Sunday, November 29, 2015

Startup Founders: Vision, Determination, and Friendship

Investors are always looking for the next founder of a $1 billion valued startup, the so called unicorn. The next Steve Jobs. The next Bill Gates. The next Elon Musk. The next Larry Page.

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But truth be told: How does an investor realize that  the next superstar founder is in front of their eyes?  What are the tell tale signs, especially if the founder has no discernible track record? What if the founder is great, but the idea is just an average idea?

In 2013, Cowboy Ventures analyzed the characteristics of founders of unicorn companies. These companies had thirtysomething year old founders with a shared history. At least one of the co-founders had co-founded a company before. One or more of the founders had a technical degree, and had prior experience working in tech/software.

Cowboy’s analysis was purely data driven, and was not able to shed any light on the qualities of the founders. Looking back at the past may not be a useful predictor of the future. For example, the thirtysomething year old founder criterion would have excluded Gates, Jobs, Musk and Page. Oops.

What then are relevant criteria for finding unicorn founders?  The least worst option is to look at key qualities that successful founders exhibit. As Vince Lombardi said, ‘The quality of a person's life is in direct proportion to their commitment to excellence, regardless of their chosen field of endeavor.’

The founder’s ability to articulate the value that the product delivers today is at the core of any vision. A founder needs to think ahead for five to ten years: What is the compelling value for the user? What kind of business could it be? Are there comparable businesses? What will the world look like? What do you want to be when you grow up? To paraphrase Lewis Carroll: Do you want where you are going?
Investors should be looking for founder/market fit. Peter Thiel’s ‘secret’ is a good way to go beyond just book learning and get to the level of insights that founders have: ‘What do you understand about your business that other companies in it just don’t get?’ Paul Graham of Y Combinator points out that imagination is critical to come up with new ideas.
One word of caution: Vision without execution is just hallucination. In their application, Y Combinator is asking for the most impressive thing that each founder has built or achieved, other than the idea they are applying with.


Determination and focus
In optics, focus means that everything converges. In a startup, it is important to get rid of all distractions and focus on what is essential. Peter Thiel: ‘It does matter what you do. You should focus relentlessly on something you're good at doing, but before that you must think hard about whether it will be valuable in the future.’  Paul Graham: ‘ long as you're over a certain threshold of intelligence, what matters most is determination.’ Elon Musk: ‘Focus on signal over noise’.
There are tell tale signs in the language and in the actions of focused founders. The conjunction ‘or’ is their worst enemy. ‘And’ is the second worst enemy. Saying ‘no’ is essential, and it happens frequently.

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Founders need to enjoy hanging out together, which is probably easier done when you are young. These are not casual acquaintances, but instead require shared interests and an extraordinary commitment to each other. Steve Jobs and Stephen Wozniak, Bill Gates and Paul Allen, Elon and Kimbal Musk, Larry Page and Sergey Brin. Y Combinator’s application is asking ‘Please tell us more about an interesting project, preferably outside of class or work, that two or more of you created together’.
Eventually many of these founders go it alone, but partnership is critical in the early years.

Other qualities in supporting roles are a sense of humor bordering on naughtiness, brains and education, and energy and passion. Niceness has never been mentioned as a critical quality, ever.

Will success be guaranteed if all these qualities are evident?

It is impossible to assess these qualities after the hero’s narrative has been created. But one can safely assume that Y Combinator has systematically evaluated their thousands of applicants accepted into the program. And indeed, Y combinator has produced outsize returns. But many of the startups in their programs have failed. Many successful program startups will not become unicorns. Hence, these desired qualities can only serve as references. Founders may not score the highest marks on all desired qualities, but at a minimum, they are outliers in at least one category. McKinsey & Company call it ‘having a spike.’

Investors should always consider the option value of investing in great teams, even if the founders don’t find a great market the first time and the financial investment has to be written off. GO was a well documented example of a terrific team that met an unsuccessful outcome. Investing in any of their team members in later ventures would have yielded significant returns.

Picture credits: Extremetech,,,

Thursday, November 12, 2015

Winning Founders Find Great Markets

Prominent investors like Chris Dixon and Brad Feld highlighted the importance of founder/market fit. Andy Rachleff and Marc Andreessen postulated that the ‘market always wins’, asserting that a market trumps the team. And to amplify the different outcomes, Rachleff labeled teams and markets either  ‘great’ or ‘lousy’. If a team stumbles onto a great market, good things will happen.

Predicting a great market is difficult, if not impossible. Value creation and new market segments arise from external shocks such as changes in demand, regulation and technology. The magnitude and the timing of these shocks are what makes the difference between ‘lousy’ and ‘great’.

This leaves early stage investors with the age old conundrum of what to invest in: Founders? Ideas? Markets?

It is a long way from a founding team to a business and to market success. Founders have to go through multiple iterations before hitting upon the best idea. An idea that can’t get to a minimum viable product (MVP) is worthless. An MVP that doesn’t scale to a business remains a hobby. And businesses which don’t disrupt markets  will not be very valuable.

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Investors cannot fund markets, but they can back great founders and their ideas. And a great team will abandon a business in a lousy market to reset and move into a great market - that’s what makes them truly distinctive. So the main job of the investor is to go out and find that extraordinary team. And be patient until they find that disruptive idea with great market potential.