Hard work

This post from Fred Wilson the other day really resonnated with me. It’s titled “Grinding”, and basically talks about how there rarely are any silver bullets - the way to solve problems is through a little bit of everything.

This reminds me of something I frequently hear: the “all you have to do is work smart” attitude - “Hard work is for suckers, I work smart instead”. I strongly disagree with this.

In my view, working smart is table stakes. There are tons of people who work smart. If you want to succeed at building something of real significance, you have to work hard as well. And of course, there people doing this as well. So you have to be lucky as well. But without hard and smart work the chances of succeeding quickly drops.

Over the past 6 years, I’ve had the privilege to observe a few hundred entrepreneurs working out of our workspace at StartupLab. I wish these observations would have given me lots of clear rules as to what kind of teams succeed, but that’s not the case. Nobody knows anything - there are no absolute rules.

Still, one thing I’ve seen again and again is that those who succeed have worked hard. It is not a two-way thing; not everyone who works hard succeed, but just about every entrepreneur I’ve seen build something of significance has put in more hours than the average entrepreneur. It’s not enough to just work smart.

I’m not saying you should push constantly yourself to burnout - that is unhealthy. But if you are only willing to put in an average number of hours, the outcomemost likely be average as well. I don’t believe in silver bullets, and I’ve yet to see evidence refuting this.

Different companies

Los Angeles has gradually become a place where great startups are built, as mentioned in the quoted tweet above. The tweet calls these startups “wildly misunderstood” companies, and that reminded me of Norway in relation to the rest of the Nordics. A few thoughts:

There is this convergence between founders and funders. While investors follow great companies, founders are also more likely to successfully build companies within domains where there are lots of investors. My view is this has happened in the Nordics: great companies have been built within certain segments (mostly consumer and SaaS), followingly more funds have been allocated to these domains, which in turn has led to more companies being built within these domains - and so on.

Then the “ugly duckling” of the Nordics emerges on the tech scene after a few too many years working on oil and gas related problems. Companies are being launched, but due to a number of different reasons (different skillsets, networks, vocabularies etc), many Norway-based founders pursue somewhat different opportunities compared to the rest of the Nordics.

A natural consequence of this is that these “wildly misunderstood” companies struggle to raise funds from VCs who, while geographically close, have spent the past decade converging towards a investing in a certain type of companies. And Norwegian founders with large ambitions have to think creatively around how to fund their companies - something I continue to see.

In this age of narrative violations and contrarianism, I’m surprised so few European investors are looking at “different” companies. To really succeed in startup investing it’s not enough to be right, you have to be non-consensus as well.

Norway has a large amount of such companies, and I hope and believe many of these companies will emerge as non-obvious winners in the years to come. It still remains to be proven that these “different” companies are good companies as well - you can’t just be non-consensus, you have to be right as well. And once this happens, you’ll see me tweeting something similar to Shaun Maguire.

Clear communication

I tweeted this a few days ago, and one of the responses I got was that I was stating the obvious. Most reasonable things are, but that doesn’t mean they shouldn’t be communicated repeatedly and clearly.

Increasingly, I’m learning how important it is for founders to communicate clearly (see another argument for this here). Clear communication is necessary to convince investors, employees and customers to join, and it is also very important for building the best possible product.

My tweet was directed at the latter; how to build the best possible product. At any given point of time, you’ll have to prioritize how to further develop your product; what features to build, what bugs to fix. This quickly turn into a question of why “job A” should be prioritized before “job B”.

The decision is much easier to make if you clearly state the different reasons to build something, as per the tweet. Generally, I would argue you should prioritize jobs reducing the probability that customers churn (obviously only to a certain point). Second, I would prioritize jobs makeing your product attractive to more customers, and third jobs that increase the revenue per customer. All exceptions apply of course, but this would be the rule to break.

With clear communication around what each job entails and why it should be prioritized, the probability of building a great product increase. And with it the chances of succeeding.

Revenue is not revenue

More revenue is always better for a company. At the same time, I’d argue you’d rather have 5 customers in 5 countries than 10 customers in one - especially if you have growth ambitions.

Bill Gurley has a really good and famous blog post called “All Revenue Is Not Created Equal” - a post that’s been broadly shared lately related to WeWork’s sudden crash. In it he talks about “customer concentration”, saying that your business is less fragile if your revenue is spread amongst more customers.

This is very true. At the same time, your list of customers represents different levels of risks (removed from the business). 0 customers: Does anyone want this? 1 customer: Someone wants this, but does this customer represent a larger group? 5 customers in 1 market: More indications that the first customer represented a larger group. Is this “larger group” local or is there an international potential for this company? 5 customers in 5 markets: Someone wants this in multiple markets. The “larger group” is not only domestic.

And so on… You probably get my argument already; don’t wait too long to test international markets if your plan is to build a large company. It’s good for your business and it’s a strong signal for investors lookin to back companies with international ambitions.

Mandatory learning

There are some things that aren’t taught at school that I belive should be mandatory learning for everyone taking part in adult life. Here’s my short, non-exhaustive list of things I believe everyone should be educated about but aren’t.

Meetings: How do you conduct a meeting? Why should you have a background, objective, question and outcome of a meeting? How do you facilitate a meeting so that is stays enough on track to get through the staged agenda without running over time? How do you make sure everyone in a meeting is included, and what is the right size of a meeting? What meetings are important and necessary? We all spend a lot of time in meetings, and too many such meetings could be run better.

Basic psychology: Why do humans behave as they do? What is loss aversion? What is anchoring? What is reciprocity bias? What is social proof? What is availability bias? There are a few more, but you get the point. These are ways we all (mis)behave, and the best way to avoid errors from such biases is awareness of them.

Sales: Whatever your position, when you reach a certain level of seniority it turns into a sales role. This is someone else’s quote originally (couldn’t figure out who), and it’s very true. Doesn’t matter if you’re a doctor, chef or CEO - when you get to the top you have to sell. Sell research, sell methods, sell your restaurant, sell your business to investors. Still, nobody I know has ever taken a school course in sales.

Email: Together with meetings, emails run most large organizations. And it runs cross-company communications. Still nobody learns how to do this right. What is inbox zero? How do you do a proper email introduction? When do you use bcc, cc, reply, reply all and so on. Basic stuff that everyone does in so many different, non-optimal ways.

The world would run much smoother if such things were also taught at school. But I don’t expect this to happen anytime soon though.

Sharing shares

One thing I find myself discussing with entrepreneurs all the time is on the topic of how to distribute equity amongst founders and employees. How to share the total number of shares amongst those working full-time in the company.

Ideally, a company would have all co-founders in place on the day the company is founded, and this group of people agree on how to compensate future hires that will be brought in as the company scales.

Unfortunately, this scenario is closer to utopia than reality. In reality, a company is started, an additional co-founder is brought in after a few months, another co-founder quits sometime after that, you recruit a super-senior executive that demands 5x the equity other early hires have been offered and so on. Reality is messy.

I rarely see companies that continuously update how they split equity amongst founders and employees. Both because this would require a lot of resources, and because it is nicely placed in the not-urgent/important quadrant of the “Eisenhower matrix”. Often, the process of redestributing shares is postponed too long - and this leads to more conflict than necessary.

What usually happens then is that people gather in a room and start throwing out numbers; “I deserve X%”, “I should have Y%” and so on. I read somewhere (can’t retrace it now) that if you ask all employees to rate their contribution to a company in percentages, the sum is closer to 300% than 100%. It goes without saying that these discussions rarely end with all smiles.

To mitigate the risk of such a discussion ending up destroying morale, I would recommend a different approach: start by establishing a framework for how equity should be distributed. This framework should consist of different principles that everyone agrees on, that will be used to guide the discussion around numbers that will follow. Which principples to include might differ, but I would at least include the following:

Step 1 > Step 10 > Step 100: All else equal, the earlier you join, the more equity you should have. You take more risk if you start the company versurs if you join post first funding versus if the company has raised big VC.

Building a company takes time: In some ways opposite to the first principle; acknowledge that the company is built over time - the idea in itself is worthless. Even though you don’t join first, you can still be instrumental in making the company turn into something of significance. And if you don’t; vesting schedules will make sure the company’s best interest is taken into account.

Uniqueness: People with skillsets that are unique and crucial for the company to succeed should get more equity than regular “employees”. Differentiate between those who act like owners and those who act like employees. Caveat; people who join early are likely to get a skillset which become unique and crucial over time as they own culture and deep know-how of a lot of stuff. If you plan on keeping people for the long-term expect them to become unique and crucial and distribute equity accordingly.

Presedence: What are the implications of anchoring on a certain number of shares early on. Not all employees nor co-founders care that much about ownership early on, and it might be tempting to be less generous because of this. This might come back to bite you because you might want to bring in people later on that care about equity and want a certain percentage, but where you’ll have difficulties offering this just because it’ll be unfair compared to former hires/co-founders.

Risk profile: There should be an inverse correlation between salary and equity. If you’re paid market, you should expect fewer shares than if you take a 50% pay-cut compared to what you’d be paid in a corporate job.

These five* “principles” are things I would discuss before entering into a discussion about numbers. If everyone agrees on the principles, you have a better “vocabulary” to bring into a discussion on specific numbers. And it’ll increase the probability of success.

  • There might be others as well - if I come to think of any I’ll make sure to add them.

Mission and Vision

Lately, I’ve spent some time exploring the company mission and vision “concept”. Both are important concepts I believe, but I rarely see them being used properly in young companies.

This article explores it more in detail. I agree with the article that mission and vision statements are often incorrectly used interchangeably, and it proposes the following definition which I like:

“Your mission statement focuses on today; your vision statement focuses on tomorrow”.

To make this more specific, let’s have a look at how Amazon work with mission and vision statements correctly:

Amazon’s Mission: We strive to offer our customers the lowest possible prices, the best available selection, and the utmost convenience.

Amazon’s Vision: To be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online.

Why is it important with these things, you might ask? Isn’t this obvious? I would argue against.

A company’s mission statement helps them in all communication - internal as well as external - with regards to whether any given activity is within or outside scope. Should we do x? Yes - if it leads to us better fulfilling our mission.

A company’s vision statement, I’d argue, is even more important - as it sets direction for the company. This is especially important in young companies - but at the same time much harder to establish. Very early on you don’t really know what your company’s target is, as it’s not always obvious what problem the company will solve.

Once it’s somewhat established what problem a company will solve, I would strongly propose articulating a vision. Maybe something like Tesla’s first ten year plan. Something that clearly communicates to the whole company what the company will become.

Having a vision in place reduces the risk of company complacency - that the apetite for growth stops once break-even is reached. Articulate a clear vision for the company, and chances you end up building something meaningful increase.

Put the gun in the other person's hand

Listened to this podcast with Andy Rachleff the other day.

While it’s two years old, the full episode is gold - featuring stories both from founding Benchmark and Wealthfront.

In the episode, he has one expression I particularly liked: “put the gun in the other person’s hand”. Meaning: if you are about to enter into a long-term relationships with someone else - you might as well try giving the other person all the power right away. Give them the gun and see if they pull the trigger.

An example of giving someone the gun is to ask them what the believe the valuation of their company should be like. If the other person tries to exploit you - walk away. If not, the test is passed and it might be someone you should work with.

Investing in startups is all about long-term. Without trust nothing will ever work. So it makes sense to put the gun to the other party’s hand immediately.

No Blog Today

There won’t be a blog post this week, as there are too many things both more important and more urgent on my agenda. Will be back next Wednesday.

Hardware

After I posted last week, a number of better articulated posts emerged on the matter as well (1, 2). The common theme in these posts was that margins matter. It looked to me that some interpreted this as “you can’t build great hardware companies”, and then responded “but look at Apple”.

Obviously, this was as a misinterpretation - building software (where new products have a marginal cost of zero) is one way of getting margins, but that alone is not enough either. You need a moat - something that allow you to capture part of the value created. But you can capture value with both software and hardware companies. Since we’ve invested in a bunch of hardware companies, I wanted to give my top two reasons why building a hardware company can be a good idea (despite a COGS > zero).

The first one is willingness to pay. You’ve probably seen the memes before; how we’re unwilling to part with $2 for a mobile app doing something useful while in the queue at Starbucks for a $7 coffee. You could call it a mental flaw or cognitive bias, either way it’s working in favor of those building “atoms”.

The other one is that products passively market themselves. In order for an app to get widespread organic growth, it needs an NPS score that is through the roof. We rarely look at other people’s phones/computers, so discovery comes through others actively choosing to talk about software they like. It’s different with hardware. People learn passively about your iPhone, AirPods, car and e-scooter when you use these products - without you having to broadcast it. Meaning that when you have a product people use, it can easily spread like crazy.

There are a lot of reasons not to build hardware. Cash flow complications, fewer iteration cycles (you can’t patch a “hardware-bug” that easily once you’ve shipped), each new product has a marginal cost and so on. But that doesn’t mean you can’t build great hardware companies. Be cautious with the associated uncertainties, and take advantage of the obvious strengths.