1. “The best companies are almost always mission oriented.”
“Eventually, the company needs to evolve to become a mission that everyone, but especially the founders, are exceptionally dedicated to. The ‘missionaries vs. mercenaries’ soundbite is overused but true.”
If the founders of a startup are not passionate about solving a customer problem which they care deeply about, the odds are small that they will be able to successfully create a business generating financial returns that are attractive to a venture capitalist. I am not talking about launching a new business like a car wash or a pizza restaurant but rather a startup that might be attractive to a venture capitalist. Creating a scalable, repeatable and defensible business that generates hyper growth and a large profitable business is a rare event. The best way to create passion in a founding team is to create a mission-driven culture within the business. Venture capitalists love founders with passion because missionaries endure in situations where mercenaries often quit.
2. “In general, it’s best if you’re building something that you yourself need. You’ll understand it better than if you have to understand it by talking to a customer.”
Passion and a mission are more likely to exist if the business is proving solutions that the founders want for themselves. Deep understanding of a customer problem and potential solutions is rather obviously fostered if the founders are themselves potential customers for the solution. Not only is this more efficient and cost effective, but there is less likely to be communications “path loss” between the potential customers who have the problem and the business trying to solve that problem. Yes, it is helpful to have “beginners mind” about potential new solutions. No, having relevant domain expertise is not necessarily a handicap.
3. “You want an idea that not many other people are working on, and it’s okay if it doesn’t sound big at first.”
“The truly good ideas don’t sound like they’re worth stealing.”
“You want to sound crazy, but you want to actually be right.”
“We are the most successful when we fund things that other people don’t yet think are going to be a really big deal but two years later become a big deal. And it’s really hard to predict that.”
“A lot of the best ideas seem silly or bad initially—you want an idea at the intersection of ‘seems like bad idea’ and ‘is a good idea’.”
Both a founder of a startup and a venture capitalist are trying to find mispriced optionality. The probability of finding opportunity that is mispriced is far greater if the startup is not working on the same problem as many other businesses. In other words, less competition with other businesses seeking mispriced optionality in a given area of business is a valuable thing. Ideas that are “half-crazy” are far more likely to reflect mispricing since most businesses love the safety of conventional wisdom. Big companies in particular tend to be afraid of half-crazy ideas and tend to overinvest in ideas that are at the peak of a hype cycle. There were a few people who recently concluded that since some VCs passed on investing in Airbnb that the process of picking startups to invest in is random. This is probably incorrect due to the power laws that exist in VC and the persistent outperformance of the top VC firms over decades.
The nature of VC involves optionality, which requires failure to work. Again, some degree of failure is essential to optionality, especially mispriced optionality. No one, even the very best VCs can predict which of~30 startups will be the one or two unicorns. The job of the VC is to pick the best unicorn candidates knowing full well that most startups will fail. Many startups that look half-crazy and may for that reason possess the necessary optionality are crazy or too early. Which of the best will be a unicorn, if any, is sorted out over time. My posts on optionality and venture capital go into greater depth on this topic.
4. “No growth hack, brilliant marketing idea, or sales team can save you long term if you don’t have a sufficiently good product.”
“Make something people want. You can screw up most other things if you get this right; if you don’t, nothing else will save you.”
“All companies that grow really big do so in only one way: people recommend the product or service to other people. What this means is that if you want to be a great company someday, you have to eventually build something so good that people will recommend it to their friends–in fact, so good that they want to be the first one to recommend it to their friends.”
“Figure out a way to get users at scale (i.e. bite the bullet and learn how sales and marketing work). Incidentally, while it is currently in fashion, spending more than the lifetime value of your users to acquire them is not an acceptable strategy. Obsess about your growth rate, and never stop. The company will build what the CEO measures. If you ever catch yourself saying ‘we’re not really focused on growth right now’, think very carefully about the possibility you’re focused on the wrong thing. Also, don’t let yourself be deceived by vanity metrics.”
There is no substitute for solving a real customer problem. Bill Campbell doesn’t mince words about the importance of the right product: “If you don’t have the right product and you don’t time it right… you are going to fail.” Without a valuable customer value proposition the customer acquisition cost (CAC) of the sales-driven effort will inevitably be fatal. Companies that don’t deliver compelling value end up having to pay too much to acquire customers. Paying too much to acquire customers is not a solvable problem since churn, COGs, ARPU and a cost of money can all kill any chance you have of creating shareholder value. Bill Campbell also says: “When I work with startups, the last thing I work with them on is marketing. I don’t want to overestimate marketing. Apple’s marketing is having great products.”
5. “It’s worth some real up front time to think through the long term value and the defensibility of the business.”
“Have a strategy. Most people don’t. Occasionally take a little bit of time to think about how you’re executing against your strategy.”
Every business must find at least one barrier-to-entry (a moat) to generate a profit. Moats can take many forms and must constantly be refreshed since they are always under attack by competitors. Without a moat of some kind, competitors will increase supply of the offering to a point where financial return is equal to the opportunity cost of capital. It is worth repeating this point: competitors increasing the supply of what you sell kills value for you. Without some limit on supply you will not earn an economic profit. On moats, read Michael Porter. Porter teaches: “if customers have all the power, and if rivalry is based on price… you won’t be very profitable.”
6. “Every company has a rocky beginning.”
“You have to have an almost crazy level of dedication to your company to succeed.”
The process of creating and managing a business will never go completely according to plan. There is no manual you can follow that will create business success. There are no fool proof recipes and formulas that founders and CEOs can follow. For these reasons it is the ability of the Founders, the CEO and the team to make wise decisions given an uncertain future that will determine success. Courage, perseverance and determination will be needed to produce positive outcomes. My blog post on VC Ben Horowitz that will dig more deeply into this set of issues.
7. “If you’re not an optimist, you make a very bad venture capitalist.”
Great entrepreneurs and venture capitalists are supernaturally optimistic despite the fact that most of what they do will result in financial failure as measured by frequency of success. What matters in the world of startups and venture capital is not frequency of success but rather magnitude of success. Even one unicorn in a lifetime of starting companies investing can justify the efforts and struggles of a founder. Maintaining an optimistic attitude in the face of uncertainty and repeated failure is a challenge. Which reminds me of a joke. An optimist entrepreneur and a pessimist entrepreneur were sitting in a café talking. The pessimist turns to the optimist and says: “Things can’t possibly get worse. The optimist replies: ‘Sure they can!”
8. “Great execution is at least 10 times more important and 100 times harder than a good idea.”
“Remember that you are more likely to die because you execute badly than get crushed by a competitor.”
While having the great idea should be the starting point in any business, that idea will result in little or nothing if great business execution is missing. Watching a great team execute under the leadership of someone like Jim Barksdale or John Stanton is a valuable experience. Trains running on time is a beautiful things to see. Ralph Waldo Emerson pointed out the obvious when he said: “Good thoughts are no better than good dreams, unless they be executed.” After all “However beautiful the strategy, you should occasionally look at the results” (Sir Winston Churchill). Mark Twain famously expressed a similar view: “There are basically two types of people. People who accomplish things, and people who claim to have accomplished things. The first group is less crowded.”
9. “Stay focused and don’t try to do too many things at once.”
“The hard part of running a business is that there are a hundred things that you could be doing and only five of those actually matter and only one of them matters more than all of the rest of them combined. So figuring out there is a critical path thing to focus on and ignoring everything else is really important.”
Any business, but especially startups, will face many challenges and much uncertainty. There will always be more things that could possibly be done than people and resources to do them. Great founders and entrepreneurs know the difference between what could be done and should be done. Setting priorities and staying focused is critical. Jim Barksdale put it this way: “The main thing is to keep the main thing, the main thing.”
10. “At the beginning, you should only hire when you have a desperate need to.”
“Later, you should learn to hire fast and scale up the company, but in the early days the goal should be not to hire.”
“Hiring is the most important thing you do; spend at least a third of your time on it.”
When a business is just getting started, small teams are very efficient and translate to cash burn rates that can be kept relatively low until key milestones are achieved. Low cash burn rates allow the business more time to build something that customers really love. If the cash burn rate of the startup is high, a business is under pressure to commit to an idea and doing that prematurely is often fatal.
When the time comes to scale the business recruiting becomes a huge priority. Great founders spend far more time recruiting than people imagine. As Keith Rabois says: “The team you build is the company you build.”
11. “One thing that founders always underestimate is how hard it is to recruit.”
“You think you have this great idea that everyone’s going to come join, but that’s not how it works.”
“A great team and a great market are both critically important—you have to have both. The debate about which is more important is silly.”
“Don’t let your company be run by a sales guy. But do learn how to sell your product.”
Experienced venture capitalists are looking for evidence that founders have strong sales skills. One early test of a founder’s sales skill is when they make a fundraising pitch. The idea is simple: If the founders can’t sell the idea to a venture capitalist, how are they going to be able to recruit great people, sell the product, and find great distribution? The ability to sell the offering to investors, sell the potential of the business to employees and sell products to customers is core to any business. If you don’t like to sell these things starting a business is probably not the right path for you.
12. “Keep an eye on cash in the bank and don’t run out of it.”
“Do reference checks on your potential investors. Ask other founders how they are when everything goes wrong.”
“Good investors are worth a reasonable premium. Go for a few highly involved investors over a lot of lightly engaged ones.”
If the founders have a great idea and a strong team, money is not the scarce ingredient in creating a successful business. What is scarce is value-added capital (investors who supply the business with more than money). Even scarcer is value-added capital that will be a big help when things are going wrong (which is inevitable as noted above). The last thing founders need are fair weather investors. Taking the time to research potential investors is wise since the relationship will last for many years. Among the questions that should be asked: What are the investors like when things don’t go according to plan? Are they fun to work with? Do the investors pitch in to help on things like recruiting when asked? Taking a higher valuation from an investor who is a known jerk is unwise. Why would you ever want to do that? Life is short. Happiness and having fun are underrated.