Who is Startup L. Jackson? Is it some kind of a super-advanced AI bot that Elon Musk has been warning us about? Or is it some world class venture capitalist with a profound sense of humour. Either ways, it is a refreshingly new take on the startup ecosystem.
Raise enough that if things go well you can get to the A
How much money should you raise? Startup L. Jackson uses an “enough to get to real” standard because he is very focused on the need for delivering metrics at an A round. Josh Kopelman recently argued: “You should target 18 to 24 months of runway post Series Seed. The best time to raise follow-on capital is when you don’t need it, and 2 years of runway gives you the best chance to land in that situation.” Mark Suster has given advice on this, and Fred Wilson has a view you can see in a video here that argues in part that ‘less can be more’. Fred Wilson seems more focused on the amount raised by the startup when he said “I just think if you’re forced to figure out how to get from here to here on a million bucks, if you’re good, you’ll figure out how to do it.”
When a startup is raising a seed round they are often able to get away with selling a dream because if they are audacious enough in attacking a massive market what they plan to do can’t be captured in a spreadsheet. Chris Dixon makes that point when he points out: “If you are arguing market size with a VC using a spreadsheet, you’ve already lost the debate.” That is why at the seed stage the best pitch is a great narrative. The story/dream must be audacious and compelling and take place in a massive market with just the right team. Don Valentine also lays it out saying “The art of storytelling is incredibly important. Learning to tell a story is critically important because that’s how the money works. The money flows as a function of the story.”
Startup Jackson points out that Founders should keep in mind that venture capital is a cyclical industry, as pointed out many times by Bill Gurley. Doug Leone has also discussed dilution when he says: “Be incredibly, ruthlessly selfish with your equity.”
The hard part about raising money as a founder is raising enough capital so that you can focus on the business, have a margin of safety and enjoy significant optionality but still have the discipline to focus on aspects of the business that are genuinely important instead of four different things that are insanely distracting. Bill Gurley makes that clear when he says: “We like to say that ‘more startups die of indigestion than starvation.” If you raise too much money you can end up solving things with money instead of with innovation and great company culture. Keith Rabois also makes that point: “Many entrepreneurs are raising more money than they need and it can cause derivative consequences down the road that are not healthy.”
Most startup outcomes are binary. Optimizing for the size of your slice is almost never a good idea if the pie is big. Raise enough to bake a big pie
The data undeniably shows that financial success in venture capital reflects a power law. John Doerr makes it saying: “The key insight is that actual [VC] returns are incredibly skewed. The more a VC understands this skew pattern, the better the VC. Bad VCs tend to think the dashed line is flat, i.e. that all companies are created equal, and some just fail, spin wheels, or grow. In reality you get a power law distribution”. Peter Thiel basically says that if you end up with a Unicorn result (a big pie), everyone gets rich. A venture capitalist or a founder getting a very high share of a 0% return is neither helpful or wise.
The worst possible thing you can do to your business is raise just enough money to throw up mediocre metrics right around the next round, especially with a high valuation you can’t back off of
Broken cap tables are a huge problem as Fred Wilson has noted, Jim Breyer discussed, and Sam Altman states simply: “don’t forget the prime directive of fundraising strategy: set things up so that you never do a down round. The badness of a down round is difficult to overstate; in fact, the threat of that is the best reason not to take a super high price when you’re offered one. If you raise at such a price, everything has to go perfectly in order for your next round to be an up one.” Metrics referred to by Startup L Jackson above will be discussed more below, including the Five Horsemen (CAC, WACC, ARPU, COGs and churn) and their friend customer lifetime value.
The existential threat to early-stage startups is almost always lack of demand. There’ll be infinite VC to fix tech if you clear that hurdle
Ann Winblad agrees when she says: “‘The market bats last’ means ‘Have you figured out: are there customers out there?’ ‘Do the dogs have their head in the dish? Are the customers buying?‘”
Getting to product/market fit and proving that “dogs are actually eating the dog food” is essential. If you want to know even more about how product/market fit fits into building a business Paul Graham lays it out here: “You need three things to create a successful startup: to start with good people, to make something customers actually want, and to spend as little money as possible.” Too many people forget that you need to solve a real customer problem. Without that, the business is toast (not even the artisanal variety). Reid Hoffman describes the other key element here: “If your technology is a little better or you execute a little better, you’re screwed. Marginal improvements are rarely decisive.”
“Most successful startups are overnight success. That night is usually somewhere between day 1000 and day 3500.”
“If you’re competing on price, it better be the case that the incumbent’s cost structure doesn’t allow them to do the same.”
“BigCo may be late to market, but if there’s not a winner by the time they show up, it’ll probably be them. Go faster.”
As Rich Barton points out: “Ideas are cheap. Execution is dear.” Relentless perseverance is a requirement for any founder. Reid Hoffman asks: “Where’s the contrarian thinking that, if they turn out to be right, could be really, really big? Consensus indicates it’s probably not a total break-out project. If your thinking isn’t truly contrarian, there’s a dog pile of competitors thinking the same thing, and that will limit your total success.”
Ann Winblad has said: “We invest in markets. If the opportunity is not large, then the business, independent of the people or the technology, will fail. Because of this issue of intense competition and capital efficiency, opportunities always get smaller as soon as you fund the company.” If you can’t get to $100 million in revenue the math does not work for the venture capitalist since the failure rate is so high, says Bill Gurley.
Can we start referring to the obligatory five year revenue forecast slide as uniporn?
Michael Mortiz could not make this point more simply: “Five-year plans aren’t worth the ink cartridge they’re printed with.” Good venture capitalists mentally giggle when see hockey stick shaped distribution curves based on unrealistic assumptions that don’t map to reality. Chris Dixon has talked about this saying: “If you can’t make the case that you’re addressing a possible billion dollar market, you’ll have difficulty getting VCs to invest.” Bill Gurley makes the point as well: “If your idea is not something that can generate $100 million in revenue, you may not want to take venture capital.”
You can iterate your way out of stupid ideas, but you can’t iterate your way out of stupid
Heidi Roizen has said: “Things outside of your control will happen. You need to lean into this fact.” One great way to deal with uncertainty is to have optionality. Warren Buffett treats cash as a call option with no expiration date or strike price. Warren Buffett also says that “cash combined with courage in a crisis is priceless.” Vinod Khosla describes the situations faced by most founders: “Bad times come for every startup – I haven’t seen a single startup that hasn’t gone through a bad time. Entrepreneurship can be very depressing. If you really believe in your product, you stick with it.”
Effectiveness is knowing 10 things will kill your startup this year and being able to block out all but the one that will kill it this month
Jim Barksdale made a very intersting point when he said “The main thing is to keep the main thing, the main thing.” Bill Gates said once: “Being a visionary is trivial. Being a CEO is hard. All you have to do to be a visionary is to give the old ‘MIPS to the moon’ speech — everything will be everywhere, everything will be converged. Everybody knows that. Which is different from being the CEO of a company and seeing where the profits are.”
Once you’ve completed this exercise you can go to investors and say ‘We see our Series A happening in X months, when we hit Y metrics. We believe we need Z dollars to hire A-C, grow with D strategy.’ This turns out to be a great way to figure out if investors are smart. Good ones will help you build a better plan and you’ll be better for it. Bad ones will have poor feedback or just ask you where to send the check
Chris Sacca points out: “Good investors are in the service business. There are angels who have 75 companies and don’t call any of them ever.” Keith Rabois reiterates: “Early stage, almost every successful entrepreneur I know doesn’t care as much about the economic terms as much as who they are going to work with.” There is a huge difference between an amateur and a professional seed stage investor.
Viral is not a product. Beware those selling it
Acquiring customers at a low customer acquisition cost (CAC) is great. What is not to like about organic growth where customers are obtained in a cost effective way? Mark Andreessen has made this point: “Many entrepreneurs who build great products simply don’t have a good distribution strategy. Even worse is when they insist that they don’t need one, or call no distribution strategy a ‘viral marketing strategy’ … a16z is a sucker for people who have sales and marketing figured out.” Reid Hoffman adds: “What a lot of people fail to realize is that without great distribution, the product dies.”
The startup that treats their investors like a bank and only calls when they run out of cash is missing opportunities
As Rich Barton points out: “Get the highest octane fuel in the tank [when choosing a venture capitalist].” Keith Rabois again weighs in: “If you have the option, raise money from one lead investor who has the right skill set, background, and temperament to help you.” As far back as when Arthur Rock was more active: “We spent a lot of time with our companies… [sometimes] if you divide up the number of companies they’re invested in by the number of partners, you find that the partners haven’t got ten minutes for any one company.”
The Benchmark Capital partners have talked about how founders can do due diligence on a venture capitalist in this video. Founders that don’t work at and devote sufficient time to this due diligence process are, well, bonkers given it is a business relationship that can last more than 10 years.
Predicting failure is easy. You can have no clue, a startup can be brilliant, & you’re still probably right. Let’s see you pick winners
Most startups fail, as both Marc Andreessen and Fred Wilson have pointed out. Getting actively involved as a venture capitalist in the small number of big winners is hard, which is why the distribution of success among venture capitalists is a power law, not just inside their portfolios. Mike Mortiz says: “[Venture capital] is a business that’s always had the investment returns concentrated in very few hands.”
Chris Sacca puts this post to bed: “As investors, VCs are wrong more often, than we are right. As a VC, I’m wrong most of the time, so whenever any of the VCs tell you about the rules etc. it’s really, because we’re wrong all the time. You should expect me to be wrong most of the time. When I’m right, I’m really really right. That’s what you should expect from a VC.”
Key people covered in the article (I strongly advise following their phenomenal work)
- Chris Dixon
- Don Valentine
- Josh Kopelman
- Mark Suster
- Fred Wilson
- Bill Gurley
- Doug Leone
- Keith Rabois
- John Doerr
- Peter Thiel
- Jim Breyer
- Sam Altman
- Ann Winblad
- Paul Graham
- Reid Hoffman
- Rich Barton
- Michael Mortiz
- Heidi Roizen
- Jim Barksdale
- Chris Sacca
- Mark Andreessen
- Vinod Khosla
P.S. This article is adapted from Tren Griffin‘s post on the same topic