Frequently used quotes

I find myself quoting other people’s wisdom all the time. For obvious reasons: why try to rephrase something which has already been expressed very eloquently. Similar to my “frequently shared links” post, I wanted to put together a collection of the quotes I use the most. I’ll update this as I find more good ones - here are five to start with:

“Either hold a rock concert, or a ballet; but don’t hold a rock concert and advertise it as a ballet”
Warren Buffet

“To a man with a hammer every problem looks like a nail”
Also known as the law of the instrument. Mark Twain, Buddha and probably many more.

“You can do anything you want but not everything you want”
Ray Dalio

“Addition by subtraction”
Andy Weissman

“Things are completed in the time allocated to complete them”
aka Parkinson’s Law, by Cyril Parkinson

Seven predictions for 2020

If you’re sick of prediction posts already, stop reading now. This is the second time I’m putting forward my predictions for the coming year, last year I got 4.57 right. I find writing predictions to be a good way to force myself to think about what’s ahead. So here we go; my predictions for the next year, mostly focused on Norwegian tech and startups:

Tech is not what it used to be: Following the public “dissection” of companies like Uber, Wework and Caspar, I expect we’ll see a decreased number of “tech” companies emerge also in Norway. Tech investing will gradually look more and more like regular investing, meaning it’ll be required that companies have planned out how to get a proper defensible position (not “economiese of scale magic”). I expect to see relatively more companies with clear IP strategies, be it unique technology, brands or something else.

High profile companies will die: take 2: I predicted this 12 months ago, claiming “it seems unlikely (from a statistical perspective) that all companies will be able to continue growing successfully”. I got this prediction wrong. I still believe this is very likely, and would like to put in the same prediction for the coming year.

Acquisitions from unusual suspects: There were a few acquisitions in 2019, including companies like Nabobil, Poio, Dragonbox and OncoImmunity. Judging by the announced valuations, none of the acquisitions we saw last year were what you’d call a “fund returner”. For 2020, I believe we’ll see a similar acquisitions activity - with few if any “fund returners”. Most of the large Norwegian corporates will continue to be absent from this scene due to their disconnected incentives, but international players plus the few local corporates with significant executive ownership will continue to see acquisitions as a viable path to growth.

ESG is the new standard: Every single investment fund announced in 2020 will have a clear and visible ESG strategy. It is no longer possible to ignore the massive challenges we are facing, and talent and capital is drawn towards the opportunities these problems bring.

The emergence of the reboot: There’s been quite a few investments in Norwegian startups the past 5 years. Naturally, many of these have folded, and a small minority has hit espace velocity. There’s also a number of startups that don’t fall within any of these two groups. Many have raised pre-seed funding followed by bridge, bridge extension and so on, and these rounds has impacted captables and with it the founders’ incentives. Most of these companies will fold or level out. Still, a number of these companies still have potential and motivated entrepreneurs, but for founders and new investors to bet on it it’s necessary to reboot the ownership. 2020 will be the year where doing a reboot is normalized. 2021 could be the year we see a firm specializing on this emerge.

Growth. Growth everywhere: A combination of a number of factors, including transition from oil, and increasingly tech-proficient talent pool and low interest rates, means we’ll see more money invested in more companies compared to the past two years. This in spite of reboots and high profile startups folding as predicted above.

Decelerating growth of aggregators: Google, Amazon, Facebook and the likes have continued to grow over the past years despite numerous attempts to challenge their positions. I believe they’ll continue to grow through 2020, but at a decelerating rate. Consumers and businesses are starting to realize the costs connected to “putting all your eggs in one distribution basket”, and will gradually shift towards products like Shopify, Substack etc. This is not a Norway-focused prediciton but if correct it’ll have broad implications.

Bonus: No new option rules: This is easy points, and also something I predicted last year (meaning I won’t include it in my 7 official predictions). Still, I find it very hard to believe the elected officials will suddenly grasp the massive benefits that comes with proper incentives in the new companies that are being built in Norway. Unfortunately…

These are my predictions for the coming 11.5 months. I look forward to revisiting this post then.

Review of 2019 predictions

Earlier today, I sent out a special edition of my newsletter called “2019 in review”. In brief, it’s an aggregate view of all the funding stories I’ve tracked the past year, and in it I also mention some of the predictions I put forward about a year ago.

I’ll post my predicitons for 2020 in a few days, but first I wanted to review my accuracy for the past year. Here we go:

High profile startups will die: Not true. No big, public failures as far as I have seen. There are probably a few companies that have plateaued (in a “normal trajectory” they should have raised more money this year but haven’t), but that’s it.

Few foreign investments: Somewhat true. According to my data, 31 companies had international investors participating in their fundraise, up from 25 the previous year - a slight increase. Seen as a percentage of all investment rounds, international investors participated in 27.68% of rounds compared to 28.74% in 2018. Looking at the 20 largest funding rounds, 62,5% had participation from an international investor. No massive increase overall, but going in the right direction.

More corporate venture: True. Corporates participated in 34 investment rounds, up from 30 the previous year. An increase yes, but more incremental than the previous year (from 10 to 30 investments).

Still out of sync: True. Not really sure how to prove this, but the absence of evidence of the contrary is probably sufficcent. I could probably point at the stock price of Kahoot as an example of continued optimism for Norwegian tech companies.

More climate change investments: True. In 2018, 100MNOK was invested in 2 companies working on climate crisis related problems. In 2019, we saw 11 companies receive more than 600MNOK in funding.

Norway as an attractive market: False. Amazon did not launch in Norway in 2019, and Revolut appears to be struggling.

No new option rules: True. No significant changes to option rules. This was an easy way to score points though.

Adding this up, I give myself 4.5 out of 7 possible points. Not too bad - especially as I work in an industry where you can win by being right 10% of the time.

Selecting investors

There’s a lot of talk about “value-add investors”, and while most of it is ironic it is coming from a more serious place. As the power has shifted from funders to founders, it has become increasingly important for investors to signal that they’re “more than capital” in order to get first access to entrepreneurs.

Probably to nobody’s surprise, I strongly believe investors can add tremendous value to a startup beyond capital - we spend every day trying to make it easier for entrepreneurs to succeed. That said, I’ll be the first to admit we should not get any praise if a company succeeds - all credit goes to the entrepreneurs. Some might call this a contradiction: investors work to add value but in reality they don’t. This is part of today’s post on how to select investors.

While all else equal, everyone would prefer a “value-add investor”, spending all your time figuring out which investor has to most “value-add” is a mistake in my view. Generally, there are three things to look for in an investor, which I would prioritize as follows:

  1. Capital to invest.
  2. No right to destroy. (If you don’t need to fundraise, I would put this at number 1).
  3. Value-add.

First and foremost, what you select investors that provide you with the funding you need to build your company on your own. Secondly, you want to make sure they don’t have any rights allowing them to take over control of your business. And thirdly, you want to select for ability to add value. Basically, you should not expect that an investor comes in and build your company with or for you. If they do, consider yourself extremely lucky, but don’t plan for it.

This prioritization should not be confused with how to approach investors. When doing that, you should reverse the numbering of the list above. When approaching investors, you always want to signal to any investor that they’re you’re preferred investor (because of “value-add x”) - even though you are really only looking for capital. I’ll cover this in a future post.

In other news, I’m taking a break over Christmas, meaning this is the last regular post of this year. Happy holidays!

The Ask

“So what should we say our company is worth?”

This is a question I get all the time from founders planning for their next fundraise. While the answer always depends, there are generally two strategies to choose between:

Strategy A: we are raising X million on a Y million pre-money valuation.

Strategy B: we are raising A-B million in exchange for somewhere between Y-X% of our company.

There are pros and cons with both strategies, but my general advice would be to go for strategy B. Here’s why:

Strategy A is the simple option - both the founder and the funder understand it immediately. While simple, there is a downside with this simplicity, and it is twofolded.

On the one hand; if you go with strategy A and communicate an amount and valuation which is the lowest you would be able to accept to continue building your company, you risk leaving money on the table (investors would be willing to pay more). Sometimes this solves itself as you have more investors competing to fund your company, but it’s not always the case as investors can lock in on the anchor you put out.

On the other hand, if you communicate an amount/valuation on the higher end of your “scale”, your risk getting “pre-emptive” rejections from investors who believe your company is “too expensive”. They could be interested in backing you at an amount/valution you would accept but not prefer, but choose to not even take the meeting because of the communicated amount/valuation. The pool of investors to choose from is reduced, and worst-case you end up with an unsuccessful fundraise because the investors you meet (who were not that price-sensitive) pass on investing for other reasons

In short; if you go too low you risk leaving money on the table, if you go too high you risk “pre-emptively” excluding investors which again can reduce the chances of successfully fundraising. This is why I would prefer Strategy B. (interestingly, strategy B is the best option the same way a direct listing is becoming the preferred way to go public for entrepreneurs. )

The combination of the highest percentage and the lowest amount should be something you would be okay closing with, while the opposite - lowest percentage and highest amount - would be a best-case scenario for your plans. Communicating ranges (valuation and amount) means you don’t exclude anyone too early, and can have the discussion on specific terms once you’ve identified one or more investors willing to lead a financing round. At this point you have a lot more information around how competitive of a process you’ve been able to run, and hence how hard you should push for the preferred end of your “ranges”. s

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.