I read this post yesterday about how startups are all about exceptions. It really resonates with me, and I’ve been thinking about it a lot the past 24 hours.
If there was “one right way” to build a company there would be no failures. Obvious, that’s not the case, but there are still some best practices that are cited frequently. Funny thing is, there are always big companies who’ve done the opposite.
The founding team should own just about all of the company when it’s founded. It’s difficult if angel investors or a TTO own too much of the company that early. Still, we have Kahoot.
You shouldn’t start a company alone. It’s too damn hard. Still, we have Remarkable.
The founding team shouldn’t be too big either - there’s a lot of cost and complexity that comes with having too many co-founders. Still, we have Kolonial.no.
You should go after blue oceans and not crowded markets. Still, we have Google.
You get the picture. While the “best practices” are sound and definitely worth listening to, there are no rules. While I think it helps to be aware of the most generic startup advice out there, at the same time you have to break some rules purposefully if you believe it’s right for your company.
If you do like everybody else, you are most likely to fail. Most startups do.
PS: After writing this and before posting, I listened to this podcast with Keith Rabois where he talks about the very same topic: consciously and purposefully breaking rules. Recommended listening.
Incentives are important. I talk about this a lot, still I tend to believe that most people don’t fully grasp how important they are. Munger does this too.
With incentives in place, people are sufficiently motivated and (continue to) do a good job. A less talked about part of this is what happens if you don’t do anything about it.
If you keep a non-functioning team member instead of letting them go, you are basically rewarding that person’s behavior.
If you accept poor efforts; be it processes, products or meetings, you are saying that this is sufficient and those who do it better than that are doing it wrong.
If you don’t promote and compensate your best people because you’re afraid of jealousy within the ranks, you are basically rewarding your more imcompetent people.
A natural consequence of such inaction is that your best people go elsewhere. Not just because incentives are absent, but because your organization is incentivizing not doing a good job - rewarding incompetence.
I did my first podcast interview yesterday; a 30 minute conversation with Lucas from Shifter around startup valuations.
It was a fun chat touching on plenty of interesting topics. As it was also my first podcast, there are of course plenty of things I could have done differently. My own assessment is that I tend to use too many words. I should pause more often, and try to articulate myself with fewer words. Others have said the same thing, as well as that I could start with a short answer then elaborate not the other way around which I did.
All things to work on, and in general great learning experience If you’re curious about startup valuations I believe you’ll enjoy the podcast. The conversation is in Norwegian, and you can find the episode here.
Today, I have several business-related topics I could write about, but all of them feel wildly out of touch with the current reality.
So far, 2020 has been a special year, and not in a good way. First Covid-19 - hopefully a once-in-a-lifetime event, and once that situation started to get under control George Floyd and protests started. I fully support these protests and every racist should fuck off, but that’s not what I want to talk about today. I always try to look at the positives in a situation, and the first 5 months of this year is no exception.
Pre-2020, there was broad consensus that this decade would be about climate change and shifting away from an economy based on fossil energy. While the climate change debate so far has been mostly focused on different “carrots”, I don’t think there are many people who believe we as a global population will reach the ambitious goals of the Paris agreement without some “stick” too.
The “stick” I’ve seen suggested most frequently is a carbon tax. This is something I fully support, and global implementation of a tax that takes the real cost of polluting into account would solve the problem overnight. But such a global implementation is a utopia, at least in the short run.
I believe that one reasons why such a tax is hard to implement, even locally, is loss aversion. We get more upset when we lose things than when we gain the equivalent. If commercial aviation was invented today and seats were sold with a carbon tax from the start, people would not complain the same way they would if it was added in an arrears. It’s harder to do these things because we feel we lose something.
This is the positive part of 2020 so far. Our expectations for what’s normal are reset to some degree. Reaching the goals of the Paris agreement will have to hurt*. There is no way we’ll get there with only carrots. And I’d rather take the stick now than in 5 years - because stick today means more time to rebuild and do things right.
I guess 2020 will continue to be turbulent for some time - probably through the year and more. We’ll have to endure. Knowing that some sort of pain is necessary in order for change to happen might make this easier. Because we have to change. And I’m optimistic that we will.
*I’m aware I’m in a privileged position feeling disproportionately little pain so far
Through this post on YC I found this talk from Balaji Srinivasan called “voice vs exit”. It’s only 16 minutes long and really recommended, especially if you plan on reading the next few paragraphs.
I really liked the first part of the talk where he talk about how to have the most impact. You will most likely accomplish more if you exit. It’s much easier to change things when you’re in control, similar to how one should sell directly to customers rather than “that one big distribution deal”. In theory large groups mean you can more easily multiply your effect, but in practice this is never the case and it’s a better bet to go direct on your own.
I struggle more with he second part on how to exit just about every part of society. I get how the principle applies more broadly, but I wonder what happens to the rest of society if such exits are successful. Will successful products and services replace existing infrastructure for everyone, or will society increasingly separate into multiple groups?
The talk was held in 2013, and I would argue that the latter has started to happen since. Polarization has been increasing on many levels, and one reason is the gap between exiters and the rest. This leaves me wondering what the right balance is.
We need people to exit for new products and services to be built, but at the same time successful exits should be distributed broadly for maximum impact and minimum conflict. We have solved the first (but maybe built the wrong products?), but the second remains.
Sometimes in fundraising processes, there is this one investor who wants special treatment. I’m not talking about the lead investor wanting a board seat (which is completely fine). I’m talking about that 7-percent-of-the-round-angel who has “so much to offer” they believe they deserve a better deal than the rest. Some warrants, a lower price, or maybe some sweat equity for the “exceptionally” good advice that will be given.
The answer to such requests is just about always no (if Ron Conway wants to invest, fine, break the rule). Investors investing in the same round should get equal treatment.
Let me start by saying that equal treatment of all investors is unfair. Everyone gets the same number of shares per dollar invested, but the degree of contribution is the opposite of even. Theoretically, there is a more fair way when it comes to investment terms. But in practice, this is too complicated. The transaction costs related to such a way fair outweigh the benefits.
Try thinking about it. If two investors should get different terms because of different contributions - how do you measure such contributions? In number of hours? Or in effect of the work they do. Either way, this means overhead for you as a founder because you have to measure and account for this contribution. And what if the contribution is not as promised? Do you buy back some of the shares? Do you give all other investors some extra shares? It’s a mess without an end.
That’s why you should always choose to go for equal terms for investors investing in the same round (except lead investor terms). It’s like the saying about democracy, that it’s the worst form of government except all the others. Same round, same terms.
Then again, nobody outside the founders and employees really matter. The rest of us are all this dog :)
VCs being helpful pic.twitter.com/o2uoNL6x8o
— Vlad Magdalin (@callmevlad) April 14, 2020