There has been a lot of speculation about the identity of Startup L. Jackson. One theory is that “he” is actually composed of machine learning algorithms and a database of the insight of a few well-known venture capitalists. Evidence will be presented below that Startup L. Jackson’s views suspiciously track the consistently expressed views of specific highly successful venture capitalists. This evidence points toward a vast conspiracy, probably orchestrated by Elon Musk. In short, Startup L. Jackson may be an example of the type of super-advanced artificial intelligence that will eventually spell doom for humanity. Or not. The only other alternative to this conspiracy thesis would be that there are fundamental principles and best practices involved in venture capital and that learning from the most successful venture capitalists is wise. In other words, Startup L Jackson is either a cutting edge example of artificial intelligence that will ultimately doom humanity or a world class venture capitalist who speaks the unvarnished truth about the venture capital industry.
While the best venture capitalists are all unique, they inevitably share certain bedrock methods of approaching their business. Startup L. Jackson has chosen to convey his ideas in a humorous and entertaining way. I find his approach refreshing and helpful. He is trying to educate and help others. As Charlie Munger said once: “The best thing a human being can do is to help another human being know more.”
1. “Raise enough that your business is “real” by the time you have six months or less of cash. What that means will depend on your business, but you will never again be able to raise on a dream.”
“Raise enough that if things go well you can get to the A.”
When a startup is raising a seed round they are often able to get away with selling a dream because if they are audacious enough in attacking a massive market what they plan to do can’t be captured in a spreadsheet. Chris Dixon makes that point in #8 here when he points out: “If you are arguing market size with a VC using a spreadsheet, you’ve already lost the debate.” That is why at the seed stage the best pitch is a great narrative. The story/dream must be audacious and compelling and take place in a massive market with just the right team. Don Valentine also lays it out in #1 here: “The art of storytelling is incredibly important. Learning to tell a story is critically important because that’s how the money works. The money flows as a function of the story.”
How much money should you raise? Startup L. Jackson uses an “enough to get to real” standard because he is very focused on the need for delivering metrics at an A round. Josh Kopelman recently argued: “You should target 18 to 24 months of runway post Series Seed. The best time to raise follow-on capital is when you don’t need it, and 2 years of runway gives you the best chance to land in that situation.” Mark Suster has given advice on this, and Fred Wilson has a view you can see in a video here that argues in part that ‘less can be more’. Fred Wilson seems more focused on the amount raised by the startup when he said “I just think if you’re forced to figure out how to get from here to here on a million bucks, if you’re good, you’ll figure out how to do it.”
Startup Jackson points out that Founders should keep in mind that venture capital is a cyclical industry, as pointed out many times by Bill Gurley. Doug Leone has also discussed dilution here when he says: “Be incredibly, ruthlessly selfish with your equity.”
The hard part about raising money as a founder is raising enough capital so that you can focus on the business, have a margin of safety and enjoy significant optionality but still have the discipline to focus on aspects of the business that are genuinely important instead of four different things that are insanely distracting. Bill Gurley makes that clear when he says: “We like to say that ‘more startups die of indigestion than starvation.” If you raise too much money you can end up solving things with money instead of with innovation and great company culture. Keith Rabois also makes that point: “Many entrepreneurs are raising more money than they need and it can cause derivative consequences down the road that are not healthy.”
2. “Power laws rule everything around me.”
“Most startup outcomes are binary. Optimizing for the size of your slice is almost never a good idea if the pie is big. Raise enough to bake a big pie.”
The data undeniably shows that financial success in venture capital reflects a power law. John Doerr makes it in #1 here: “The key insight is that actual [VC] returns are incredibly skewed. The more a VC understands this skew pattern, the better the VC. Bad VCs tend to think the dashed line is flat, i.e. that all companies are created equal, and some just fail, spin wheels, or grow. In reality you get a power law distribution” Peter Thiel basically says that if you end up with a Unicorn result (a big pie), everyone gets rich. A venture capitalist or a founder getting a very high share of a 0% return is neither helpful or wise.
3. “The worst possible thing you can do to your business is raise just enough money to throw up mediocre metrics right around the next round, especially with a high valuation you can’t back off of.”
Broken cap tables are a huge problem as Fred Wilson has noted, Jim Breyer discussed (#6), and Sam Altman states simply: “don’t forget the prime directive of fundraising strategy: set things up so that you never do a down round. The badness of a down round is difficult to overstate; in fact, the threat of that is the best reason not to take a super high price when you’re offered one. If you raise at such a price, everything has to go perfectly in order for your next round to be an up one.” Metrics referred to by Startup L Jackson above will be discussed more below, including the Five Horsemen (CAC, WACC, ARPU, COGs and churn) and their friend customer lifetime value.
4. “The existential threat to early-stage startups is almost always lack of demand. There’ll be infinite VC to fix tech if you clear that hurdle.”
Ann Winblad agrees with Startup L Jackson when she says: “Warren Buffet’s quote: ‘The market bats last’ means ‘Have you figured out: are there customers out there?’ ‘Do the dogs have their head in the dish? Are the customers buying?'”
Getting to product/market fit and proving that “dogs are actually eating the dog food” is essential. If you want to know even more about how product/market fit fits into building a business Paul Graham lays it out here: “You need three things to create a successful startup: to start with good people, to make something customers actually want, and to spend as little money as possible.” Too many people forget that you need to solve a real customer problem. Without that, the business is toast (not even the artisanal variety). Reid Hoffman describes the other key element here: “If your technology is a little better or you execute a little better, you’re screwed. Marginal improvements are rarely decisive.”
5. “Most successful startups are overnight success. That night is usually somewhere between day 1000 and day 3500.”
“You can recognize a company that isn’t executing by the arrows in its back.”
“If you’re talented, don’t let the tech press do your thinking. You’d be better off relying on Dr. Seuss books.”
“If you’re competing on price, it better be the case that the incumbent’s cost structure doesn’t allow them to do the same.”
“BigCo may be late to market, but if there’s not a winner by the time they show up, it’ll probably be them. Go faster.”
As Rich Barton points out: “Ideas are cheap. Execution is dear.” Jeff Bezos is always thinking: “Your margin is my opportunity.” Relentless perseverance is a requirement for any founder. Reid Hoffman asks: “Where’s the contrarian thinking that, if they turn out to be right, could be really, really big? Consensus indicates it’s probably not a total break-out project. If your thinking isn’t truly contrarian, there’s a dog pile of competitors thinking the same thing, and that will limit your total success.”
Ann Winblad has said (#3): “We invest in markets. If the opportunity is not large, then the business, independent of the people or the technology, will fail. Because of this issue of intense competition and capital efficiency, opportunities always get smaller as soon as you fund the company.” If you can’t get to $100 million in revenue the math does not work for the venture capitalist since the failure rate is so high, says Bill Gurley. Fred Wilson has also made that point (#1).
6. “Can we start referring to the obligatory five year revenue forecast slide as uniporn?”
“Figure out how long you think it’ll take you to get there. It’s hard to go fast for extended periods of time. Be realistic about that ski-slope graph you made in YC. It might not last for the next 24 months.”
Michael Mortiz could not make this point more simply: “Five-year plans aren’t worth the ink cartridge they’re printed with.” Good venture capitalists mentally giggle when see hockey stick shaped distribution curves based on unrealistic assumptions that don’t map to reality. Chris Dixon has talked about this (#8): “If you can’t make the case that you’re addressing a possible billion dollar market, you’ll have difficulty getting VCs to invest.” Bill Gurley makes the point as well: “If your idea is not something that can generate $100 million in revenue, you may not want to take venture capital.”
7. “Take your budget and pad it by 50%. Shit happens, particularly in startups.”
“You can iterate your way out of stupid ideas, but you can’t iterate your way out of stupid.”
Heidi Roizen has said: “Things outside of your control will happen. You need to lean into this fact.” One great way to deal with uncertainty is to have optionality. Warren Buffett treats cash as a call option with no expiration date or strike price. Warren Buffett also says that “cash combined with courage in a crisis is priceless.” Vinod Khosla describes the situations faced by most founders: “Bad times come for every startup – I haven’t seen a single startup that hasn’t gone through a bad time. Entrepreneurship can be very depressing. If you really believe in your product, you stick with it.”
8. “Effectiveness is knowing 10 things will kill your startup this year and being able to block out all but the one that will kill it this month.”
“Many a startup has failed selling ‘better’ products.”
“Early customers were down and they rolled right with it, We raised our lifetime value by a thousand percentages.”
“10x better = hard to build, easy to sell. Marginally better = easy to build, hard to sell.”
“Being first to market with the right tech but a shitty UX is the same as being late.”
“If you generate a little value for a lot of users in consumer, you’re Facebook. Do the same in B2B, you’re an acquihire.”
These operational points made by Startup L Jackson remind me of a point made by Jim Barksdale: “The main thing is to keep the main thing, the main thing.” Bill Gates said once: “Being a visionary is trivial. Being a CEO is hard. All you have to do to be a visionary is to give the old ‘MIPS to the moon’ speech — everything will be everywhere, everything will be converged. Everybody knows that. Which is different from being the CEO of a company and seeing where the profits are.”
9. “Once you’ve completed this exercise you can go to investors and say ‘We see our Series A happening in X months, when we hit Y metrics. We believe we need Z dollars to hire A-C, grow with D strategy.’ This turns out to be a great way to figure out if investors are smart. Good ones will help you build a better plan and you’ll be better for it. Bad ones will have poor feedback or just ask you where to send the check…”
Chris Sacca points out: “Good investors are in the service business… There are angels who have 75 companies and don’t call any of them ever.” Dan Levitan would agree (#5), and Keith Rabois reiterates (#2): “Early stage, almost every successful entrepreneur I know doesn’t care as much about the economic terms as much as who they are going to work with.” There is a huge difference between an amateur and a professional seed stage investor. Startup L. Jackson say on this point: “Those in the know, go with the pro.”
10. “Sufficiently advanced customer acquisition strategies are indistinguishable from magic.”
“Blessed is he who, in the name of profit, shepherds the user through the funnel, for he is truly his user’s keeper.”
“What do you need for marketing? Do you need firm CACs by the A? If so, have you budgeted to figure them out? What is your marketing strategy? MIT super-nerds are often surprised how much Scotch it takes to get a BD deal done even in Silicon Valley.”
“Viral coefficient two point some, I got 99 problems but my pitch ain’t one.”
“Viral is not a product. Beware those selling it.”
Acquiring customers at a low customer acquisition cost (CAC) is great. What is not to like about organic growth where customers are obtained in a cost effective way? Mark Andreessen has made this point (#10): “Many entrepreneurs who build great products simply don’t have a good distribution strategy. Even worse is when they insist that they don’t need one, or call no distribution strategy a ‘viral marketing strategy’ … a16z is a sucker for people who have sales and marketing figured out.” Reid Hoffman adds: “What a lot of people fail to realize is that without great distribution, the product dies.”
11. “The startup that treats their investors like a bank and only calls when they run out of cash is missing opportunities.”
“Investors you have built a relationship with who can see past the metrics and are willing to double down because they believe in you are an under-appreciated asset.”
As Rich Barton points out (#11): “Get the highest octane fuel in the tank [when choosing a venture capitalist].” Keith Rabois again weighs in (#2): “If you have the option, raise money from one lead investor who has the right skill set, background, and temperament to help you.” As far back as when Arthur Rock was more active: “We spent a lot of time with our companies… [sometimes] if you divide up the number of companies they’re invested in by the number of partners, you find that the partners haven’t got ten minutes for any one company.”
The Benchmark Capital partners have talked about how founders can do due diligence on a venture capitalist in this video embedded on Forbes. Founders that don’t work at and devote sufficient time to this due diligence process are, well, bonkers given it is a business relationship that can last more than 10 years.
12. “Predicting failure is easy. You can have no clue, a startup can be brilliant, & you’re still probably right. Let’s see you pick winners.”
Most startups fail, as both Marc Andreessen and Fred Wilson have pointed out. Startup L Jackson is saying that getting actively involved as a venture capitalist in the small number of big winners is hard, which is why the distribution of success among venture capitalists is a power law, not just inside their portfolios. Mike Mortiz says: “[Venture capital] is a business that’s always had the investment returns concentrated in very few hands.”
#5 here from Chris Sacca is a good one to put this post to bed: “As investors, VCs are wrong more often, than we are right… As a VC, I’m wrong most of the time, so whenever any of the VCs tell you about the rules etc. it’s really, because we’re wrong all the time. You should expect me to be wrong most of the time. When I’m right, I’m really really right. That’s what you should expect from a VC.”
Notes:
Startup L. Jackson: Website & Twitter
Bonus Round (Greatest Hits):
“Is The Jerk the most underrated startup movie ever made? Discuss.” [ Definitely. More on the Jerk in #12 here ]
“Another essential [Bill] Murray principle: Wear your wisdom lightly, so insights arrive as punch lines.” [ See #12 in my Bill Murray post ]
“Rapid iteration works for stupid shit, but we’re doing real engineering.” <– if I had a nickel…”
“Code is easy, people are hard. It often takes the best engineers the longest to realize this.”
“If you have to assess an engineering org based on one question, it should always be “How often do you deploy to production?”
“Complaining about efficient markets &/or constructing artificial barriers (e.g. regulation) are easy, but have never been viable strategies.”
“Skills of the future: – Creativity – Critical thinking – Communication Code + robots will eat everyone who doesn’t have them.”
“A fool and his money are soon parted, ideally on an uncapped note. —Newish Proverb”
“Employee equity in tech is like sex ed in the South, most have no idea how it works & are going to be very surprised if they get screwed.”
“Coincidentally, my Spotify is all Marvin Gaye.” [This just shows excellent taste]
“Keep your chin up ugly duckling, hot seed rounds are inversely correlated with black swanness.”
“There are only two ways to make money on the internet: intermediating and disintermediating.”
“Losers blame winners for stealing their ideas. Winners are already 2 steps ahead—riffing off other winners—by the time losers steal theirs.”
“Crowds, like drunk people, are very rarely wise. This is why drunk crowds make such great customers.”
- A Dozen Things I’ve Learned from Dan Levitan About Venture Capital, Business and People
- A Dozen Things I’ve Learned from Lou Simpson About Investing and Business
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