Sharing some insights/patterns from various co-founder breakups I have witnessed over the years.
Recently, I received the sad news of a potentially powerful co-founding team breaking up rather acrimoniously. I had been tracking this team closely for several months now as a potential deal, and this happened right as the company received a seed term sheet from a Tier 1 VC.
Over a 15-year career in venture, I have expectedly seen several co-founder breakups, both in my own portfolio as well as those I have known well/ observed from the sidelines. This recent breakup got me thinking about any patterns/ insights I have noticed over several such instances over the years. Here are a few:
1/ Undergrad batchmates seem to have higher endurance
For some reason, I have repeatedly noticed that teams where the co-founders have been undergrad batchmates tend to survive much longer. Perhaps relationships born in those fledgling, relatively innocent years tend to have higher levels of subconscious trust and, more importantly, a sense of love and tolerance.
While it’s easier to find people with complementary skills and similar pedigrees (both of which look great on paper on the team slide), what keeps co-founders together is also what keeps people together in long-term marriages – having an underlying mutual respect & fondness, which leads to daily hours of fun as well as the willingness to both extend higher levels of tolerance to each other, as well as introspect and evolve to meet the other person midway.
Especially at the seed stage, company missions can evolve with pivots, but this mutual vibe is what keeps co-founders together across multiple iterations and often, multiple companies.
2/ Ex-colleagues and work friends seem to have a higher risk
My hypothesis here is that most people tend to put on a work personality at the job that suits their manager’s preferences as well as the company’s culture. Therefore, even after working with someone as a colleague, it’s very hard to know their real, full personality and values. In many cases, people end up misjudging mutual fit, especially when it comes under the immense pressure of doing a 0-to-1 startup.
Interestingly, this applies to colleagues at both large companies as well as startups. As an investor, I often hear pitches where founders say, “We worked together in the trenches of this early-stage startup and discovered this idea”. While this gives the impression of a strong set of founders germinating inside the cauldron of another startup, I have frequently seen such teams breaking up soon. While they do have the claimed early product and GTM skills they together learned at the startup, the mutual co-founder vibe & grit end up breaking under pressure.
3/ Co-founders coming together via common friends/ relatives, without a strong shared history, is a miss
I see this scenario a lot – one person decides to start up, spreads the word around for a co-founder, connects with someone via a really strong common friend/ relative, and both decide to partner.
In the majority of these cases, there is no shared history, and the team also hasn’t had the opportunity to spend enough time in the trenches going through the ups and downs together. When pitching to seed investors, they usually tell the story of “our skills are perfectly complementary, and both of us have met each other multiple times at this X/Y/Z person’s parties over several years, and developed a shared passion for this idea”.
In most cases, this ends up being a window-dressed story of the co-founding team and lacks the underlying bond & trust needed to grind out the tough times.
4/ “Earned co-founders” are solid
In many cases, folks start as single founders, surround themselves with early founding team members, validate, iterate, and get to early PMF with them, and during this journey, 1-3 people naturally come up and start playing a critical role in the management team. In a sense, they start playing the co-founder role without the title (or the equity).
I call these earned co-founders, and these are solid personas. In many of these cases, I have pushed the solo founder to look at these 1-3 people as core parts of the leadership team, if not as full co-founders, and have it also reflect in their equity at the appropriate time.
“A firm writing seed checks without specific competence in that stage is like a cheetah in the rainforest. The beast is a wonder of nature that can run at a top speed of 60-70 mph in the African grasslands. But place it in the Amazon rainforests, and all its wondrous capabilities will amount to zilch. It’s just not built for it!”
Most 2021 vintage startups got VC ‘cheetahs’ on their ‘rainforest’ Boards. Surviving the new reality that faces them, will require a cathartic reboot.
Had an interesting conversation with a Bay Area-based founder a few weeks back. His startup is in the high-ACV enterprise space wherein the product is solving an intense and wide-ranging problem that is especially applicable to large companies. He got off the blocks in 2021 with a mid-single digit $Mn pre-seed round by a top-tier VC at the idea stage itself. A start that most founders dream of!
However, now two years down the road, the situation on the company’s Board is far from rosy. The company has gone through tumultuous times that are typical for any 0-to-1 startup. While the founder has kept his chin up during this phase, he is very disillusioned with the VC’s advice, behavior & general stance so far. When he shared some specific examples of this with me, my first reaction above all else was that this firm clearly has little past experience of portfolio management at the seed stage & in particular, what founders need in order to navigate its inherent complexity.
As I started relating this to many other founders I have met this year, a pattern is clearly emerging in the 2021 vintage of startups. Specialist VCs who have mainly invested in the Series A & beyond space in the past, went upstream & wrote massive pre-seed & seed checks with minimal or no traction. They were probably under pressure to deploy or get early dibs on the best teams as later stage valuations were going to stratospheric levels.
Seeing these companies now, after most of them have almost consumed their 24-month runway, I am seeing how the lack of milestone-based capital sequencing & strong stage-firm fit has created many fundamental issues with their core:
1/ Armed with big checks from large AUM firms, founders ignored the scrappy, capital-efficient approach right out of the gate. Instead, they bulked up teams & spent disproportionately on go-to-market even before problem-solution fit. Now in hindsight, they have ended up creating fragile organizations that are at the mercy of the macroeconomy & availability of follow-on capital.
2/ Many of these VC firms have put relatively inexperienced team members on the boards of these companies. My guess is because in their overall AUM game, these types of really early investments are probably considered highly risky “option bets” with low stakes in general & therefore, good learning opportunities for more junior members.
While experience by itself doesn’t make anyone a good or bad VC, pre-seed & seed stages of venture capital demand much more art & judgment in company building from all stakeholders. A firm writing seed checks without specific competence in that stage is like a cheetah in the rainforest. The beast is a wonder of nature that can run at a top speed of 60-70 mph in the African grasslands. But place it in the Amazon rainforests, and all its wondrous capabilities will amount to zilch. It’s just not built for it!
It’s a bit counter-intuitive but in my view, the best VC talent (best = strong fit from a personality & skills perspective) needs to be involved in the earliest stages of company building. There is a reason why YC has a strong moat in that stage, & why while most fresh MBAs can invest & do portfolio management at Series A & growth funds, pre-seed & seed needs artists like Paul Graham & Semil Shah that are few & far between.
One of the things I would like to see coming back into the startup ecosystem foundation post this venture downturn is the importance of “capital staging” – rigorously thinking through how the company should be capitalized at the earliest stages, what kind of investors should be assembled for it, the mindset, approach & time a specific company would need to iterate towards problem-solution fit & eventually, product-market-fit.
I would like to see the return of angels, domain operators & specialist boutique VCs partnering with founders at the earliest stages of venture. We need some version of the Arthur Rock & Ron Conway models but modified for this age. These types of stakeholders in turn, would educate and/ or encourage founders to be scrappy, agile and perseverant during the 0-to-1 stage, supporting them in building the most optimal path to the next base camp.
Closing thoughts specifically for the 2021 vintage startups – while it’s not easy to rewire the foundational DNA of a company, it’s not impossible. While the lesser gritty teams will flame out, I am also seeing founders who are acknowledging both the mistakes of the past as well as the new reality that faces them and are determined to learn & re-invent themselves. Even though as an investor, I am not too excited about the 2021 vintage the way it looks & is behaving right now, I will be more than eager (& rightly so!) to back its re-invented & re-wired v2.0.
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As the business world reverts to a blend of remote & in-person, meeting customers IRL is becoming important once again, especially in a slowing economy.
Sharing some thoughts on how jumping on a plane & meeting people could be key to unblocking growth for your business.
I was recently in a brainstorming session with a portfolio company that is struggling with stagnant growth. The company is profitable, has clear PMF as demonstrated by loyal top-tier customers, yet is unable to grow the business fast. It has major logos but the ACVs just aren’t expanding.
Now, as with any startup, stagnant revenue is a symptom & the causes could be many. In order to do a root-cause analysis & subsequently unblock growth, my immediate actionable input to them was simple – “go and meet customers in-person”.
When the bolt of lightning called Covid struck our planet, paradigms of doing business changed overnight. As workers went remote, so did interactions with customers. In fact, as companies were forced to do business with each other over video calls during the lockdown months, people discovered that it was both highly productive and profitable to drive the sales process sitting anywhere in the world with a laptop & a stable Internet connection, engaging customers living thousands of miles away over a shared screen.
As the world is stabilizing into a new-normal, many companies are now realizing that the success of a fully remote sales & BD process is highly contextual. In hindsight, its applicability & effectiveness became extraordinarily broad based in 2020 and 2021, mainly due to:
An excess liquidity fueled, demand-on-steroids environment, and
Altered social norms of human engagement.
Simply put, everyone wanted to buy so badly that the only bar the sales process needed to clear was to show up on a Zoom call. And, it also helped that nobody really wanted to meet a stranger in-person & take the risk of Covid transmission.
Now, as we sit in 2023, both these factors no longer exist:
Demand is contracting across industries, courtesy of the ongoing cycle reset driven by rising interest rates.
Post vaccine, broader social norms have reverted to a blend of remote & in-person. What proportion will they reach at steady state is hard to predict, although with the present return-to-office movements even with Big Tech like Amazon & Meta, my guess is 60% in-person & 40% remote (assuming a continuing trend of 3 days per week in office).
It’s critical for all founders & operators, especially those in early stage startups that typically have finite resources to deal with business headwinds, to quickly embrace this reality. In a 60-40 IRL:remote world with contracting demand, it’s unacceptable if founders & senior leaders aren’t getting on the plane to meet customers & build trust.
Meeting customers IRL has multiple advantages. First, leaders taking the time to travel & spend bandwidth in listening is a strong demonstration of commitment. It’s Strategy 101 that in most cases, it’s easier to grow a current customer vs land a new one. Even in consumer products, product leaders first focus on retaining existing customers + re-activating inactive ones, before filling up the top of funnel with new leads. In any business, growth is possible only when existing customers are happy.
Second, breaking bread with customers builds 1:1 trust with their execs, putting a human face to contracts, transcending beyond employers & current deals to opening up the possibility of these leaders becoming your personal champions for long after.
Third, getting informal feedback about their product experience as well as larger problems & challenges they are facing, & then connecting the dots across multiple such conversations, is the best way to do a root-cause analysis of “why are we not growing fast enough?”.
Going back to the portfolio company I mentioned in the beginning, I gave them a very simple & actionable plan for the next 8 weeks to unblock growth:
One founder to play what I call a ‘Key Accounts’ role.
Literally make an excel sheet of top 5-10 customers, hop on flights, meet key execs IRL, get feedback, hear their problem statements & build a personal rapport via drinks/ dinner.
As an output of each meeting, create a simple roadmap for (1) enhanced customer success, where customers are unhappy and (2) in-account revenue expansion via upsell/ cross-sell, where customers are happy & want to grow.
Finally, and most importantly, partner with relevant teams (product, delivery ops etc.) to unblock & provide execution momentum to these customer-wise revenue roadmaps.
The founder’s role shouldn’t end with token customer visits. Driving results by providing the necessary context, energy & cross-functional unblocking help to operating teams is the real output all stakeholders are looking for.
Btw, as I was working on this draft, star product operator & angel Gokul Rajaram posted this thought yesterday on the importance of building relationships in enterprise sales:
On a side note, willingness to get on a plane often is a career hack I used very successfully at Alibaba & something that I learnt from my then boss. While our international peers in US & EU offices loathed traveling to China & facing all the inconveniences (from jet lag & language to food & other cultural disconnects), me & my team would show up in Hangzhou every month, blending in with our local colleagues & building trust over meals, rice wine & karaoke. Slowly, we came to be known as the “true believers” – the only team willing to make the sacrifice & do a round-the-world trip every month to get s**t done. We gradually earned the right to be ‘insiders’, getting access to unique growth opportunities within the Group.
Now in this new phase of my career as a tech investor, am doubling-down again on this approach. As I ramp up venture investing in the US-India corridor, I am aiming to spend at least 2 weeks per quarter in India & devote more operating time to portfolio founders, grow new deal flow, cement old ecosystem relationships as well as initiate new ones.
Let me end this post with an article from Jason Lemkin of SaaStr that I really like – 10 Things That Always Work in Marketing. This is a must-read for anyone looking to unblock growth in their business. The suggestions go much beyond marketing, touching on all aspects of go-to-market. Reproducing the section on visiting your largest customers:
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As an angel, one of the strongest leading signals I look for in a startup is progress per unit of capital – how much forward movement has the team achieved & the resources it has consumed for it.
My thoughts on why a capital-efficient mindset is so important for early-stage tech founders.
Having seen 1000s of deals across a decade of investing my own as well as institutional money, I rarely cringe while evaluating a new company. As an investor, I have often seen the same goods-and-bads in other deals several times before. As an ex-founder, I have walked the path & made the same unforced errors so almost every time, I can empathize & almost pre-empt why a founder is doing things a certain way.
However, there is one specific thing that is guaranteed to make me cringe – a founder attempting to raise an amount that is totally out-of-sync with where the business is. In many cases, this is accompanied by other precursors:
No intent to bootstrap from idea to “some” traction.
Wasteful handling of the last round.
Coding & building product for months at a stretch without putting anything meaningful in front of customers.
Personally, one of the strongest leading signals I look for in a startup is progress per unit of capital – how much forward movement has the team achieved & the resources it has consumed for it, especially when evaluated relative to other comparable startups.
I remember an interesting learning from my time at IDG Ventures (now Chiratae). Sudhir Sethi, the Managing Partner & the lead investor who had backed Myntra (Zappos of India at that time; was eventually acquired by Flipkart for ~$300Mn in 2014), often cited how when he went to meet Mukesh Bansal (the founder) for the first time at the Myntra office, he observed they were working out of a dingy space in a classic Indian neighborhood market with the ground floor occupied by a fruit & vegetable vendor. Sudhir used this as one of the positive signals for the team’s ability to execute in a cut-throat eCommerce vertical like fashion.
Fast forward a few years, and I got a similar insight yet again in the retail context. While working with Alibaba, I saw how frugal the Group was in terms of saving every dollar of operating cost. eCommerce works on wafer-thin margins, especially in highly competitive & price-conscious markets like Asia. And one could see this by comparing the bare minimum facilities & perks we got at the US HQ in San Mateo vs even well-funded growth startups, which were offering everything from catered meals to draft beer stations at that time.
Why is a capital-efficient mindset so important for early-stage tech founders? It’s because they are playing a game where the odds are hugely stacked against them. Where 9 out of 10 new startups fail on average. Where the starting point and end point of companies are vastly different, with each year choked with iterations, a major pivot every few years, and team members jumping on & off the ship.
Setting yourself up to have even a remote chance of winning such a game requires many shots at the goal, many course corrections, and many resets. At the same time, capital is scarce at the pre-PMF stages even for the best teams. Capitalism is brutally efficient, throttling money when relative risk is high, & opening the faucet once success is highly certain (typically post-PMF).
Building even a decently sized company can take anywhere from 6-8 years, & up to 15+ years. In such a long period, both the overall economy as well as your specific market will go through several cycles. The key is surviving long enough, even with limited capital, to be able to walk this arduous path.
This is what the best founders bring to the table – using investor capital like their own, each dollar wisely deployed towards only what’s truly necessary for the stage, raising each round with specific milestones in mind, and realizing that ownership is everything, with each bps of dilution being the costliest trade shareholders can make. To me, this mindset & building approach is perhaps the biggest signal of perseverance in a team.
Come to think of it, in the non-tech world where starting a business isn’t called “doing a startup”, entrepreneurs typically use their savings to get going, & once there is enough business confidence & profitable revenue flowing-in, grow using either internal accruals or debt. Initial bootstrapping creates skin-in-the-game, profitable revenue creates high confidence that customers want what you are making, & debt creates financial discipline around managing cash flows while preserving the founder’s ownership to compensate for all the risk they have taken.
This model has been used by everyone from Sam Walton to Richard Branson, & continues to survive in all parts of the SMB economy. While the venture capital model definitely works for building tech companies, which are asset-light, highly scalable & operate in winner-takes-all dynamics, I believe the founders who are in it for the long run build with a similar philosophy – planning for the next basecamp & raising conservatively, maintaining discipline around cash & giving high importance to ownership.
On a related note, I wanted to share something I recently wrote on Twitter regarding a fundraising pitfall specifically for serial founders:
Often see serial founders who have seen success before (scale and/ or exit), raise large rounds at high valuations at the idea stage!
From what I have seen, even the most successful founders have operated in phases where a lack of capital could have potentially killed their startup. That’s probably why on the 2nd attempt, they try and take that risk out of the equation at the beginning itself.
Oddly enough though, having a capital-rich Plan B to fall back on reduces the scrappy iterativeness, discipline & underdog mindset that startups usually need to succeed. And which probably contributed to their success the 1st time too.
In asymmetric bets like startups, to reference The Dark Knight Rises, “the way to climb out of the pit is without a rope”.
Hopefully, as this cycle resets, all of us founders & investors will go back to the drawing board & start appreciating Benjamin Franklin’s age-old virtue of frugality as a key to success in business & life.
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SMB SaaS is hard. Getting the positioning right, increasing ACVs, controlling churn – it all becomes harder when your customer is a small business that is resource constrained & perpetually dealing with its own execution challenges.
Despite this, given SMBs are the most frequent early adopters of new products, the reality is that most startups tend to start mid-market. Though, in my experience, a majority get stuck in unfavorable economics of this customer segment & are unable to achieve breakout PMF.
So, what is the secret sauce founders can learn to effectively scale SMB SaaS? Hubspot is a great case study. I recently came across this SaaStr podcast with the HubSpot CEO Yamini Rangan, where she shared some of the company’s SMB strategy & learnings. Here are the key highlights:
Go after a large TAM: given the fragmented nature of SMB verticals, it’s really important to have a large TAM. HubSpot made the smart decision to transition from marketing automation to CRMs, basically going after Salesforces’s lunch.
Mid-market verticals tend to have open opportunities for startups as SMB customers are usually sandwiched between either buying a host of solutions & stitching them together or buying an expensive, enterprise-grade solution. In this context, I had recently posted a Twitter thread about how Zoho followed a similar multi-use case bundling strategy to position itself as an “operating system for SMBs”. This strategy works well as SMBs have a tendency to simplify their tech stack & procurement processes by buying multiple solutions from the same vendor.
2. Customers gravitate towards competitively-priced, mission-critical products: in times of economic uncertainty like today, SMBs tend to become really sensitive about budgets. Customers start asking tough questions internally around (1) where are they spending?, (2) do they have a clear path to getting enough value from the spend? and (3) can they do more with less?
Acting per this analysis, SMB customers are then likely to consolidate their tech stack to a handful of mission-critical platforms that are competitively priced & deliver the most value. This is the bar startup products need to cross while selling in this tough macro environment.
3. PLG-based distribution is king: to achieve break-out growth in SMB SaaS products, startups need to have the widest possible distribution. The front door needs to be big enough so that most people can come in.
For the first 8-9 years, HubSpot was mainly driven by a sales motion comprising Direct Sales & Partner Sales. Around 2016-17, in order to exponentially grow distribution, the founders made a counter-intuitive bet to go from sales motion to product motion. Today, HubSpot has a massive user base of ~1Mn WAUs to monetize off of.
4. A strong “free” product is key to PLG: One of HubSpot’s truly differentiated product strategies has been to offer a strong, full-featured free product. Rather than making a “free” product free just for the sake of it, they have focused on making it really valuable.
Some important benefits of having a strong “free” plan:
Drives high top-of-funnel growth & user engagement, improving the probability of monetization once the value is proven out.
Puts product org. under pressure to deliver enough features at the top, in order to maintain the competitiveness of paid versions.
Forces the product team to maintain a “consumerized” ease of use, which benefits all customers, free or paid.
Irrespective of whether your GTM is sales-led or PLG-led, a founder should never give up on the “free” plan as it’s key to keeping your product competitive.
5. North Star Metric should be Net Revenue Retention: NRR is the best health indicator of an SMB SaaS business given it represents whether or not: (1) you are retaining the customer, (2) you are continuing to drive enough value so they buy more from you and (3) you are protecting yourself from churn.
6. Don’t underestimate the value of a Partner ecosystem: once you reach a certain scale, PLG & Direct sales aren’t enough. A thriving partner ecosystem can be a strong GTM moat. Interestingly, a majority of HubSpot solution partners *only* sell & deploy HubSpot as a CRM, thus creating valuable network effects for the company.
7. In geo-expansion, less is better: PLG-driven companies will always have customers in many countries eg. Hubspot has 130+. But in order to deeply localize for elements like language, currency, customer support etc., it’s important to focus only on a few markets. As an example, HubSpot has chosen 7-8 markets to deeply localize their offerings in, based on factors like TAM, existing installed base, net ARR growth being seen & the company’s ability to serve the market locally.
While SMB SaaS can be a tricky business model, it compounds beautifully once the founders figure out its key levers, as HubSpot has shown.
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Growing up in India, where inherent chaos makes sure most things don’t go according to plan, I got organically trained to always have a Plan B. The classic fallback option – the bylane you take when the main road is clogged because a minister is scheduled to pass through, the backup college seat you block in case you ranked low in the entrance exam for your top preference, or the autorickshaw you hail when the car refuses to start.
Look, I get it! Now that I am a father to 2 boys, I see the instinct parents have to ensure their children are tangibly & emotionally “safe” in all situations. So, I can appreciate why my middle-class upbringing was designed this way. To top it up, my technical education & early analytical jobs further pushed me into the world of scenario analysis & fail-safes.
Down the road, as I entered the risky world of startups, I naturally brought this instinct with me. While building, operating & investing in high-risk-high-reward endeavors, my animal brain would always push me to have a Plan B in my backpocket:
If this startup doesn’t work, I can always go back to Company X.
What if this investment fails? Let me spread my resources & take a smaller bet.
If I don’t like living in Country Y, I can always go back to India.
A few years into taking these asymmetric bets (presumably backed by Plan Bs), I expectedly started encountering failures, both big & small, one after another. They ranged everything from major projects going South & unforeseen external risks coming to the party to unexpected company restructurings & gross misjudgment of certain people’s skills & intent.
During a recent introspection of these adverse experiences, something interesting jumped out – every time I attempted to call on a Plan B for a specific situation, more often than not, it wasn’t really there. In some cases, the “backup” companies had changed their strategy & weren’t a fit anymore. In others, I had grown in a different direction & going to a fall-back option would be a negative step. Many times, people I was relying on to help materialize a certain Plan B had either fallen out of touch, were themselves dealing with adversity, or had changed their context & therefore, relevance.
So this was my lightbulb moment that inspired this post – in high-risk-high-reward situations, Plan Bs are….fictitious. The very nature of extremely risky situations is that they take you in unpredictable directions, change your context in unimaginable ways & leave you with baggage that’s hard to foresee. And all this happens in parallel to a rapidly-changing external environment that in most cases, becomes increasingly incongruent with your endeavor (most asymmetric projects are by definition, contrarian in relation to established rules of the game that the majority operates by).
This complex system renders even the most thought-through Plan Bs useless. Given asymmetric bets are driven by power laws (a few will drive a majority of the total outcome) & compounding (need a long enough timeline for ideas to mature, which is when outcomes start growing exponentially), positioning yourself to be on the right side of these rules requires going all-in for a significant period of time.
While having a Plan B provides the initial psychological space to initiate a risk, in my experience, it unfortunately also creates a mental mechanism to cop out of it, & even worse, often doesn’t provide the safe landing space it initially promised.
Going forward, my aim is to ditch the “Plan B” mindset in all asymmetric bets. A fall-back instinct comes from a place of fear, and while controlled fear can be a useful tool to drive alertness & urgency, it becomes adverse when acting as a roadblock to going all-in & persevering on a thoughtfully-chosen path.
It’s important to add here that while ditching the Plan B outlook, I will still proactively focus on avoiding the Risk of Ruin at an overall life level. Asymmetric bets require multiple shots at the goal & therefore, safeguarding the ability to keep playing is paramount.
On a related note, a mental heuristic I have recently started using while making asymmetric decisions I am 50-50 on – “which option is the fear side of my brain asking me to choose?”. In most cases, I then lean towards the other option!
I have found the following quote by Swami Vivekananda to be hugely inspiring in driving this mental transformation:
Take up one idea. Make that one idea your life – think of it, dream of it, live on that idea. Let the brain, muscles, nerves, every part of your body, be full of that idea, and just leave every other idea alone. This is the way to success.
Swami Vivekananda
As you consider this approach, I want to leave you with this outstanding scene from Christopher Nolan’s ‘The Dark Knight Rises’. As a frustrated Bruce Wayne is trying to catch his breath after yet another failed attempt at climbing out of the pit (he was using a rope each time), an old & wise prisoner gives him the mantra for successfully making the climb:
You do not fear death. You think this makes you strong. It makes you weak.
How can you move faster than possible, fight longer than possible, without the most powerful impulse of experience – the fear of death!
Make the climb…as the child did. Without a rope!
The Dark Knight Rises (2012)
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I recently tweeted a really interesting insight I heard from Mike Maples, Jr of Floodgate at a recent Draper University closed-door event:
This is so true, and a common mistake that founders & product leaders make while building new products. Looking back on my own startup, while I rigorously tried to execute Paul Graham’s “Do things that don’t scale” philosophy, I still created unreasonable expectations in my own head around user growth for each MVP iteration. This was probably due to the baggage I was carrying from my previous experience of working at large companies like Alibaba, where numbers were talked about in Millions & sometimes, Billions.
When the absolute user numbers weren’t met, my morale as a founder would get hit with each iteration. In hindsight, hitting numbers shouldn’t have been the goal at all. The ideal 0-to-1 mindset is like that of a scientist, with curiosity being the core driving emotion, backed by an iterative product development approach. The target outcome of this approach should be to gather insights that help refine the hypothesis.
Similar to how scientists drive their research process one experiment at a time, I have realized that building any new product or service from grounds-up requires moving one “unit” at a time. It’s up to you to decide what that unit should be – acquisition, activation, frequency of use, revenue or even just getting qualitative feedback!
In a scientific process, more than just the number of experiments run, what’s important is taking the learning from each experiment & applying it to the next one so it becomes better than the first.
Similarly, a good approach to building anything new is to delight one person at a time. This automatically focuses the building process & anchors it on an actual customer, thus making it easier to ship something that solves a monetizable problem for someone in the real world. Trust me, this is a non-trivial hurdle that many startup teams are unable to cross.
The 0-to-1 stage can be highly fuzzy but breaking it down into one unit at a time helps give more clarity to the team around the exact short-term goals.
The most profitable way for a product to grow is via word-of-mouth. The above approach naturally optimizes for it. And once the testimonials & organic growth start kicking in, traction compounds with minimal incremental effort.
Of course, the key to executing this building approach well is patience. Again, think of a scientist. A larger research budget or more headcount can’t necessarily speed up a breakthrough. Similarly, building one unit at a time requires a small team committed to iterating over a long enough timeline for customer compounding to kick in. A lean & capital-efficient operating model is a requirement of this approach as a long runway significantly improves the odds of success.
Learning from my mistakes as a founder, as I have now started working towards regularly putting useful startup & investing content out there, I am consciously following the approach of publishing & learning one unit of content at a time – blog post, Twitter thread, LinkedIn post etc.
Same for my angel investing, wherein I am trying to help each founder, co-investor & startup employee I meet, one week at a time, with whatever resources I have – network, expertise, capital etc.
This approach is helping me to first put the core enablers of my venture investing craft in place that then, hopefully, self-compound. Therefore, I feel much better this time about hitting my long-term goals.
Also, in case you are interested in other similar startup insights shared by Mike Maples at the DraperU event I referred to earlier, check out my Twitter thread on it.
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As the fundraising environment continues to get harder in 2023, founders & investors are deep into rationalizing business plans & finding ways to cut burn. The first temptation is to follow what I call an “excel sheet” approach – starting with the largest expense items without enough strategic thinking around the revised set of goals, business constraints in this new environment, what is working well right now, & how capital should be most efficiently allocated going-forward.
As opposed to big companies, startups operate with a finite runway, trying to address significant customer problems that remain unaddressed by large incumbents. This requires constant innovation – essentially doing hard, non-consensus things across the stack, everything from technology & design to customer experience & business model, that incumbents aren’t doing.
While big companies can afford to be relatively unscientific in cutting costs & still tide through tough macros with the help of their existing PMF, startups unfortunately, have no option but to play offense at all times in order to continue innovating & thereby, give themselves a chance to survive & succeed. In financial terms, this implies investing incremental $$ into innovation that drives more revenue (& profit), which is what will ultimately save a startup, not investor cash sitting in the bank.
So how should founders think about playing offense while being capital-constrained? I would like to propose a thinking tool called the “Focus Canvas“:
As a first step, rather than focusing on P&L line items, break down your business into specific buckets. These could include customer segments (eg. Individual, SMB, Enterprise etc.), product lines (eg. shrink-wrapped, custom deployment, pure services etc.), platforms (eg. desktop app, iOS, Android, browser extensions etc.), distribution channels (eg. self-serve, inside sales, direct sales, channel partners etc.), geographies (eg. US, EU, India etc.), teams by function/ type (eg. engg., product, design, sales, marketing, offshore contractors, agencies etc.) & other buckets that are relevant for your business.
Arrange all the relevant buckets & their constituent elements on a single page. This is your “Focus Canvas“.
On the top-left corner, list the most updated business goals for this year that all stakeholders in the company have aligned on. These could be things like “hit $1Mn ARR”, “show x% retention”, “start fundraising in Q4” etc.
On the top-right corner, list all the business constraints you expect to face this year. These could be things like “12 months runway left”, “only 2 backend engineers”, “sales cycle taking 6+ months to close” etc.
Now, as you are looking at this Focus Canvas, try and answer the question “what is working well right now?”*. You need to define “working well” for each bucket as per your specific context, also taking into account the above goals & constraints. It could be driven by one or more of revenue growth, most profitable, highest ROI, generating the most valuable feedback, creating the most differentiation, highest team productivity etc. *Note: this step is well-suited for a team workshop/ brainstorming session.
The most important step – for each bucket, put a ✅ in front of the element(s) you believe is your best bet to achieve this year’s business goals while navigating expected constraints. Then, ❌ out all other elements in the bucket. This is where ruthless focus is extremely important for the Canvas to do its job well – ideally, force yourself to ✅ only your #1 focus element. In the case of most startups, that’s probably all you can afford to execute anyway.
Finally, take the ✅ element from each bucket & weave them into a simple, 1-2 paragraph Focus Narrative. An example to illustrate this – “In 2023, we will focus on the Enterprise customer segment & offer them the standard product suite with a billable custom deployment services wrapper. The product roadmap will focus on the desktop app. We will double down on the internal sales model for distribution, with founders pitching in for strategic logos. To increase our team’s efficiency, we will significantly reduce contractor headcount & re-allocate them to full-time hires in engineering & internal sales.”
This Focus Canvas now provides a clear & strategic view of opportunities to both cut burn & re-allocate resources, while staying on track to achieve business goals & making progress toward PMF. The Focus Narrative can be used to socialize the going-forward strategy across teams in an easy-to-remember way. If used well (read: with ruthless focus), this approach can help startups in playing offense even in a tough economic environment.
PS: sharing a Focus Canvas template that you can use as a starting point. Feel free to download a copy & modify it as per your requirements.
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2022 definitely felt like the end of an era. A decade-long party for US tech, fueled by low-interest rates -> increased availability of risk capital -> price inflation across asset classes.
The last chapter of this post-GFC era was perhaps the craziest – an unprecedented pandemic -> widespread lockdowns -> more fiscal stimulus -> injecting more air into already inflated asset bubbles.
With inflation crossing 7%, the Fed finally started increasing interest rates last year and is expected to continue quantitative tightening over the next few quarters. Public market valuations expectedly turned south (valuations are based on DCF, so as discount rates go up, valuations go down), with tech growth stocks correcting by as much as 80-90%.
The following dynamics are currently at play:
Large tech: shrinking macro-demand + adverse public markets -> pressure on companies to reduce costs to bring them in line with lower growth projections -> drastic cost-cutting measures, including major layoffs.
VentureInvestors: public market corrections -> LPs cut back on venture allocations + downward revision of expected returns on exit -> venture activity slows down + any deals that happen, happen at much lower valuations given new public market comps.
Startups: less capital available + higher bar in private markets -> startups need to cut costs to survive -> layoffs in high-cost/ non-core functions + pause hiring unless absolutely essential.
2023 appears to be the “year of transition”, as both the overall macroeconomic cycle, as well as the technology sector within it, move into a new paradigm. I see the following ten big ideas for 2023:
Leaner-and-meaner big tech
For anyone working in tech over the last decade, we have witnessed first-hand the level of entitlement & cultural complacency that has grown within large tech companies like Google & Meta. With more challenging times ahead, I expect large tech companies to take drastic steps towards re-wiring their cultures & operating models. Layoffs are just one piece of the puzzle – expect significant changes to compensation policies, KPI/ OKR philosophies, org. structures, functional locations, work-from-home policies, contractor hiring, operating routines etc., all with the aim to make execution more efficient.
Founder-led companies (eg. Meta, Salesforce, Shopify, Coinbase etc.) will take quicker & braver calls to re-invent themselves, compared to those run by professional management teams (eg. Google). In the latter case, I expect shareholders to put considerable pressure on these professional CEOs to take corrective measures. In fact, I won’t be surprised if some of the big tech CEOs get unexpectedly replaced as many of them come across as peacetime CEOs who will struggle in wartime.
2. Capital efficiency over growth for startups
The last decade in tech startups was all about growth. This year, expect investing thesis & operating models to decisively shift towards capital efficiency. Mirroring the demands for margin improvement by public markets, I expect private market investors to significantly raise their expectations on operating efficiency.
Founders will have to react fast and in several cases, give a 1800 turn to their culture & business models. A silver lining – founders who were heads-down amidst the craziness of 2020-21, building their companies in a capital-efficient way, will have an enviable opportunity (& deservedly so!) to play offense both with customers & investors.
3. Bay Area bounces back
Remote work boomed during the pandemic, as tech companies grew at unprecedented rates. However, we saw signs of a comeback-to-office across both big companies & startups last year. With current headwinds, I expect factors like teams getting together to drive execution & in-person networking to become increasingly important.
With rampant layoffs, tech professionals will also feel more insecure & would need more access & optionality to get their careers back on track. All this bodes well for the Bay Area – I expect significant migration to the region, especially for people in their 20s to mid-30s. In terms of the sheer depth of the tech ecosystem, the Bay Area remains unparalleled. As emerging areas like AI, health-tech & EVs gain strength, they will provide even more reasons for talent to be physically here.
4. “De-angelification” of the startup ecosystem
Amidst the post-pandemic investing frenzy, liquidity-rich, over-optimistic, FOMO-driven tech professionals started dabbling in angel investing. Becoming an angel in a “hot deal” became a status symbol, & rapid paper-markups made everyone feel like a winner.
A majority of newbie angels from this vintage neither understand the nuances of this asset class nor have the depth of resources to play the game effectively over the long term.
As more startups start shutting down this year, combined with layoffs & decreasing compensations courtesy dwindling value of RSUs, I expect a massive churn in 2020-21 vintage angels. In my experience, tourist angels typically drop out of the game around the 4-6 deals/ 24 months mark, as they see portfolio companies starting to shut down & their hard-earned money vaporizing into thin air.
5. More pain in Crypto
If you thought 2022 was brutal for Crypto, brace yourself! FTX implosion is only the beginning of a much-needed cleanup in the space. I expect many more tokens to go to zero, projects to shut down & low-conviction talent to move out. Given the scale of the FTX fraud, am expecting even more regulatory oversight & ramifications for the overall sector this year.
Personally, I do believe there is a kernel of truth in the Web3 opportunity. The faster this cleanup happens, the sooner the next chapter can begin & we can make tangible progress towards discovering its real-world use cases.
On BTC and ETH, I expect both to remain flat at best, & significantly down from current levels in the bear case.
6. The FOMO shifts to AI
Whenever there is too much consensus around a trend or an asset class, I get worried! It was clean-tech pre-GFC, then Blockchain & Crypto pre-pandemic, moving to Web3 & future-of-work post-pandemic. Based on my Twitter feed, I can safely say that with the rise of OpenAI & launch of ChatGPT, the FOMO has now shifted from Web3 to AI. I am expecting the space to see a lot of hype, investor interest & startups being launched in 2023.
Studying how the previous FOMO waves evolved gives a fair understanding of what to expect – those without first-principles conviction & a long-term strategy are more likely to get their hands burned. Those who were anyway committed to the space & were quietly building behind the scenes over the last few years stand to disproportionately benefit from the increased availability of risk capital & talent.
7. The return of “moats” (& rise of deeptech)
As the perpetual-growth era of software ends, I expect the question around “moats” to re-appear in the diligence checklist of investors. The lifecycle of companies like Netflix & Robinhood has clearly shown how hard it is to have a sustainable competitive advantage in tech (one reason why Warren Buffet stays away from investing in it!).
As the likelihood of purely growth-driven exits goes down, I expect venture investors to start looking at deeptech verticals with inherent moats much more seriously. These include space-tech, health-tech (including lifesciences), energy, climate etc.
Each of the above markets seems to be getting unlocked in its own unique way & while these companies can be more capital-intensive & have higher technical risk compared to say SaaS or Social, the resulting market leaders have much more defensible competitive positions & hence command healthy valuation multiples.
8. EVs taking over the transportation stack
EVs are seeing major progress on both the supply & demand side. On the supply side, most major auto companies have an EV product in the market, with use cases evolving from urban sedans to SUVs, pickup trucks & now, even semi-trucks.
On the demand side, record-high gasoline prices have acted as a key unlock. This is visible in the rising hybridization of the latest gasoline car models. With non-Tesla EV products rapidly expanding, consumers have more choices across use cases & price points. I wrote a post a few months back on how I warmed up to EVs & Tesla, in particular. I expect EV penetration to have significant growth momentum this year.
9. Digitization of mainstream healthcare
A positive side-effect of the pandemic has been consumers getting increasingly comfortable with digitally-delivered healthcare services. In my case, interacting with healthcare providers over Zoom and accessing services such as Carbon Health & One Medical via their apps (including getting advice via chat) has really opened my eyes to its value. Even beyond that, I work-out with my trainer via video & our family nutritionist is in India with all interactions happening via Whatsapp.
I expect the overall healthcare stack, including mainstream services, to digitize at an even faster rate in the coming year. These tech platforms will also open up opportunities for niche services to exist eg. virtual monitoring & consultations for chronic patients, pre & post-natal advice, nutrition guidance etc.
10. India as a global greenshoot
Amidst an unstable China, weakening EU, war-torn Russia, one-dimensional Middle East, fiscally-unstable LatAm & fragmented Africa, India appears to be a solid greenshoot both geo-politically & economically. A stable & reformist govt. has worked hard to put together core growth pillars over the last 8 years – from building physical infrastructure & a national digital payments network to ensuring economic development at the grassroots & supporting tech startup activity in the country. India is poised to now reap the dividends of all this hard work, and similar to China, grow its per-capita income from ~$2k at present to ~$10k over the next 20 years, all in a democratic environment.
India’s tech ecosystem has also come of age in the last 5 years. The mega question of “can exits of venture-backed companies happen in India?” has been progressively answered, beginning with the acquisition of Flipkart by Walmart, followed by IPOs of consumer companies like Paytm, Nykaa & Zomato in domestic public markets, & the IPO of Freshworks in the from-India SaaS space on Nasdaq. There is a growing pool of startup talent, courtesy of a decade-long Mobile & software wave, which will fuel the country’s tech ecosystem over the next decade.
The above ideas are making me super-excited for 2023, both as an angel investor & operator. After a 2.5-year hiatus, I returned to angel investing in 2022, doing 3 deals in Q4. With the turning cycle & above ideas as a backdrop, my goal is to make 2023 my most active year yet as an angel, while also keeping a high bar on quality. Excited to collaborate with all founders, angels, VCs & operators out there 👊🏽
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Heard an excellent conversation between Michael Seibel (CEO of YC) and Patrick O’Shaughnessy (top asset manager, also moonlighting as an amazing podcaster). It had many fundamental insights that would help any founder♟ Sharing my top takeaways here:
#1 Don’t be too “smart” for your own good: there is nothing like that one breakthrough idea that is guaranteed to work 100%. Teams need to be willing to iterate, pivot & execute in new directions all the time 🛶
#2 Launch!!! At the 0-to-1 stage, the most important thing is the ability of a team to build & launch a working product, as fast as possible. You can’t build a company if you don’t launch in the first place 🚀
#3 Startups are all about momentum: teams need to demonstrate forward momentum in whatever time they have spent building the product. The best teams generate rapid momentum to acquire users & fundraise with this tailwind 🏎
#4 What kind of problem is worth solving? a) high frequency⏰, b) high intensity🔦, c) high willingness to pay💵. Overall, founders need to have some special insight into the problem they are setting out to solve💡
#5 Founders essentially take 2 kinds of risk: a) product risk🛠, not sure if people need this product (typically taken by relatively younger founders) and b) execution risk🔨, I know this product is needed but not sure of execution (usually taken by more experienced founders).
#6 Be “real” when coaching founders: be upfront in presenting facts about high failure rates. And that to win, you have to reach out for extraordinary (be 2 standard deviations from average). Also, emphasize the importance of developing tools to manage their emotions & health⚖️
#7 Best way to create leverage during your fundraising process? Acquire users & grow m-o-m. Pitch with real users & data. It’s possible to raise money just on ideas/prototypes, but you will have zero leverage in these discussions. Your goal should be to fundraise with leverage💪🏼
#8 What is Product-Market Fit? It’s like a sledgehammer to your jaw. It’s that month or quarter where you get so many users that it breaks your systems. When the sheer market traction bypasses all your spreadsheet plans & projections. When you have PMF, you WILL know it🚰
To conclude, what I found most intriguing was the importance of “bravery” in founders🧗🏽♀️ 2020 has shoved in our faces a plethora of issues we are facing as a species. The need of the hour is a generation of founders that take on problems that are intimidating to solve⭐️
Note: this post first appeared on the Workomo blog here.
