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.


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.

Tech companies

Recently, I’ve read a few articles around the topic of “what is a tech company”, and I think this is more than just a debate around semantics. Ben Thompson writes in length about this here, and Ben Evans previously introduced his mental framework around questions in this piece on Netflix; “are the important questions tech questions or TV questions?”.

Historically, tech investing has given outsized returns to a lot of skilled/lucky investors. Tech introduced a significantly better way to do a lot of things, and given that most competitors were non-tech companies, just being a tech company was a strong differentiator and a reason to capture part of the value that was created.

Gradually, more and more companies have become tech companies. What was previously a differentiator is now a commodity and table-stakes. From an investment perspective, this means that the question gradually moves from “can this company create and capture value in this market by introducing tech” to “what does this company have to do to create and capture value in this market”.

Tech, in more and more cases, is no longer the differentiator. As this shift is happening, we are starting to see investors evaluating companies differently. As I wrote in my previous newsletter; the question is not whether it’s a tech company, but rather if the company can scale and earn like a tech company?

You can create value by introducing tech, but it’s uncertain whether you can capture enough of it (if any). Network effects has been a very popular moat in the past 15 years, but now I’m seeing an increased focus on other moats too - for example USV’s thesis 3.0 on trusted brands and this from Point9 on branding SaaS-companies.

I predict many of today’s “tech” investors will start to look more and more like miniature Berkshire Hathaways going forward. By that I mean the focus will shift from product and tech to other, more generic fundamentals. There’ll still be the “cutting-edge technology investors”, investing in companies built on top of fresh and unique technological research, and I guess we need a new term to describe such companies as the “prefix” tech soon applies to all companies.

Every problem has an owner

I spend a huge amount of time going through startup slide decks with founders. One thing I frequently discuss is who the owner of their problem is.

Most decks (rightly) start with the big problem the startup is trying to solve. The big problem can be everything from inefficiencies to the climate crisis. Unfortunately, many decks fail to clearly communicate who the owner of the problem they’re solving is.

Because every problem has one or more owners. Put differently, all problems are subjective. My impression is this is (too) obvious for most founders, and thus fail to include it in their deck which is their plan. This is a bad idea.

Very often, this is a reflection of a company that hasn’t though enough about their go-to-market strategy. What will their beachhead market be? Who will the company target with their product - who owns the problem? And maybe even more important, who they won’t target?

A problem owner should be a specific type of person or company, and if it’s a company also the specific role(s) within said company. Once the owner(s) of a company’s problem is communicated clearly, it’s a lot easier to further dissect a company’s product and plans - and potentially build confidence around an investment opportunity. Everyone wins.

Describing entrepreneurs

When talking about entrepreneurs, it is often highlighted that they’re “great”. In early-stage it’s all about the entrepreneur/s, and the entrepreneur has to be great if the company is to have any chance of succeeding. If the entrepreneur is great, then the discussion moves on to the opportunity they are pursuing.

Very often, when a company folds a few years later, the reason is that the “great” entrepreneur was not so great. And lately I’ve come to realize that describing an entrepreneur as “great” is the most unsophisticated thing we can do, as it’s not setting us up for learning.

What makes an entrepreneur great? The short answer is “it depends”. It depends both on the opportunity the entrepreneur is pursuing, but also on who you’re asking. Some say it’s about being relentlessly resourceful. Others say it’s about being good at effectual reasoning. It’s about hard and soft skills. Others again emphasize entrepreneurial experience. The list goes on. Some of these claims are empirically backed, others are more anecdotal. All can be valid arguments for choosing to back a startup. But when talking about why an entrepreneur deserves to be backed, it should not be described simply as “great”.

Rather, an entrepreneur could be described as hard-working. Or relentlessly resourceful. Intelligent. Charismatic. Fast-moving. Likeable. Coachable. As having relevant industry experience. Having built a startup before. Having recruitment power. Having unique insight. Or none or all of the above.

If you describe an entrepreneur as “great” it’s because s/he has certain characteristics. But it’s really stupid to stop at “great” instead of elaborating on why any given entrepreneur actually is great. Going into details around what characteristics you value improves the discussion, also it makes it a lot easier to learn about startups port-morten when “great” entrepreneurs turn out to be not so great.

Words matter. To paraphrase Confucius; when words lose their meaning progress stalls. This is something that is becoming increasingly clear to me. Don’t use synonyms, but communicate clearly and precisely. In order to improve, you need to be deliberate about how you communicate. This is the only way to learn and progress.

Next time I talk about an entrepreneur that I think is great, I won’t stop at great. I’ll elaborate with which of the entrepreneurs characteristics that makes me form that opinion.