In an earlier post on fundraising do’s and don’ts, I wrote that startups should optimize for success rather than valuation. Specifically, I wrote that sometimes it’s worth “taking a few additional points of dilution [by accepting a lower valuation] to get the right partner in your company”.
In addition to letting you work with the right partner for your company, the benefits of taking a slight discount on your company’s valuation are that it:
1. Increases investor demand for the round, thereby creating scarcity which sometimes even results in a higher final valuation for the round.
2. Makes it more likely that the round’s investors have a nice paper return by the time of the next round, thereby making them more likely to be happy investors who refer the company to other investors.
3. Lowers the likelihood of a potentially morale hindering future down round.
4. Increases the pool of potential buyers of the company by not boxing out smaller buyers who would otherwise not put in the time to evaluate the company due to believing that they wouldn’t be able to meet its valuation expectations.
In a recent talk with a fellow investor, I shared how, the more data points I see, the more I believe that people who work together (for example as employees, partners, or investors) end up having a good relationship if their work together is successful and a bad relationship if they fail together.
Ideally, this shouldn’t be the case. Ideally, we should evaluate one another on the basis of the actions we take, that is what’s in our control, rather than the outcome of those actions, where external forces also influence the outcome. Doing so would mean that you should have a good relationship with someone with whom you experience a failure as long as you believe that they took the right actions during your time working together.
Following my remark, my fellow investor gave a great example of exactly that. Despite not being part of a successful outcome, the person in the example did indeed do what’s necessary to preserve a good relationship. And although this won’t always be the case, this graceful behavior laid the foundation for the two parties working together again in the future.
It’s easy to be graceful when you succeed together and everyone is happy. Celebrating is a better term for this than grace.
Grace is what you do when things go wrong. For example, it’s what you do when you fail together.
Although failing gracefully is rare, as my fellow investor pointed out, it does occur.
Leo Tolstoy begins Anna Karenina with the quote: “All happy families are alike; every unhappy family is unhappy in its own way.”
The more startups I see, the more I feel that the same is true for startup success. All successful startups are alike while every unsuccessful startups is unsuccessful in its own way.
The similarities of successful startups aren’t at the layer of what they do but rather why they do it and the resulting how. What you do is often the same across many competing startups and can easily be copied at the surface. But why you do it and the resulting how you do it, which are the determinants of success, are different. And there’s a very limited range of why’s and resulting how’s that produce success.
Having the same why’s and resulting how’s doesn’t guarantee success. However, it’s the only way to have a shot at it.
Among other factors, the motivations of the founders, their ability to attract others to their mission and the attributes of the people they attract, and the resulting identification of a product which the market is ready and willing to pay for are very similar across all successful startups.
The corollary to this is that a few misguided motivations, recruiting mistakes at the outset of the company, or target markets where creating and capturing value are an uphill climb rather than a downhill run are all it takes to fail.
I’m a strong believer that luck is an important determinant of success. However, there are ways to increase your chances of getting lucky.
For example, persisting in doing something that you believe in in different ways will eventually produce success. Although the probability of success of any individual attempt may be small, persistence in taking a greater number of attempts will produce a much greater aggregate probability of success. And if you’ve set yourself a big target, it will eventually produce a big success.
When I first started investing at Romulus Capital in 2008, whenever I read about a startup raising a large round, I took it as a sign that the company was very successful. At the time, we were writing $20K to $100K checks so a large round was anything above 10X that, so anything above $1M. If a company had raised that much money, I thought that this meant that they were growing very fast, had a clear business model, and a clear path to profitability.
Now I know that this is no longer the case. The reason is that, since joining Aslanoba Capital in 2013, our investments in our Turkish startups tend to range between $250K and $2.5M in a single round. This includes many investments above $1M. And while some of these decisions have indeed turned out to be great investments, some are performing less well and some have failed.
As a result, I now know that just because a startup gets $1M in funding doesn’t mean that it’s experiencing very fast growth, has a clear business model, and is steadily moving towards profitability.
And we can extend this line of thinking.
Now that we’re making bigger investments, my new definition of a large round is anything above 10X our upper limit of $2.5M, so anything above $25M. But just like raising $1M didn’t mean that a company was destined for success in the past, raising more than $25M doesn’t mean that it’s destined for success now. It’s certainly a good signal, but you’d be surprised at the number of startups who raise this much money without having found a scalable customer acquisition channel or settled on a business model with a clear path to profitability.
And I bet this also extends to startups that raise more than $250M.
One of the toughest challenges that entrepreneurs face is understanding their role in the company. Specifically, many entrepreneurs try to have all the answers themselves and try to either get everything done themselves or sign off on everything that gets done. This is especially true for first-time entrepreneurs.
You can get by with this approach for the first few weeks of your startup while you’re working on the idea and the product (if you’re a developer), but that’s about it. Once your company starts to grow, you need people to help you decide what to do (at least on most topics; the ultimate decision for very important topics can rest with you) and do it.
If you think about a company as an organization that takes inputs (customer demands, market conditions, …) and builds outputs (product, pricing, marketing strategy, …) to best respond to these inputs, your role as entrepreneur is to be on top of the inputs, provide an environment where your team can openly debate what the outputs should look like, and support your team as they build and deploy the outputs. Your role is not to single handedly decide on what each output should look like (although you can have the final say on very important issues), and it is certainly not to build the outputs.
Internalizing your role has two big benefits. The first is that it makes you more likely to succeed. The second and equally important benefit is that it makes you less stressed at work. The stress won’t go away, as being an entrepreneur is very stressful. But it will make it more likely that you build the great team that’s necessary to lower the pressure on you. And the less stressed you are, the more likely your company will be to succeed.