbites I’ve been fortunate enough to collect over the past year. The first four of what I imagine of many more to come. Each of which fall under one of the ten categories below, along with how many pieces of advice for each category:

  1. Fundraising (30)
  2. Cash flow levers (23)
  3. Culture (11)
  4. Hiring (9)
  5. Governance (7)
  6. Product (5)
  7. Competition (5)
  8. Brand/Marketing/GTM (4)
  9. Legal (1)
  10. The hard questions (4)

You can also find the first three installments of 99 pieces of advice for both founders and investors here. Totaling us to a total of 396 pieces of advice.

But without further ado…

Fundraising

1/ If you’re an early stage startup, expect fundraising to take at least 3-4 months to raise <$1M. If you’re on the fast side, it may take only 2 weeks. – Elizabeth Yin *timestamped April 2022

2/ If you’re going to raise a round over 6-12 months, it often doesn’t seem fair that your first commits have the same terms as those who commit 6 months later, since you’ve grown and most likely have more traction at the time. As such, reward your early investors with preferred terms. Say you’re raising a $1M round. Break the round up to $300K and $700K. Offer a lower cap on SAFEs for the $300K. “Tell everyone that that offer will only be available until X date OR until you hit $300k in signed SAFEs. And that the cap will most likely go up after that.” Why? It lets you test demand and the pricing on the cap – to see if you’re cap is too high or too low on the first tranche. – Elizabeth Yin

3/ As a startup in recessionary times, you have to grow your revenue faster than valuations are falling to make sure you raise your next round on a mark up. Inspired by David Sacks and Garry Tan. *timestamped April/May 2022

4/ There’s only going to be 1/3 the amount of capital in the markets than in 2020 and 2021. So plan accordingly. If you’re not a top 0.1% startup, plan for longer runways. Fund deployments have been 1-1.3 years over the past 1.5 years, and it’s highly likely we’re going to see funds return back to the 3-year deployment period as markets tighten. *timestamped May 2022

5/ B2B startups that have the below disqualifiers will find it hard to raise funding in a correcting venture market:

  1. No to little growth. Good growth is at least doubling year-over-year.
  2. Negative or low gross margins. Good margins start at 50%.
  3. CAC payback periods are longer than one year.
  4. Burn multiples greater than 2 (i.e. You’re burning $2 for every dollar you bring in). A good burn multiple is 1 or less.
    – David Sacks

6/ Beware of “dirty term sheets.” Even though you’re able to get the valuation multiple you want, read the fine print for PIK dividends, simple “blocks” on IPO/M&A, and 2-3x liquidation preferences. Inspired by Bill Gurley.

7/ “This came at a very expensive valuation with certain rights that should not have come with it — like participating preferred, which is they first get their money out and then they participate in the rest, which was OK for the earlier rounds, but not for the later ones.” – Sabeer Bhatia in Founders at Work

8/ In a bear market, public market multiples are the reference points, not outlier private market multiples. Why? Public market multiples are their exit prices – how they return the fund. It matters less so in bull markets. – David Sacks

9/ Don’t trust the “why”, trust the “no.” Investors don’t always give the most honest responses when they turn down a company.

10/ If you inflate your projections, the only investors you’ll attract are dumb investors. They’ll be with you when things are going well and make your life a living nightmare when things aren’t, will offer little to no sound advice, and may distract you from building what the market needs. By inflating your projections, you will only be optimizing for the battle, and may lose the war if you can’t meet or beat your projections.

11/ VCs will always want you to do more than you are pitching. So if you’re overpromising, they’re raising their expectations even more down the road.

12/ Five questions you should answer in a pitch deck:

  1. If you had billboard, what 10 words describe what you do?
  2. What insight development have you had that others have not?
  3. How you acquire customers in a way others can’t?
  4. Why you?
  5. What you need to prove/disprove to raise next round?
    – Harry Stebbings

13/ The longer you’re on the market, the greater the differential between expectations and reality, and the harder it is over time to close your round. Debug early on in the fundraising process (or even before the fundraising process) by setting and defining expectations through:

  1. Preempting FAQs, by defusing them early on.
  2. Leveraging market comparables. You don’t have to be good at everything, but you have be really really amazing at one thing your competitors aren’t. It’s okay if they’re better than you in other parts.

14/ You should reserve 10% of your round to allocate to your most helpful existing investors. Reward investors for their help. – Zach Coelius

15/ If your next round’s investor is willing to screw over your earlier investors out of pro rata or otherwise. After they leave, the only one left to screw over is you. – Jason Calacanis

16/ “Nobody’s funding anything that needs another round after them.” – Ben Narasin quoting Scott Sandell

17/ “When a VC turns you down for market size, what they are really saying is: I don’t believe you as the founder has what it takes to move into adjacent and ancillary markets well.” – Harry Stebbings

18/ When raising from corporates, be mindful of corporate incentives, which may limit your business and exit opportunities. “I’ve often seen the structure just simply be a SAFE with no information rights. No Board seats. Check sizes that are worth < 5% ownership. No access to trade secrets.” – Elizabeth Yin

19/ LOIs mean little to many investors, unless there’s a deposit attached to it. A customer must want the product so much they’re willing to take the risk of putting money down before they get it. 1-5% deposit would be interesting, but if they pay the product in full, you would turn investor heads. – Jason Calacanis

20/ “The most popular software for writing fiction isn’t Word. It’s Excel.” – Brian Alvey

21/ “Ask [prospective investors] about a recent investment loss, where the company picked someone else. See how they describe those founders, the process, and what they learned. This tells you what that investor is like when things don’t go their way.” – Nikhil Basu Trivedi

22/ “Founders, please hang onto at least 60% of the company’s equity through your seed raise. Series A or B is the first time founder equity should dip below 50%. I’ve seen cap tables recently where investors took too much equity early on, creating financing risk down the road.” – Gale Wilkinson

23/ “One of the worst things you can say to a VC is ‘we’re not growing because we’re fundraising.’ There are no excuses in fundraising.” – Jason Lemkin. Fundraising is a full-time job, but when you’re competing in a saturated market of attention, it’s you who’s fundraising, but not growing, versus another founder who’s also fundraising and is growing.

24/ Extraordinarily difficult fundraise = extraordinary investment 7/10 times. – Geoff Lewis

25/ The goalposts of fundraising (timestamped Oct 20, 2022 by Andrea Funsten):

  1. Pre-seed: $750K-1.5M round
    • Valuation: $5-10M post (*She would not go over $7M)
    • Traction:
      • A working MVP
      • Indications of customer demand = have interviewed hundreds of potential customers or users
      • 2-5 “Design Partners” (non-paying customers or users)
  2. Seed: $2-5M round
    • Valuation: $12-25M post (*She would not go over $15M)
    • Traction:
      • $10-15K MRR, growing 10% MoM
      • 6-12 customers who have been paying for ~6 months or more, a few that would serve as case studies and references
      • Hired first technical AE
  3. Series A: $8-15M round
    • Valuation: “anyone’s guess”
    • Traction:
      • $1.5M in ARR is good, more like $2M
      • 3x YoY growth minimum, but more like 3.5x • 12-20 customers, indications of ACV growth
      • Sales team in place to implement the repeatable sales playbook

26/ Don’t take on venture debt unless you have revenue AND an experienced CFO. – Jason Calacanis

27/ When you are choosing lead investor term sheets:

  1. For small VC teams (team <10ppl): Make sure your sponsoring partner is your champion. Why does investing in you align with their personal thesis? Their life thesis? Which other teams do they spend time with? How much time do they spend with them? When things don’t go according to plan, how do they react? How do they best relay expectations and feedback to their portfolio founders?
  2. For larger platform teams (team >10ppl): Ask to talk to the 3-5 best people at the firm. And when the investor asks you to define “best”, ask to talk to their team members who best represent the firm’s culture and thesis. Why? a/ This helps you best understand the firm’s culture and if there’s investor-founder fit. b/ You get to know the best people on the team. And will be easier to hit them up in the future.

28/ “If you are a category-defining company, you will always have a TAM question, if the category is defined by somebody else, you will not have a TAM question.” – Abhiraj Bhal

29/ “[Venture] debt typically has a 48-54 month term, as follows: 12 months of a draw period (ballooned to 18 months over the last few years), to which you can decide to use it or not 36 months to amortize it after that 12 months. The lender at this stage is primarily underwriting to venture risk, meaning they are relying on the venture investor syndicate to continue to fund through a subsequent round of financing.” This debt is likely to be paired with language that allow the fund to default if investors say they won’t fund anymore and/or just not to fund when asked. “They typically are getting 10bps-50bps of equity ownership through warrants. Loss rates must be <3-4% for the model to work.” If there’s less than 6 months of runway or cash dips below outstanding debt, then as a founder, expect a lot of distracting calls. – Samir Kaji

30/ The best way to ask for intros to investors is not by asking for intros, but by hosting an event and having friends invite investors to the event. There’s less friction in an event invite ask than an investor intro ask. The reality is that the biggest investors are inundated with intro requests all the time, if not just by cold email too.

Cash flow levers

31/ The bigger your customers’ checks are (i.e. enterprise vs. SMB vs consumer), the longer the sales pipeline. The longer the sales pipeline, the longer you, the founder, has to stay the Head of Sales. For enterprise, the best founders stay VP of Sales until $10M ARR. For SMB, that’s about $1-2M ARR, before you hire a VP of Sales. Inspired by Jason Lemkin.

32/ “‘I have nothing to sell you today — let’s take that off the table and just talk,’ he would say. ‘My goal is to earn the right to have a relationship with you, and I know it’s my responsibility to earn that right.'” The sales playbook of David Beirne of Benchmark Capital fame, cited in eBoys.

33/ “All things being equal, a heavy reliance on marketing spend will hurt your valuation multiple.” – Bill Gurley

34/ If you were to double or triple the price of your product, what percent of customers would churn? If the answer is anything south of 50%, why aren’t you doing it?

35/ Getting big customers and raising capital is often a chicken-and-egg game. Sometimes, you need brand name customers, before you can raise. And other times, you need capital before you can build at the scale for brand name customers. So, when I read about Vinod Khosla’s advice for Joe Kraus: “We had $1 million in the bank and we didn’t know what we were going to bid. We sat down in my office, all on the floor. Vinod said we should bid $3 million. I was like, ‘How do we bid $3 million? We only have $1 million in the bank.’ And he said, ‘Well, if we win, I’m pretty sure we can raise it, but if we don’t win, I don’t know how we’re going to raise.'”

36/ “Your ability to raise money is your strategy. If you’re great at it, build any business with network effects. If you’re bad at fundraising, it’s strategically better to build a subscription business with no network effects.” – Elizabeth Yin

37/ Be willing to fire certain customers (when things get tough or in an economic downturn). If they aren’t critical strategic partners or are loss making, figure out how to make them profitable. If you can, renegotiate contracts, like cheaper contracts for longer durations. If not, let them go. Make it easy to offboard.

38/ An average SaaS business, that doesn’t have product-led growth, is spending about 50% of revenue on sales and marketing. Those that are in hyper growth are spending 60%. – Jason Lemkin

39/ “The only thing worse than selling nothing is selling a few. If you sell nothing, you stick a bullet in it and move on. When you sell a few, you get hope. People keep funding even though it’s really not viable.” – Frank Slootman

40/ If your customer wants to cancel their auto-renew subscription to your product, you should refund them a 100% of their cost. – Jason Lemkin

41/ “Your price isn’t too high. Your perceived value is too low.” – Codie Sanchez

42/ “15-20% of IT spend is in the cloud.” And it’s likely to go up. – Alex Kayyal

43/ If your customers are willing to pay you way ahead of when your service is executed, you have an unfair and unparalleled cashflow advantage. – Harry Stebbings

44/ If you’re in the CPG business, it’s better to negotiate down the contract. “You buy 75, and you sell 60, they’re going to go, ‘Ah, I got 15,000 in inventory, it’s not a success.’ If you give them 40, and then they have to buy another 20, and they sell 60, they go, ‘Wow, we ordered 50 [(I think he meant 20)] more than our original order.’ You’re still at 60, but one, they’re disappointed, and one, they’re not. You’re still playing some weird mind games a little bit so that they feel good about whatever number was there.” – Todd McFarlane

45/ “If you are under 100 customer/users, get 20 of them in a Whatsapp Group. You will:

  • Get much higher quality feedback, faster, on the current product.
  • They will be WAY more proactive in suggesting future product ideas and helping you shape the product roadmap.
  • It will create a closer relationship between you and them and they will become champions of the product and company. People like to feel they had a hand in the creation process.”
    – Harry Stebbings

46/ Create multiple bank accounts with different banks to keep your cash, to hedge against the risk of a bank run. The risk is very unlikely to occur, but non-zero, especially in a recessionary market. Inspired by SVB on March 10, 2023. More context here, and what happened after here. Breakdowns here, here and here.

47/ “Keep two core operating accounts, each with 3-6 months of cash. Maintain a third account for “excess cash” to be invested in safe, liquid options to generate slightly more income.” – A bunch of firms

48/ “Maintain an emergency line of credit. Obtain a line of credit from one of  your core banks that can fund the company for 6 months. Do not touch it unless necessary.” – A bunch of firms

49/ In case of a bank run: “1/ Freeze outgoing payments, let vendors know you need 60 days, 2/ Figure out payroll & let your investors know exactly when cash out, 3/ Attempt emergency bridge with existing investors; hopefully reasonable terms or senior debt (but given valuation reset this is a HARD discussion for many), 4/ Figure out who can take deferred salary on management team, which will extend runway, 5/ Make sure you communicate reality to team honestly so they can make similar plan for their household, 6/ Make sure you talk to HR about legal issues around payroll shortfall — which hopefully this doesn’t come to, 7/ In future, keep cash in 3 different banks.” – Jason Calacanis

50/ “Whenever a CEO blames their bad performance on the economy, I knew I had a really crappy CEO. ‘Cause it wasn’t the economy, it was a bad product-market fit. The dogs didn’t wanna eat the dogfood. Sometimes the economy can make that a little worse, but if people are desperate for your product, it doesn’t matter if the times are good or bad, they’re going to buy your product.” – Andy Rachleff

51/ General reference points for ACV and time to close are: $1K in 1 week. $10K in 1 month. $100K in 3 months. $300K in 6 months. And $1M in 12 months. – Brian Murray

52/ A B2B salesperson’s script from Seth Godin. “Look, you’ve told me you have this big problem you need to solve. You have a five million assembly line that’s letting you down, blah blah. If we can solve this problem together, are you ready to install our system? Because if it’s not real, let’s not play. Don’t waste my time, I won’t waste yours. You’re not going to buy from me because I’m going to take you to the golf course. You’re not going to buy from me because our RFP is going to come in cheaper than somebody else’s. You want my valuable time? I’m going to engage with you, and tell you the truth and you’ll tell me the truth. You’re going to draw your org chart for me. You’re going to tell me other complicated products you’ve bought and why your company bought them. And I’m going to get you promoted by teaching you how to buy the thing that’s going to save your assembly line. Let’s get real or let’s not play.” – Seth Godin

53/ “The job of a pre-seed founder is to turn investor dollars into insights that get the company closer to finding product-market fit.” – Charles Hudson

Culture

54/ Deliver (bad) news promptly. Keep to a schedule. The longer you delay, the more you lose your team’s confidence in you. For example, if your updates come out every other Friday, and you miss a few days, your team members notice. Your team is capable of taking the tough news. This is what they signed up for. Explain a stumble before it materially impacts your bottom line – revenue. Inspired by Jason Lemkin.

55/ “Process saves us from the poverty of our intentions.” – Seth Godin quoting Elizabeth King

56/ “It’s easier, even fun, to do something hard when you believe you’re doing something that no one else can. It’s really hard to go to work every day to build the same thing, or an even worse version, of what others are already building. As a result, there was a huge talent drain from the company.” – Packy McCormick

57/ Lead your team with authenticity and transparency. “Employees have a ridiculously high bullshit detector, more so than anyone externally, because they know you better. They know the internal brand better.” So you have to be honest with them. “Here’s what we’re going to tell you. Here’s what we won’t, and here’s why.” Set clear expectations and leave nothing to doubt. – Nairi Hourdajian

58/ When someone ask Jeff Bezos, when does an internal experiment get killed? He says, “When the last person with good judgment gives up.” – Bill Gurley citing Jeff Bezos

59/ “Getting too high on a ‘yes’ can prepare you for an even bigger fall at the next ‘no.’ Maintaining your composure in the high moments can be just as important as not getting too down in the low moments.” – Amber Illig

60/ “Most have an unlimited policy paired with a results-driven culture. This means it’s up to the employee to manage their time appropriately. For example, no one bats an eye when the top performing sales person takes a 3 week vacation. But if someone is not pulling their weight and vacationing all the time, the perception is that they’re not cut out for a startup.” – Amber Illig

61/ “Whenever we’re dealing with a problem and we call a meeting to talk about the problem, I always start with this structure. We are here to solve a problem. So the one option that we know we’re not going to leave the room doing is the status quo. That is off the table. So whenever we finish this meeting, I want to talk about what option we’re taking, but it’s not going to be what we’re currently doing.” – Tobi Lutke

62/ “[Peter Reinhardt] would put plants in different parts of the office in order for the equilibrium of oxygen and CO2 to be the same. He would put noise machines in the perfectly placed areas and then reallocate the types of teams that needed to be by certain types of noise so that the decibel levels were consistent. What I don’t think people realize about founders is that they are maniacal about the details. They are unbelievable about the things that they see.” – Joubin Mirzadegan

63/ “Leadership is disappointing people at a rate they can absorb.” – Claire Hughes Johnson

64/ Page 19 Thinking: If you were to crowdsource the writing of a book, someone has to start inking the 19th page. And it’s gotta be good, but you can’t make it great on the first try. So you have to ask someone else to make it better, and they have to ask another to make their edits even better. And so on. Until page 19 looks like a real page 19. “Once you understand that you live in a page 19 world, the pressure is on for you to put out work that can generously be criticized. Don’t ship junk, not allowed, but create the conditions for the thing you’re noodling on to become real. That doesn’t happen by you hoarding it until it’s perfect. It happens by you creating a process for it to get better.” – Seth Godin

Hiring

65/ Hiring when your valuation is insanely high is really hard. Their options could very much be valueless, since they would depend on the next valuation being even higher, which either means you grow faster than valuations fall (market falls in a bear market) or you extend your runway before you need to fundraise again.

66/ It’s easier to retain great talent in a recession, but much harder to retain them during an expansionary market. Talent in a boom market have too many options. There’s more demand than there is supply of talent in a boom market.

67/ If you’re a company with low employee churn, you can afford to wait a while longer to find someone who is 20% better in the role. – Luis von Ahn

68/ “[Fractional CMOs and CROs often] want to be strategists.  Tell you where to focus, and what to do better. But the thing is, what you almost always just need is a great full-time leader to implement all the ideas.” – Jason Lemkin. The only time it works is when the fractional exec owns the KPI and the function, where they work at least 60% of the time OR they work part-time and help you hire a full-time VP.

69/ Hire your first full-time comms person after you hit product-market fit, when you are no longer finding your first customers, but looking to grow your customer base. – Nairi Hourdajian

70/ “Ask [a high-performing hire] if there’s someone senior in her career that’s been a great manager, and if so, bring them on as an equity-compensated advisor to your company. If there’s someone in industry she really admires but doesn’t yet know, reach out to them on her behalf.” Give her an advisor equity budget, so they can bring on a mentor or someone they really respect in the industry. As a founder, create a safe space for both of them. Monthly 1:1s and as-needed tactical advice, introductions, and so on. And don’t ask that mentor to give performance feedback “because if so it’s less likely they’ll have honest, open conversations.” – Hunter Walk

71/ Hire talent over experience for marketing and product. “In marketing and product I prefer people with less experience and a lot of talent so we can teach them how we do things. They don’t have to unlearn anything about how they already work. We teach them how we work. For developers it might be different because it takes a lot of time to be a really good developer, and it’s relatively easy moving from one environment to another.” – Avishai Abrahami

72/ If you’re going to use an executive search firm to hire an exec, ask the firm three questions: “1/ Walk me through your hardest search? 2/ Walk me through a failed search? 3/ Why did it fail? 4/ How do you assess whether an exec is a good fit?” You should be interviewing the firm as much as the candidate. Watch out for “a firm with a history of candidates leaving in a short timeframe. Avoid firms that recycle the same execs.” – Yin Wu

73/ Before signing with any recruiting agency, ask “What happens if the person hired is a bad fit? (Many firms will restart the search to align incentives.) Is there a time limit for the search? (Some firms cap the search at 6 months. We’ve worked with firms without caps.)” – Yin Wu

Governance

74/ “The higher the frequency and quality of a young startup’s investor update, the more likely they are to succeed in the long run.” – Niko Bonatsos

75/ Five metrics you should include in your monthly investor updates:

  • Monthly revenue and burn, in a chart, for the whole year
  • Cash in the bank, at a specific date, and runway based on that
  • Quarterly performance for the past 8 quarters, in a chart
  • Target for the quarter AND year and how you are trending toward it
  • Headcount
    – Jason Calacanis

76/ Another reason to send great, consistent investor updates is that when prospective investors backchannel, you want to set your earlier investors up for success on how they pitch you.

77/ If you don’t have a board yet, still have an “investor meeting.” “Create investor meetings where you invite all your investors to do an in-person + Google Hangout’ed review every 60 days.  They don’t have to come.  But they can.” – Jason Lemkin

78/ “[The] most important measures of success for a CEO [are] internal satisfaction, investor relations and consumer support.” – Bob Iger

79/ “Entrepreneurs have control when things work; VCs have control when they don’t.” – Fred Wilson

80/ If an investor really wants their money back (usually when VCs have buyer’s remorse), there are times when they force you to sell or shut down your companies. Instead, ask them, “What would it take to get you off my cap table?” – Chris Neumann

Product

81/ “The ones that focus, statistically, win at a much higher rate than the ones that try to do two or three things at once.” – Bruce Dunlevie, cited in eBoys

82/ Once you launch, you’re going to be measured against how quickly you can ramp up to $1M ARR. One year is good. Nine months is great.

83/ The more layers of friction in the onboarding process (i.e. SSN, email address, phone number, survey questions), the better you know your user, but the higher the dropoff rate. For PayPal, for every step a user had to take to sign up, there was a dropoff rate of 30%. – Max Levchin in Founders at Work

84/ “Product-market fit can be thought of as progressively eliminating all Herbies until there are no more Herbies. Then, you’re in a mode where you can invest in growth because it’s frictionless.” – Mike Maples Jr. (In the book, The Goal, the trek is often delayed by a large kid called Herbie. As you can imagine, the group only moves as quickly as their weakest link.)

85/ “There’s a ruthlessness in the way Dylan finds sources, uses them and moves on.” – No Direction Home. Be ruthless about how knowledgeable you can be about your customers, about your problem space, and about your product. The knowledge compounds.

Competition

86/ “If you patent [software], you make it public. Even if you don’t know someone’s infringing, they will still be getting the benefit. Instead, we just chose to keep it a trade secret and not show it to anyone.” – Max Levchin in Founders at Work

87/ If you know you’re building in a hot space, and your competitors are being bought by private equity firms, share that with your (prospective) investors. The competitors’ innovation slows, and optimizing for profit and the balance sheet becomes a priority when PE firms come in. – David Sacks

88/ “As a startup, you always want to compete against someone who has ‘managed dissatisfaction at the heart of their business model.” – Marc Randolph

89/ “You cannot overtake 15 cars in sunny weather… but you can when it’s raining.” – Ayrton Senna. It’s easier to overtake your competitors in tough markets than great markets.

90/ “Having a real, large competitor is better than having none at all!” – Anna Khan

Brand/Marketing/GTM

91/ If you’re a consumer product, your goal should be to become next year’s hottest Halloween costume. Your goal shouldn’t be fit into a social trend, but to define one.

92/ Don’t be married to the name of your company. 40% of NFX‘s early stage investments change their names after they invest in the seed.

93/ The viral factor doesn’t take into account the time factor of virality. In other words, how long it takes for users to bring on non-users. Might be better instead to use an exponential formula. “Think of a basic exponential equation: X to the Y power. X is the branching factor, in each cycle how many new people do you spread to. Y is the number of cycles you can execute in a given time period. The path to success is typically the combination of a high branching factor combined with a fast cycle time.” – Adam Nash

94/ In a down market, you may not need as big of a marketing budget as you thought. Your competitors are likely not spending as much, if at all, to win the same keywords as before.

Legal

95/ “Nothing is more expensive than a cheap lawyer.” – Nolan Church

The hard questions

96/ “I’d love to kill it and I’d hate to kill it. You know that emotion is exactly the emotion you feel when it’s time to shut it down.” – Andy Rachleff, cited in eBoys

97/ “Inexperienced founders are usually too slow to fire bad people. Here’s a trick that may help. Have all the cofounders separately think of someone who should probably be fired, then compare notes. If they all thought of the same person…” – Paul Graham

98/ When you’re in crisis, find your OAR. Overcorrect, action, retreat. Overcorrect, do more than you think you need to. For instance, lay off more than you think you need to. Actions can’t only be with words. Words are cheap after all. And retreat, know when it’s time to take a step back. “Sometimes you just have to do your time in the barrel. When you’re in the barrel, you stay in the barrel. And then you slowly come out of it.” – Nairi Hourdajian

99/ “A half measure is usually something a management team lands on because it’s easy. If a decision is easy, it’s probably a half measure. If it’s hard, if it’s really damn hard… if it’s controversial, you’re probably doing enough of it. The other thing is a half measure often doesn’t have an end result or goal in mind. If you have a really specific goal, and implementing that goal is difficult, that’s probably doing your job. That’s probably what’s necessary.” – Tom Loverro

Photo by NEOM on Unsplash

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How Do You Know It’s Time To Let Go?

alone

I’ve been asked by many founders over the years, “How do I know it’s time to let it go?” And every single person asks me for some length of time. When I tell them I don’t have an “optimal” length of time that would do the question justice, they ask: “When do you usually see other founders you work with let go?” To which, the answer spans as far as the Pacific Ocean. I’ve known folks who work on it for six months before they called it quits. Others for seven years, without external validation. And then some who continue at it past the decade.

Who’s right? Who’s wrong? If I were to be honest, I don’t know. Rather I’ve always believed the independent variable here shouldn’t be time, but rather your emotional state. I’ll elaborate.

The “ideal” emotion to quit with

There’s a timeless apologue about a boiling frog. If you put a frog in boiling water, it’ll jump straight out. But if you put a frog in lukewarm water and slowly increase the heat, it won’t realize it’s dying until it’s too late. It goes to say that the more time you spend in the forest, the harder it is to see the forest itself. As such, this essay is for everyone who is stuck in the forest.

Andy Rachleff of Benchmark and Wealthfront fame has this great line. “I’d love to kill it and I’d hate to kill it. You know that emotion is exactly the emotion you feel when it’s time to shut it down.”

I really love this line because loving to kill something and hating to kill something are on two sides of a spectrum. Oftentimes, if you’d love to kill something, that means you haven’t spent enough time on it. It’s easy to give up on something you care little to nothing about. On the flip side, if you’d hate to kill something, you’ve spent too long on it. Often, an example of sunk cost fallacy. And it’s when these two distinct emotions meet at twilight that you know you’ve put your best effort in. It’s when you feel both of these emotions simultaneously that you can finally let it go.

As I rounding out this blogpost, I thought I’d post on Twitter to tap into the world’s greatest minds alive on Monday. And when my friend Sara shared the below line, I knew she had something better. Something I did not know that I would be remiss not to double click on.

So I did. And I promise the next few paragraphs from deep within Sara’s mind will change the way you think about quitting.

“You’re not a quitter, but you needed to quit a long time ago.”

“One of the things I learned over the years is that your intuition is probably right. It’s hard to trust though, especially when there is a lot of chaos or noise. Anything unstable from market turbulence to a toxic relationship creates that noise. You need to find quiet time to let your mind relax enough to think clearly. 

 “Sometimes if you’re anxious, it is hard to be in a spot that’s quiet or still. Don’t feel obligated to be in Zen meditation mode. Personally, I’m not someone who can be still. Instead, I find my quiet time when I walk and think around the water, where I live a block from.

“When I find myself caught between a rock and a hard place, I find myself asking the below questions with neither judgement, shame or guilt:

“If this problem was a house fire, what is my first instinct? If I stay, am I going to get swallowed up in it? Do I want to get a hose to put it out or do I want to add gasoline to it?

“If the answer is gasoline, is it because you’re beyond frustrated? If the reaction is to dump more gasoline, roast marshmallows, and walk away, that means it’s the point of no return. It’s time to quit or bring in someone else to get a fresh perspective. In these situations, the individuals involved tend to want to pick fights out of frustration. They’re combative. They can’t see any way through the problem, and they’re exhausted. It’s time to step away at least temporarily.

“In scenario two, if I’m just sitting there and watching the fire burn while I think about it, I’m stuck in indecision. Create a list of pros and cons, and really think critically about it. If you’re in a team situation, you need to figure out where the rest of your team stands and what the core problem is that needs to be solved in order to be successful. Sometimes it’s a team shift. It’s just one person who wants to call it quits, and the others want to keep going. If you’re in a relationship, you need to be completely honest with yourself and each other about what you both need to do to get things back on track and if you actually want to. The hard part about a slow burn is if you just stay stuck, you have a hard time recognizing when it’s too late.

“Thirdly, there’s the situation where I am motivated to look for the hose. I want to fight the fire. You need to think about what you actually need to do in order to fix the problem. If you’re short on capital, can you extend your runway? Be it sales, outside capital, or cutting your burn. If you’re short on talent, can you bring in world-class talent? Other times, you need to ask yourself does the market really need your product in its current iteration? You need to be really honest and look at it from a third-party perspective. If you don’t know how to fix it, you can always ask others for help. It might not seem like it, but most people are willing to help. 

“The takeaway from all of this is that you have to suspend your own judgment and ego. You have to be honest with yourself. The right answer is usually the first answer. Trust your gut with what’s right.

“Sometimes the honesty will hurt. If you’re running a company, at some point, that might mean you might not be the right CEO for your company anymore.”

In closing

The hardest parts about building anything – be it a house, business, relationship, career, family, or passion – are starting it… and ending it. If most people had to pick, they’d say the former is more difficult than the latter. But if you truly love or loved someone or something, the latter is always more difficult. And while the above may not solve all your problems, I hope when the nights are the darkest, that Andy and Sara’s thoughts may light the way.

Photo by Alex McCarthy on Unsplash

Thank you Sara for sharing your thoughts with the broader world!

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Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.

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Should you get an MBA as a founder?

library, should i get an mba, entrepreneurship

Over the years, the silver screen sure has mythologized the dropout founder – from Steve Jobs to Bill Gates to Mark Zuckerberg. While students who choose to dropout will continue to wow the world, and I believe it (otherwise, I wouldn’t be working with Danielle and Mike at 1517 Fund, if I didn’t), reality isn’t nearly as black and white. A Quora user requested my answer to this question recently. Why do business schools not make world class entrepreneurs? It presumed that great academic institutions, mainly B-schools, were no longer capable of minting world-class founders. Admittedly, it’s neither the first, nor will it be the last time I see or hear of it.

The MBA grads

I met a Fortune 100 executive last year who said that it was because of her Wharton MBA, that she catapulted her career in artificial intelligence and machine learning. Specifically, it was because of the research she did with her professor, Adam Grant, that led to opportunities and introductions down the road. On the same token, David Rogier of MasterClass met his first investor at the Stanford GSB. In fact, it was his business professor who wrote that first check, just under $500K.

Business schools are amazing institutions of learning, but admittedly most people go for the network and the brand. On the same note, I would never go as far as to say that business schools don’t mint world-class entrepreneurs. If we’re going by pure valuation, there’s a study that found a quarter of 2019’s top 50 highest valued startups had MBAs as founders.

And here are a few more founder names among many, not even including some of the most recognizable CEO names, like Satya Nadella (Microsoft), Tim Cook (Apple) and more.

  • Tony Xu and Evan Moore of Doordash
  • Michael Bloomberg of Bloomberg
  • Steve Hafner of Kayak
  • Aneel Bhusri and Dave Duffield of Workday
  • Jeremy Stoppelman of Yelp
  • Mark Pincus of Zynga

Having grit and having a business degree don’t have to be mutually exclusive. I work with founders who come from all manners of educational backgrounds: high school dropouts, college dropouts, BA/BSs, MBAs, PhDs, MDs, JDs, home schooled, and self-taught. At the end of the day, it doesn’t matter what kind of education someone has. What matters is what they do with the education.

What an Ivy League dean once told me

Back when I toured the US to decide which school to SIR (statement of intent to register) to, I met the dean of an Ivy League school. I thought he was going to spend our 20 minutes trying to convince me to come to his school. But he didn’t. Instead he said, “David, it doesn’t matter which school you choose to go to. While I would be honored to have you attend ours, what matters is what you do while you’re in school. You could choose to just take classes here or you could go to a CC, but choose to be a member of 5 clubs, 3 of which you take leadership positions in. And if I were to look at you in four years, I’d be prouder of the latter person you chose to become.”

Capping the risks you could take

When I graduated from Berkeley, I also came out with a certificate in entrepreneurship and technology. While I still believe to this day that no class can really teach one to be entrepreneurial, I learned quite a bit of the institutionalization around entrepreneurship – what exists in the ecosystem, some of the risks involved and how to hedge those bets. Yet, my greatest lessons on entrepreneurship didn’t came from a textbook. But rather, the risks I took outside the classroom. Because each time I made one, I internalized it.

To do great things, you have to first dream big and act on those big dreams. By definition, big dreams entail high degrees of risk. High risk, high reward. And with risk, you’ll make mistakes. So one of the rules I live by is that I will force myself to make mistakes – many mistakes – more than I can count. But my goal is to make each mistake at most once. Jeff Bezos once said, “If you can’t tolerate critics, don’t do anything new or interesting.”

Equally so, there’s a joke that Andy Rachleff, founder of Wealthfront and Benchmark, shares with the class he teaches at the Stanford GSB. While it pertains to VCs, I find it analogous to founders and mistakes, “What do you call a venture capitalist who’s never lost money on an investment?”

“Unemployed.”

But, what institutionalized academia does help you with is provide you a platform to make mistakes. Without the downside. Capped downsides, but it’s up to you, the student, to realize what could be the uncapped upside. Last month I chatted with a VC, who works at a top 10 firm. Our conversation eventually spiraled into her MBA at the Stanford GSB. There she took on projects that put her on the streets talking and building products for potential customers. Her professors taught her the hustle, but it was up to her to apply her learnings. While she chose the VC path after, her experience led her to become a trusted advisor to founders while she was still in school.

In closing

Similarly, world-class entrepreneurs aren’t decided by which school they go to, or lack thereof, but how and why they choose to spend the days, weeks, and years of the short time they have on Earth. And where they practice their entrepreneurial traits.

I would be pretentious to say that you should get an MBA if you want to be founder. Or that you should dropout if you want to be one. If we’re to look at the cards on the table, MBAs are expensive. A $200K investment. Almost half of what might be your pre-seed round. But I can’t tell you if it’s a great investment or not, nor should I. For an MBA, or for that matter, any higher education. I pose the two extremes – MBA (or a PhD too) and a dropout – as I presume most of our calculi’ fall somewhere in-between. Instead, I can merely pair with you with the variables and possible parameters that may be helpful towards your decision. So, I’ll pose a question: Are there rewards you seek in the process rather than just in the outcome (of an MBA/higher education)?

In other words, are there skills, relationships, gratitude, entertainment, and/or peace of mind you build in the journey that transcend the outcome of your decision on the future of your education?

Photo by Patrick Robert Doyle on Unsplash

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#unfiltered #40 Questions That Hone Your Emotional Fitness

As I’m gearing up for a few projects, I spent the last few weeks pondering on a number of questions. And to stress test those questions, I spent the greater half of that time asking the people around me. But in the process of doing so, I found 10 of the above questions sponsored the most self-inquiry within myself and others.

The Questions

Elad Gil, legendary angel investor, said in an interview late last year that “every startup needs to have a single miracle… If your startup needs zero miracles to work, it probably isn’t a defensible startup. If your startup needs multiple miracles, it probably isn’t going to work.” Was there a defining miracle, when preparation met opportunity, that got you to where you are today?

Similarly: Life is some percent skill and effort and some percent of luck. How much has luck contributed to get you to where you are today?

In 2005, a Yahoo! Exec once told the Alexis Ohanian, founder of Reddit, that they were a “rounding error” which Alexis then framed on the company wall as motivation. Have there been chapters of your life that were defined by strong opposition – externally or internally – and your ambition to prove them wrong?

Pat Riley, Hall of Famer basketball coach, wrote in his book, The Winner Within, “You don’t wanna be the best at what you do; you wanna be the only one who does what you do.” What skills, experience, or mental models do you have where you are the only person – or in extremely rarified air – who can do what you do?

Quoting Jerry Colonna in his book Reboot, how are you complicit in creating the conditions you say you don’t want?

Norman Vincent Peale, author of the bestseller, The Power of Positive Thinking, once said, “Shoot for the moon. Even if you miss, you’ll land among the stars.” Entrepreneurs are people who pursue impossible odds and enjoy the journey of shooting for the moon to become world-class athletes. Telling them no is like telling a 7-year old they can’t become an NBA All-Star. Odds are they’re not going to succeed, but the process of pursuing that goal makes it worthwhile. And in doing so, they become a stronger, more resilient individual than never trying to pursue it in the first place. In your life, what have you done or would you do regardless of the outcome of the pursuit?

Andy Rachleff, founder of Wealthfront and Benchmark, once said in an interview: “If we’re batting a thousand or close to a thousand, we’ve done a really poor job.” If your probability of success is really high, the likelihood of a big win is extremely low. To win and not just focus on not losing, you have to take big risks. And as per the definition of risk, you’re more likely to fail. Have you had a failure in your life that contributed the most to where you are today?

On the same token, have there been alleged setbacks turned out to be a blessings in disguise? Or, were there “misfortunes” that turned out to be fortunes?

Let’s say life is a game blackjack. If the first card you drew represents your journey prior to 2020 – face up – and the second card exemplifies your life from 2020 till now – face down, which two cards did you draw? And would you continue “hitting” knowing the hand you’re dealt?

I saw in a Quora thread once, “When you are happy you enjoy the music, but when you are sad you understand the lyrics.” When you were in your lowest of lows, were there words, phrases, or lessons that had profoundly new meaning to them?

Desmond Tutu, who won the Nobel Peace Prize in 1984, once said, “My humanity is bound up in yours, for we can only be human together.” So, to borrow his words, what are the common themes between moments you’ve given up your humanity, either individually or collectively?

What is the narrative that you find most compelling when your inner weather is the most turbulent?

Photo by Johannes Plenio on Unsplash

#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.

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How Do We Welcome the Founder Narratives Behind the Curtains

Being a founder is one of the toughest jobs in the world. Resilience and grit are two (or one) of the indispensable traits of a 5-star entrepreneur. And most, if not all, investors establish grit as the baseline in founder selection, as opposed to the topline in various other careers. While I don’t mean to discount other career paths, all of which I have incredible admiration for, I can only speak in the world of venture where I spend most of my time in.

Yet that same persistence could very much be the same double-edged sword that makes or breaks you. In October, Ryan Caldbeck wrote about his decision to step down as CEO of CircleUp. It was and is one of the most candid pieces I’ve read about the founder journey to date. In it, one section particularly stood out. “Persistence was my superpower. But now I’ve now come to understand that persistence is a double-edged sword, and my decision not to take a break, to not take more off my plate, hurt me, my family and the company. That was the biggest mistake of my career.”

In the founder journey, there exist many moments a founder’s resilience is stress-tested. To get their first customer. To scale to a team of 10. 30. 100. To get their first investor. To raise their first institutional round. But the last thing a founding team needs is for some of their greatest evangelists – their investors – to create counterproductive friction. While it’s presumptuous of me to say that all friction is counterproductive, some friction and additional perspective is necessary to help founders make better, more informed decisions.

In his same essay, Ryan shares a feedback email he wrote to his former board member, as that member’s participation in the company had become “counterproductive”, “vindictive”, and even “destructive”. Unfortunately, these stories happen more often than I would like. It is why many founders believe investors are the gatekeepers to their startup’s success. But we’re not. We don’t have the right to be. On the same token, that’s exactly why it’s so important for founders to deeply consider founder-investor fit.

Michael Freeman found in 2017 that entrepreneurs are 50% more likely to report a mental health condition. Being a founder is lonely. But it doesn’t have to be.

Anton Ego’s words

A few weekends back, my friend and I re-watched my favorite movie. And as the movie faded into music, Anton Ego’s words echoed in my head. While it’s not the first time this quote has appeared in the venture world, it certainly won’t be the last:

“In many ways, the work of a critic is easy. We risk very little, yet enjoy a position over those who offer up their work and their selves to our judgment. We thrive on negative criticism, which is fun to write and to read. But the bitter truth we critics must face is that, in the grand scheme of things, the average piece of junk is probably more meaningful than our criticism designating it so. But there are times when a critic truly risks something, and that is in the discovery and defense of the new. The world is often unkind to new talent, new creations. The new needs friends.

“Last night, I experienced something new, an extra-ordinary meal from a singularly unexpected source. To say that both the meal and its maker have challenged my preconceptions about fine cooking is a gross understatement. They have rocked me to my core. In the past, I have made no secret of my disdain for Chef Gusteau’s famous motto: ‘Anyone can cook.’ But I realize, only now do I truly understand what he meant. Not everyone can become a great artist, but a great artist can come from anywhere. It is difficult to imagine more humble origins than those of the genius now cooking at Gusteau’s, who is, in this critic’s opinion, nothing less than the finest chef in France. I will be returning to Gusteau’s soon, hungry for more.”

For VCs

One of my favorite investors often says, “stay positive, test negative.” While the greatest strength an entrepreneur can have may be grit, the greatest strength an investor can have is optimism.

Optimism in the world. In markets. In startups. But especially people. That even if one venture doesn’t work out, for the people I’ve had the opportunity to stand behind, I know one of their pursuits eventually will. It’s only a matter of time and luck.

That same optimism is a leading indicator for open-mindedness. As people who build our careers at the top of the funnel, it is our obligation to cast our net outside of what is most familiar to us. There will be a number of ideas and belief systems entrepreneurs have that challenge our own. And in many ways they should, as founders are on the frontlines of innovation, they are aiming to be “right on the non-consensus“, to quote Andy Rachleff. When I first got into VC, that same investor who said “stay positive, test negative”, shared another word of advice, “Some of the best ideas seem crazy at first.“

George Bernard Shaw once said something similar as well, “The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man.”

Optimism isn’t only isolated to ideas, but also to the people – the “unreasonable” women and men – behind those ideas and the decisions they make. These innovators aren’t perfect, yet somehow many of us expect them to be. And that dichotomy has created this unfair dynamic that stunts innovation more than we think. I have so much respect for the funds that have set aside capital to invest in founders’ wellbeing, like Felicis Ventures, Freestyle, Crosscut, and more. And I hope many more will follow.

The stories we tell

Over the past few months, I’ve had a number of conversations with founders, friends, and readers about “mental fitness” and “emotional hygiene”. If I could borrow two of my friends’ vernacular. And I’ve learned that we humans are such amazing storytellers.

These powerful narratives has kept the human race alive all these millennia. Before the written word, it was the art of the spoken word, passed down from generation to generation, that held tales of ancestral origins of where to hunt and where to migrate to each season. The same stories have started and ended wars. They have helped us conquer impossible odds. Some narratives today are compelling enough for us to buy a new product or to end a conglomerate.

Yet these exact stories, especially the ones we tell ourselves, can cause stress, anxiety, and depression. The ones that the people we care about and respect tell us can carry even more weight. From role models, parents, managers, friends, mentors, teachers, peers, and more.

In closing

I realized, in conversation, these past few autumn months, more than ever, the power of sharing those stories. To share that we’re not alone and that together, we may learn more than the sum of our individual parts. I understand that it’s no easy task. Even for myself, I debated for the longest time whether to share that I’m not at my best right now. But I’m glad I did. The feedback from the people around me I’ve gotten since brought forth clarity and solace. Similarly, six of my friends, who publicly shared how they get through their toughest times (Pt 1, Pt 2), told me after how grateful they were to have an enormous weight lifted off their shoulders.

Top photo by Nong Vang on Unsplash

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Fantastic Unicorns and Where to Find Them

As a venture scout and as someone who loves helping pre-seed/seed startups before they get to the A, I get asked this one question more often than I expect. “David, do you think this is a good idea?” Most of the time, admittedly, I don’t know. Why? I’m not the core user. I wouldn’t count myself as an early adopter who could become a power user, outside of pure curiosity. I’m not their customer. To quote Michael Seibel of Y Combinator,

… “customers are the gatekeepers of the startups world.” Then comes the question, if customers are the gatekeepers to the venture world, how do you know if you’re on to something if you’re any one of the below:

  • Pre-product,
  • Pre-traction,
  • And/or pre-revenue?

This blog post isn’t designed to be the crystal ball to all your problems. I have to disappoint. I’m a Muggle without the power of Divination. But instead, let me share 3 mental models that might help a budding founder find idea-market fit. Let’s call it a tracker’s kit that may increase your chances at finding a unicorn.

  1. Frustration
  2. The highly fragmented industry with low NPS
  3. Right on non-consensus
Continue reading “Fantastic Unicorns and Where to Find Them”
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Myths around Startups and Business Ideas

In a number of recent conversations with friends outside of venture and “aspiring entrepreneurs”, a couple myths, which I’m going to loosely define here as popular beliefs held by many people, were brought to my attention. 4 in particular.

  1. If I have a great idea and build it, it’ll sell itself.
  2. That idea/startup is over-hyped.
  3. The startup/venture capital landscape is over-saturated.
  4. If it doesn’t make sense to me, it’s not a good idea.

Quite fortuitously, a question on Quora also inspired this post and discussion.

If I have a great idea and build it, it’ll sell itself.

Unfortunately, most times, it won’t. As Reid Hoffman puts it: “A good product with great distribution will almost always beat a great product with poor distribution.” As a founder, you have to think like a salesperson (for enterprise/B2B businesses) or a marketer (for consumer/B2C businesses). People have to know about what you’re building. ’Cause frankly you could build the world’s best time machine in your basement, but if no one knows, it’s just a time machine in your basement. Probably a great story to tell for Hollywood one day (even then you still need people to find out), but not for a business.

That idea/startup is over-hyped.

I’ll be honest. This really isn’t a myth, more of a common saying.

Maybe so, at the cross-section in time in which you’re looking at it. But if you rewind a couple months or a year or 2 years ago, they were under-hyped. In fact, there’s a good chance no one cared. While everyone has a different technical definition of over- and under-hyped, by the numbers, time will tell if it’ll be a sustainable business or not. If it’s keeping north of 40% retention even 6 months after the hype, we’re in for a breadwinner.

Take Zoom, for example. Pre-COVID, if you asked any rational tech investor, “would you invest in Slack or Zoom?” Most would say Slack. Zoom existed, but many weren’t extremely bullish on it. Today, well, that may be a different story. As of this morning (Oct. 12, 2020), while I’m editing this post before the market opens, the stock price of Zoom is $492 (and same change). Approximately 343% higher than it was on March 17th, the first day of the Bay Area shelter-in-place. And, right now, the price of Slack is $31. Approximately 56% up from the beginning of quarantine.

Neither are startups anymore, but the analogy holds. Also, a lesson that predictions, even by experts, can be wrong.

The startup/venture capital landscape is over-saturated.

“There’s too much money being invested (wasted) on startups.”

From the outside, it may very well look that way. Every day, every week we see this startup gets funded for $X million or that startup gets funded for $YY million. According to the National Venture Capital Association (NVCA), $133 billion were invested into startups last year. Yet, it pales in comparison to the capital that’s traded in the public markets.

VC funds see thousands of startup pitches a year. Per partner (most funds 2–3 partners), they each invest in 3–5 per year (aka about once per quarter). Meaning >99% of startups that a single VC sees are not getting funded by them. That doesn’t mean 99% never get funded, but it’s just to illustrate that proportionally, capital isn’t being spent willy-nilly.

If we look at it from a macro-economic perspective, if we are reaching saturation in the startup market, we should be getting closer to perfect competition. And in a perfectly competitive market, profit margins are zero. The thing is profits aren’t nearing zero in the startup/venture capital market. In fact, though the median fund isn’t returning much on invested capital. A good fund is returning 3–5x. A great one >5x. And well, if you were in Chris Sacca’s first fund, which included Uber, Twitter, and more, 250x MOIC. That’s $250 returned on every $1 invested.

If it doesn’t make sense to me, it’s not a good idea.

Finding Product-Market Fit and “Idea-Market Fit”

Revolutionary ideas aren’t meant to conform. If an idea is truly ground-breaking, people have yet to be conditioned to think that a startup idea is great or not. As Andy Rachleff, co-founder of Wealthfront and Benchmark Capital, puts it: “you want to be right on the non-consensus.” Think Uber and Airbnb in 2008. If you asked me to jump in a stranger’s car to go somewhere then, I would have thought you were crazy. Same with living in a stranger’s home. I write more about being right on the non-consensus here and in this blog post.

Frankly, you may not be the target market. You’re not the customer that startup is serving. The constant reminder we, on the venture capital side of the table, have is to stop thinking that we are the core user for a product. Most products are not made for us. Equally, when a founder comes to us pre-traction and asks us “Is this a good idea?”, most of the time I don’t know. The numbers (will) prove if it’s a good idea or not. Unless I am their target audience, I don’t have a lot to weigh in on. I can only check, from least important to most important:

  1. How big is the market + growth rate
  2. Does the founder(s) have a unique insight into the industry that all the other players are overlooking or underestimating or don’t know at all? And will this insight keep incumbents at bay at least until this startup reaches product-market fit?
  3. How obsessed about the problem space is the founder/team, which is a proxy for grit and resilience in the longer run? And obsession is an early sign of (1) their current level of domain expertise/navigating the “idea maze”, and (2) and their potential to gain more expertise. If we take the equation for a line, y = mx + b. As early-stage investors, we invest in “m’s” not “b’s”.

In closing

While I know not everyone echoes these thoughts, hopefully, this post can provide more context to some of the entrepreneurial motions we’re seeing today. Of course, take it all with a grain of salt. I’m an optimist by nature and by function of my job. Just as a VC I respect told me when I first started 4 years back,

“If you’re going to pursue a career in venture, by nature of the job, you have to be an optimist.”

Happened to also be one of the VCs who shared his thoughts for my little research project on inspiration and frustration last week.

Photo by K. Mitch Hodge on Unsplash

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VCs = Gatekeepers?

vc gatekeepers, gate

Not too long ago, I had the fortune of chatting with a fascinating product mind. During our delightful conversation, she asked me:

Are VCs the gatekeepers of ideas?

…referencing Michael Seibel‘s recent string of tweets:

And I’m in complete accordance. I want to specifically underscore 2 of Michael’s sentences.

… and…

The only ‘exception’ to this ‘rule’ would be if investors themselves were the target market for the product. At the same time, I can see how the venture industry has led her and many others to believe otherwise. So I thought I’d elaborate more through this post.

Continue reading “VCs = Gatekeepers?”
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Finding Product-Market Fit and “Idea-Market Fit”

Photo by Loic Leray on Unsplash

I was recently inspired by a fascinating conversation between Mike Maples Jr., co-founder and partner at Floodgate, and Andy Rachleff, co-founder of Benchmark Capital and Wealthfront, but more interestingly, the founder of the term, product-market fit, or PMF – a term that signifies when a product is recognized by a strong demand in the market. Over the years, there have been various ways entrepreneurs, go-to-market strategists, and investors have defined when an idea reaches product-market fit. But before I dive into the PMF, let’s take a look at market definitions first, which admittedly is a step off the beaten path.

The Markets

How I Like to Think about Market Sizes. *Not drawn to scale

Traditionally, the total addressable market (TAM), serviceable addressable market (SAM), and the serviceable obtainable market (SOM) are defined according to the geographic location of your market. It makes sense – your market is as big as where you can offer the service. But now, in an increasingly connected world, technologies are less and less inhibited by the geographical boundaries that plagued the decades before. That said, there are still cultural, social and economic differences when accessing new demographics, which is why I like to characterize the TAM, SAM, and SOM by psychological resistances to new ideas. The TAM is still defined by the total upside potential of a product, where it still excludes laggards, or folks who would most likely never (seek to) use your product. The SAM is construed of people who would use the product after three to five friends in their network recommend and are using the product themselves. And finally, the SOM consists of customers who are desperate, as Andy Rachleff called it, for your product. They have spent sweat, blood, and tears finding or building their own solution. They have already traversed the idea maze themselves and put the dollar (or the euro, peso, krone, pound, yen, RMB, BTC, ETH… you get my point) here their mouth is at. And here, in the SOM, is where you find your product-market fit.

Product-Market Fit

PMF is most noticeable on the hockey stick curve. Before PMF, traction is slow and looks very much like the blade of a hockey stick. And after PMF, traction skyrockets and exemplifies exponential growth.

The Hockey Stick Curve

While there are many heuristics to assess PMF across different verticals, I’m the most fluent in consumer tech where I’ve spent most of my time in. And in consumer tech, I’d like to underscore the notion of ‘exponential organic growth’, and subsequently, a short analysis on each word of that phrase.

Exponential is probably the most straight-forward, where at the early stages of a business, we’re looking for rapidly compounding growth.

Organic growth, as opposed to paid growth, is a measurement for word-of-mouth. Investors tend to measure the effectiveness of a product by its virality from its initial customers to its nth customer – growth that is achieved without directly spending (ad) dollars on acquiring the new customers.

Growth is something I break down into – retention and adoption. Increasing adoption is great as measured by the growth of total users on consumer platform or for a consumer product, but focusing only on adoption leads to a leaky funnel, or in my case, trying to hold too many groceries in my hand without a shopping cart. Every time I grab another item on the shopping list, I drop some other item I was already trying to balance and hold. Of course, focusing only on retention means there’s no growth, which for keeping your best friend circle is fine (unless you want a thousand BFFs), but not for growing a startup.

Below are some growth signs to pay attention to signify that your product is near/at PMF:

RetentionAdoption
> 25% DAU/MAU 100s of organic signups/day
40% are active day after signup> 30% MoM growth
Usage 3 days out of every week

“Idea-Market Fit”

As a founder with an ambitious idea, reaching product-market fit is a great goal to have, but the truth is PMF is a mystical beast – a chimera – in and of itself. Market demands change; what satisfied the definition of PMF a decade ago may not satisfy it now and will most likely not satisfy it ten years from now. Many studies have shown that most startups don’t fail from technological risk, but rather the inability to reach PMF, which ends up leading to lack of investor interest, demotivation, and the founding team falling apart. And quite obviously, before you reach PMF, the hardest part about starting a business is reaching PMF, or what Peter Thiel and many call the Zero to One. I’ll dive into the lessons I learned about the journey to “1” in future posts, but for the purpose of this post, I’m going to focus on the “0” – or what I like to call, “idea-market fit“, or IMF.

What differentiates a good idea from a great money-making idea? I’m going to borrow Andy’s thought calculus exercise. In a 2×2 matrix with right/wrong on one axis and consensus and non-consensus on the other, “you want to be right on the non-consensus.”

Andy Rachleff’s 2×2 Startup Idea Matrix

Why? Discounting the situations where you’re wrong (because you don’t make much, if any money), if you’re right on consensus, it means the market’s already mature, and perfect competition in a capitalistic market squeezes you out of your profit margins. If you do pursue this option as a founder, you’re more or less tackling an execution risk. On the other hand, if you’re right on the non-consensus, the market is still nascent, and you have the potential for monopolistic control of the market. In other words, you’re taking a market risk.

It definitely isn’t intuitive. At the very least, it wasn’t to me when I was on the operating side of the table. I wanted validation. When I was at Localwise helping build a community of local talent, I wanted people to say “I totally agree” or “You’re onto something.” But often times, I just received friction and resistance, with the toughest to receive from some of my friends.

“No one would ever buy that.”

“You’re wasting your time.”

“When are you going to get a real job?”

And at some points in time, I did think, “Maybe they’re right.” Until I started meeting a few people who thought a hiring destination for local mom-and-pop shops wasn’t a bad idea, and especially when small business owners started opening up about their frustrations. Hiring platforms, at that time, focused on the sexier brands and companies to get more demand side traction – the Googles, the Big Four’s, or the Bains, but had seemingly completely underrepresented the population of local businesses. Even if these SMBs were on these other platforms, they were overshadowed by the presence of bigger brands.

When validating startup ideas, you don’t want consensus. If your idea is truly revolutionary, people have yet to be conditioned to accept the idea. Take Uber or Airbnb, for example. If you asked the average person if they would use such a product, most would have thought that you’d be crazy to have a stranger sharing a car ride or home with them. These days, take e-sports or streaming. If someone told me in my pre-teen days that I could make a living off of playing video games, I’d most likely think I was dreaming. After all, I grew up playing Snake on my dad’s Motorola Razr, which admittedly seems to have made a return to the markets.

IMF is about challenging convention and the status quo. That’s what makes an idea revolutionary, or as people in Silicon Valley like to call it, disruptive. A crazy good idea challenges the explicit and implicit biases we have about society and ourselves. In other words, we have to detect the deception we bestow onto ourselves to find the gems in the rough, which Josh Wolfe of Lux Capital explains in his 2019 Lux Annual Dinner Talk – one of the best VC thesis-driven thought pieces I’ve ever seen.

In closing

As a geeky quote collector, I’d like to close this piece not in my own words, but in the words of three brilliant investors who have a few more patches of scar tissue on their back than I do now.

“Some of the best ideas seem crazy at first.”

– Curiosity, in my Thanksgiving blogpost

“Most of the big breakthrough technologies/companies seem crazy at first: PCs, the internet, Bitcoin, Airbnb, Uber, 140 characters…you are investing in things that look like they are just nuts… it has to be something where, when people look at it, at first they say, ‘I don’t get it, I don’t understand it. I think it’s too weird, I think it’s too unusual. “

– Marc Andreessen

“Breakthrough ideas have the traditionally been difficult to manage for two reasons: 1) innovative ideas fail far more than they succeed, and 2) innovative ideas are always controversial before they succeed. If everyone could instantly understand them, they wouldn’t be innovative.”

– Ben Horowitz, in his new book What You Do Is Who You Are
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