1/25: I’ve been told that some of the simple concepts I routinely share with Founders get adopted by their firms as “truths” (which is flattering). I was asked to outline a few of them in Tweet form. Unpacked:
2/25: One of my favorites is a concept called “0.8 to the 5th”. It’s an acknowledgment that contingent probabilities suck. If a business plan has many “ands” joining process steps to create outcomes then its stuck in the world of contingent probabilities.
3/25: Most businesses are complex with strings of three, four, and sometimes five or more dependencies linked together. The best Operator in the world only has in the ballpark of an 80% chance of hitting an aggressive goal if it’s one of many complex priorities on his/her plate.
4/25: While 80% sounds pretty good, when all of the goals are contingent on each other the chances of achieving the desired outcome are very low. The implications of 0.8 to the 5th are stunning and intimidating.
5/25: Having less than a 1 in 3 chance of hitting plan is not a fun statistic to stare at, and this is what one should expect from a World Class Operator. Average Operators don’t have a chance in this type of environment.
6/25: Reducing the chain of contingencies is a lot of what I help Founders think through. Investing in things that remove contingencies might look expensive but are usually cheap in retrospect. 0.8 to the 4th is a heck of a lot better than 0.8 to the 5th.
7/25: And what’s nice is that by reducing the number of battlefronts a management team is fighting on they should be able to increase the probability of accomplishing their other goals. So 0.8 to the 5th becomes 0.85 to the 4th becomes 0.9 to the 3rd, etc.
8/25: Eventually the business has a fighting chance of success, especially if everyone in the system has a maniacal focus on reducing contingencies and delivering on the tasks at hand. Detailed blog post with examples: fintechjunkie.com/2015/05/01/the…
9/25: Another favorite is the concept: “You can’t accelerate time.” The unfortunate truth is that most complex businesses can’t be cracked overnight and this is especially true if they require today’s investments to result in a stream of results that trickle in over time.
10/25: The return profile of money invested in originating customers today might take months, quarters, or even years to understand. Everyone likes to show quick progress but the cadence of growing certain types of businesses doesn’t always fit this profile.
11/25: If a business’s financial model suggests that the economics at month 12 or month 24 post-customer-acquisition matters, then the business needs to gather data over 12 or 24 months to gain confidence in its projections.
12/25: For some products there are ways of analyzing early performance results as a method for gaining comfort with future performance estimates, but many times these estimates are inherently flawed. And for the most complex products there is no substitute for real data.
13/25: You Can’t Accelerate Time. Full Stop. Moving quickly can work if the business is fungible and customers are understanding. Growing a business that requires making irreversible decisions before performance is well understood is equivalent to gambling with investor money.
14/25: To Founders - Before you become a steward of Investors’ money make sure you and your investors understand what the business will have learned before the money runs out.
15/25: If it isn’t enough, adjust the model accordingly or raise enough money to prove out the next series of critical assumptions. If you can’t do either then you’re likely dead before you start so don’t start.
16/25: To Investors - Before you invest in a complex, annuity oriented business, identify the critical assumptions that need to be proved out before the business is at “the next stage” and ask the Founder to pull together a plan that proves out these assumptions.
17/25: If you’re willing to fund this plan, great. If not, ask for the plan to be refined. But, you should avoid funding a business to get part-way to the next stage without expecting to write the next check yourself.
18/25: It’s better to just move on because a half-funded business will typically struggle. Tick tock, respect the clock! Detailed blog post: fintechjunkie.com/2016/07/18/you…
19/25: The next concept requires us to step back in history for a moment to the “Age of Sail”, a time in the 16th and 17th centuries when naval battles progressed from “grapple and board” combat tactics to battles resolved by “floating artillery.”
20/25: The most advanced weapon of the time was the cannon and for 200 years investments were made in its design and use. Why? If one ship had cannons that fired a small percent farther than those of another, it should win ONE HUNDRED PERCENT of the battles between them.
21/25: Minor improvements led to devastating advantage and justified investment in improvement. Many products and services behave in the same way. This is very true in financial services businesses for reasons that become apparent when the drivers of success are picked apart.
22/25: In lending businesses in particular, very small advantages can literally suck the oxygen out of a market and create havoc for the competitive landscape. Why? Because we live in a world of near perfect information and good customers generally make rational choices
23/25: While there are times that customers make choices based on “less quantifiable reasons”, it’s always good to ask and answer the question “If a rational consumer we’re faced with perfect information, would they choose your product?”
24/25: I ask this question all the time and use it to know when a company has a “reason to exist” when viewed from their target customers’ standpoint. Full blog post with examples: fintechjunkie.com/2015/04/07/let…
25/25: Lots more at fintechjunkie.com. Happy to summarize other generic concepts if requested! And remember that retweeting is the best encouragement that you can give!
Sorry for the typo —- “were” not “we’re”. Can’t edit tweets!
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2020 + 2021: Most “valuations relative to traction” were crazy
2022 + 2023: Bridge rounds helped startups grow into their valuations
Now + 2024: Most “valuations relative to traction” will be reasonable
But some startups can raise at high multiples due to momentum:🧵👇
Every talented Investor eventually comes to the realization that Momentum is one of the most powerful forces in the growth (and therefore valuation) of a Startup.
Momentum is a very simple Physics concept that ports nicely over to the business world.
The Physics formula for momentum is: P=MV (Momentum = Mass X Velocity) but the easier way to think about it conceptually is “mass in motion”.
In business terms, it matters how large a company is (mass) and how fast it’s growing (motion).
AI is undeniably going to change the world but 99% of AI companies will fizzle and die.
I have real, actionable advice about how to build durable AI companies but understanding my perspective requires a primer on how I think about AI.
Trust me, you’ll like it: 🧵👇
Artificial Intelligence (AI) has become the focus of the investing community and business world over the past 12-24 months but it isn’t a new discipline. Dating back to the 1950s, AI is focused on creating machines capable of mimicking human intelligence.
There are many forms of AI, but the sub-categories of Generative AI and Large Language Models have captured the world’s imagination because they feel “human” and “magical”.
Together, they form the basis for AI learning machines that are starting to produce human-like outputs.
Startup employees are under immense stress right now. They've been told to do more with less and that bad things will happen if commitments are missed.
Stress can't be eliminated but great Leaders take steps that can help:🧵👇
Edit the corporate agenda
A common characteristic of ambitious Leaders is that they set bold agendas and expect their teams to deliver against stratospheric goals.
The energy and feeling of accomplishment that comes with steep forward progress can be addictive.
But world class Leaders know that it's better to focus the collective resources of an organization against fewer things than to challenge their team to deliver everything that’s theoretically possible.
Delivering 100% of 70% is better than delivering 50% of 100%.
You’re probably familiar with SAFE notes if you’re an early stage Founder or Investor.
But did you know that later stage Investors and Founders are also using SAFE notes?
And have you figured out that later stage SAFEs can create real downstream problems for a startup? 🧵👇
Background
A SAFE note is a “Simple Agreement for Future Equity” and it was created by Y Combinator in 2013. It was designed to reduce the cost and complexity of the legal paperwork associated with equity deals for very young companies.
Another important goal was to create a standard for the industry so Founders didn’t get surprised or swindled by terms they didn’t understand.
Board meetings can be incredibly awkward when the CEO and one or more of the company’s Board members don’t see eye to eye.
When I see this happening, I frequently play the role of “peacekeeper” and start by reminding both parties of a well-known parable:
A man in a hot air balloon is lost. He sees a man on the ground and reduces height to speak to him.
"Excuse me, can you tell me where I am?"
"You’re in a hot air balloon thirty feet above this field," comes the reply.
"You must a Board member," says the balloonist. "I am," says the man, "How did you know?" "Well," says the balloonist, "Everything you told me is technically correct, but it doesn’t help me at all."
The startup ecosystem is finally seeing good companies come to market again.
But after a year of focusing on costs and runway, some startups aren’t exciting anymore.
Many startups that try to raise will hear: “We want more proof!”
Here’s what you need to know about proof:🧵👇
Investors aren’t always good at sharing honest feedback with Founders. It’s easier to pass with generic decline reasons than to outline “what would need to be true” for a “no” to become a “yes”.
And the #1 decline reason Founders hear is “we want more proof”.
What Founders want is a metrics driven definition of “proof” but it’s not what they get. Instead, they hear “more proof please” and have to figure it out themselves.
But what Founders need to internalize is that “proof” is contextual and multi-dimensional.