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After a long night of too many drinks of Founders Mindset and Essays\u00a0by Paul Graham, I woke up with the following question: for what are early-stage VC firms really looking?<\/p>\n
LinkedIn is overflowing with posts insisting that you must have everything figured out before you build anything: a clearly defined problem, a big enough market, the perfect team, a plan to scale fast, metrics proving your solution works, a moat to defend it, a sustainable business model, an efficient distribution strategy\u2026 blah blah blah.<\/p>\n
All of these questions sound like they\u2019re straight out of a McKinsey interview case study. It\u2019s a comprehensive outline of all the \u201clevers\u201d of a startup.<\/p>\n
The problem is that when you solve those questions in a nice PowerPoint presentation and Excel spreadsheet, you demonstrate that you\u2019re a very good problem-solver, but you don\u2019t demonstrate that you\u2019re a good founder.<\/p>\n
Why is this process of answering these questions a false positive? Because initially, investors decide on the founder, not the startup. Many will say, \u201cwell, if they were able to create that presentation and that Excel spreadsheet, then they must have founder potential.\u201d But that\u2019s simply not true. It would be like assuming that Nike\u2019s advertising director is an Olympic athlete.<\/p>\n
For what does a venture capitalist look in an early stage?<\/p>\n
According to Paul Graham, they are looking for a formidable founder, a promising market, and some evidence of success to date.<\/p>\n
Let me put it more simply. An early investor is thinking about whether a founding team is capable of creating a transformative company. The \u201csubject\u201d is the founding team, and the \u201chow\u201d is the startup. Here, I\u2019ll use a sort of consulting framework (sorry): does the founder have the will and the skill to create a transformative company?<\/p>\n
The first thing is the\u00a0will. It\u2019s different for a founder to say, \u201cI want to sell the best hamburgers in Santiago, Chile,\u201d than to say, \u201cI want to reverse climate change.\u201d Why is it different? Sounds obvious, right? One sounds like BS; the other like something real. Why is the desire to do something big relevant? Because without it, there\u2019s no extraordinary return. The venture capital business is about betting on 100 projects and hoping one delivers an extraordinary return. If they don\u2019t invest in businesses they believe can be extraordinary, then the odds go from one in 100 to zero. But wait, maybe they don\u2019t want extraordinary returns. Well, then it\u2019s not venture capital; it\u2019s private equity, a bank, your mom, your uncle, etc.<\/p>\n
The problem is that it still sounds like BS. But is there any substance or reality to that rhetoric? I think so. More than a desire to reverse climate change, help overcome poverty, or connect all the people on the planet, these announcements reflect ambition. Ambition to do something big. They reflect a desire to seize that extraordinary opportunity.<\/p>\n
So, the question for VCs then becomes: is this founder looking for something extraordinary? Are they going to pursue that opportunity to do something huge? Do they really want to do this? Perhaps this is where the obsession with the market comes from. Doing something huge implies being in a huge market or creating a huge market. Wanting to do something huge in a small market doesn\u2019t make sense.<\/p>\n
There\u2019s probably some information asymmetry here. True VCs know how hard it is to build something from scratch, and founders don\u2019t. The best VCs have already climbed Everest, run out of oxygen, carried those who died on the way back to base camp, and returned them to their families. The worst have watched YouTube videos on how to climb Everest.<\/p>\n
That\u2019s why desire is so important. Because it\u2019s difficult, or it\u2019s going to be difficult. That\u2019s why it\u2019s also necessary to reward that effort.<\/p>\n
How do you quantify how difficult it is? One way is to measure how long it takes. How long did it take for existing Chilean companies to reach a market capitalization similar to that of a startup that expects to achieve it in five years?<\/p>\n
Another way to measure the difficulty could be to measure the intensity of that time. I mean, how difficult must it be to try to race in Formula 1 in Fred Flintstone\u2019s car? Not only must his feet hurt, but at some point, Fred must also start to doubt whether the Flintmobile is the right vehicle for that competition.<\/p>\n
Assuming it\u2019s difficult, is the desire to build something great enough to overcome those difficulties? It might be, but this is also the place in which incentives come. The basic idea is that the effort to overcome this difficult path will be rewarded. And extraordinary efforts will be rewarded in an extraordinary way.<\/p>\n
Okay, let\u2019s assume the VCs know it\u2019s difficult and will design incentives accordingly. What signals do investors get that founders are eager to embark on this journey? I think the main one is whether they\u2019ve done it before. Then there are those who have tried before, meaning those who perhaps made it to base camp. They haven\u2019t done it, but they\u2019ve tried.<\/p>\n
But here\u2019s a chicken-and-egg problem. The proxies want to see if you\u2019ve done it or tried before. But how can you have tried before if you\u2019ve never had the opportunity? That\u2019s where the proxies come in. Maybe you haven\u2019t been to Everest Base Camp, but you\u2019ve climbed other peaks. Or maybe you haven\u2019t climbed other peaks, but you\u2019ve climbed socioeconomically thanks to their efforts.<\/p>\n
What message do you send to investors that you\u2019ve done these things? That you\u2019re resilient and determined? Or maybe it\u2019s something else\u2026 Maybe they\u2019re assessing your ability to tolerate uncertainty in a difficult situation. That you\u2019ll make the right decision.<\/p>\n
That ability to make the right decision leads us to the second dimension that an early investor evaluates, the skill to make this happen.<\/p>\n
What skills\u00a0does a team need to build a startup?<\/p>\n
First is judgment.\u00a0Is this person capable of making the right decision without having all the necessary information? Will they even make a decision? Are they able to tolerate the uncertainty of not having all the necessary information? Or will this founder be like Anakin, and out of fear of losing Padm\u00e9, allow themselves to be manipulated by Palpatine, betray the Jedi, and end up becoming Darth Vader? Or like Frodo, who, after three films carrying the Ring to the ends of the earth, just as they reach Mount Doom, decides to claim the One Ring as his own and almost destroys all of Middle Earth because he can\u2019t withstand the pressure? Before any decision, we humans ask ourselves, \u201cshould I do this?\u201d This space between impulse and action is what we call freedom. Taking the right action is what I call judgment.<\/p>\n
The second skill they assess is storytelling. Why is it important to know how to tell stories? Here\u2019s a summary of Harari\u2019s bestseller: storytelling is the unique human ability that has allowed us to dominate the planet.<\/p>\n
Good storytellers have two key characteristics: the ability to convey security\u00a0and empathy. Investors want to believe a founder who will lead them to the promised land (i.e., money). But they won\u2019t believe him because they have a DCF that says that, in Year 5, the ARR will reach a level in which the scale of the MOAT will cause the unit economics to hug each other, and the CAC went home because OpEx is angry with CapEx, and Zimbabwe\u2019s gross margin helps the Mexican leads generate 10x the valuation. They will believe him because they trust the founder. They will believe him because the founder is able to look them in the eye and tell them that the future she envisions is up there in the Sanctuary of Kami-sama and that she\u2019s already started building with Mr. Popo the spaceship that will take her there. They will believe him because she has spoken with each of the million of minions in Gru\u2019s lab, and all they want are AI bananas. They will believe him because investors can smell how convinced the founder is that garlic is the toothpaste of the future. They\u2019ll believe him because they want to believe her. But if the founder isn\u2019t convinced that he\u2019s found a major problem and has the ability to make it happen, he has no way to convince them.<\/p>\n
In short, my friends, my view is that if investors are truly risk-takers, they want to believe in something, and to do that, you have to show them that you have the drive and ability to make their dream a reality. Perhaps the best way to demonstrate capabilities and commitment is by building long, comprehensive, and aligned pitch decks. But there are probably other ways because the first investor is the founder himself, who invests his time and ideas in this venture.<\/p>\n
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Cristi\u00e1n Richard (MBA \u201926 )\u00a0is originally from Santiago, Chile.\u00a0 He graduated from Pontificia Universidad Cat\u00f3lica de Chile with a degree in Industrial Engineering in 2018. Before HBS, he worked as Head of Finance at Betterfly, the first LATAM social unicorn, and in a boutique Consulting firm in Santiago de Chile.<\/p>\n","protected":false},"excerpt":{"rendered":"After a long night of too many drinks of Founders Mindset and Essays\u00a0by Paul Graham, I woke up…\n","protected":false},"author":2,"featured_media":330381,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[40],"tags":[28,158],"class_list":{"0":"post-330380","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-entrepreneurship","8":"tag-business","9":"tag-entrepreneurship"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/330380","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/comments?post=330380"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/330380\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media\/330381"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media?parent=330380"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/categories?post=330380"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/tags?post=330380"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}