Elad Gil was a co-founder of Mixer Labs and Color Genomics. After Mixer Labs was acquired by Twitter, he was a VP at Twitter. He also previously worked at Google where he started their mobile team and worked on AdSense. Gil is an investor in and advisor to companies like: Airbnb, Coinbase, Instacart, Stripe, OpenDoor, Square, Pinterest, Stripe, Gusto, Wish and Zenefits.
Gil is the author of a new book entitled: High Growth Handbook. He writes in the introduction: “many of the sections of this book started life as blog posts on my website. It is not meant to be read straight through [and] is meant to be an active reference.” You may want to buy an electronic version of the book since it is searchable. For example, if you want his views on late stage financing you can refer to that section of the book. High Growth Handbook includes a number of very informative interviews. My latest book A Dozen Lesson for Entrepreneurs also started its life as blog posts and like Gil I believe that including the views of people who have direct experience with these issues is a great framework for a book and makes it more interesting. As I was reading High Growth Handbook I repeatedly thought about how the book is also a checklist of areas where a first time founder or CEO might want to engage the services of a coach or get help from other people including their board members and investors. I have no doubt that Gil could have written more on every single topic, but his skillful way of making choices makes the the book understandable by a broad audience.
One point about the book and this blog post should be emphasized: Gil believes that startups in the zero to one stage of their development must deal with very different issues than businesses that are in the one to n stage of their development. Some of what Gil talks about in quotes featured in this blog post is about the earlier of the two stages (i.e., proving the value hypothesis) and some of what he talks about is about what comes next (i.e., proving a growth hypothesis). High Growth Handbook is different than this blog post because the focus is on the one to n or the growth hypothesis stage.
A well-written introduction to an excellent podcast conversation between Chris Dixon and Gil on the a16z web site sets the stage for a discussion of the book:
“There’s a lot of knowledge out there — and networks of talent (especially in Silicon Valley) — on what to do in the early stages of a company, going from 0 to 1, and even in going from 1 to 100… but what about beyond that? It’s not as simply linear as merely doubling or tripling resources and org structures; it’s actually much more complex on many levels, communication to coordination. Because with great scale comes great complexity… and many, many more places for things to break down.”
- “The only good generic startup advice is that there is no good generic startup advice.” “All startup advice needs to be filtered through the unique context of your own situation or company.” “Each startup is incredibly unique and yet there are multiple things that are very repetitive that you always have to do.”
A key word in the sentences above is “generic.” Anyone who writes a book with the word “handbook” in the title believes in the value of advice. Starting from first principles on everything in life or in business is a bad idea so having access to advice is a good thing. What Gil cautions against is advice that is not sufficiently specific to the unique situation (i.e., too generic). In other words, All advice must be considered in the context of the actual facts and circumstances involved in the specific business. Humans may have behavioral and other flaws in their decision-making systems that have been well described by many people, but as a species we still are far better than algorithms in dealing with a complex/chaotic world driven by risk, uncertainty and ignorance. This is particularly true if you do not have access to huge data sets that allow you to eploy algorithms to make decisions or provide guidance based on statistical factors. Humans are uniquely skilled at dealing with exceptions including in situations where there is very little data available. The best founders, CEOs and company employees know when to break a rule and when to follow a rule. Breaking too many rules is a bad idea (since the crowd is usually right), but breaking no rules at all is a guarantee that the decision maker will not outperform the crowd (a market average). Being a successful technology investor or founder is greatly enabled when that person is skilled at knowing which rules to break and when generic advice is a bad idea.
- “There are only 3 things that kill pre-product market fit companies. These are self-evident, but founders tend to forget them. To not die you need to: (1) Find product market fit. (2) Resolve co-founder conflicts. (3) Don’t run out of money. Everything else is noise.”
Let’s unpack the three elements Gil identifies which can kill a startup that is still in a zero to one stage of its development.
- Product market fit is like sex appeal in that many people falsely believe that they have it. In other words, achieving product market fit is much rarer than most people imagine. I have written a few blog posts on product market fit which you can find links too in the End Notes. The product market fit concept was developed and named by Andy Rachleff who is co-founder and CEO of Wealthfront (in addition to being a former partner at Benchmark among other things). Rachleff believes that the startup must identify the features that must be built, the audience that’s likely to care, and the business model required to convince a customer to buy the product. Trouble often arises when the people working very hard to build a business want product market fit to exist so badly that they ignore anything that gets in the way of a conclusion that it exists. If the team is running out of money the tendency to falsely conclude that product market fits exists is even higher. A false conclusion that the value hypothesis has been proven usually leads to premature spending on growth and that often leads to the death of the business or at least significant destruction of value. Gil believes: “The best signal of product/market fit and differentiation or moat is the ability to raise prices repeatedly without losing customers.” “Fake customer signals include: Customers who won’t actually pay for your product. Saying ‘this is really interesting’ is different from cutting a check. Don’t get fooled or self-delude.” “Companies wait too long to cut costs, raise prices, or start charging for services. If no one is willing to pay you for your product, you are in the wrong business. The exception is consumer apps or related where you monetize later.”
- Founder conflicts is a topic that Gil has written and talked about in podcasts and writes about in the book. He believes: “Co-founder conflicts tend to arise when there is a lack of clarity on decision making, product vision, and overlapping founder roles.” “One of the only advantages of a startup versus an incumbent is speed. When you fight your co-founder everything takes longer than it should and decisions don’t get made. If you and your co-founder cannot work together well, one or more of you should leave. The longer you wait, the longer the company will waste time and burn.” “Where is tie breaking going to happen? Ultimately there is no single correct organizational structure.” On this and other organizational issues Gil believes it is important to have a structure that allows decisions to be made in a way that does not result in a deadlock because of a “tie” vote. Deadlocks kill the speed advantage that a startup or early stage business can exploit and shorten the runway of the business to achieve necessary milestones. In his book Gil suggests a number of methods that can be used to deal with founder conflicts that are not just ordinary differences of opinion.
- Cash is oxygen for a business. If a business runs out of cash, it is an unforgivable sin. In managing how much cash is available creating a margin of safety is appropriate. What is a margin of safety in the context of cash and why is it needed? Since every business will make errors and mistakes as it develops, having a supply of cash insurance in the event a business is harmed by one of those mistakes is wise. Cash on hand allows a business to handle variance in outcomes. With a margin of safety, the people running a business can make some mistakes and still and still have enough cash to recover and prosper. As an illustrative example, early in the history of Microsoft Bill Gates famously wanted enough cash in the bank at all times to pay for all expenses for a full year even if no revenue came in during that period. In this conversation below Gates and Ballmer werer talking about being frugal during the early years of the company:
Gates: But I had this very conservative view because we’d seen a lot of customers go bankrupt. So I liked a lot of cash in the bank, relative to our payroll needs.
Ballmer: Bill had these yellow pieces of paper all over his house that had written on them the amount of cash we had in the bank, contract payments due, and the name and salary of everybody in the company, and you could see how many months of salary he had in the bank. So we had a big row about his conservatism. And Bill says to me, “I didn’t have you quit business school to come up here and bankrupt us.”
One way to have more cash is to be careful about spending. I enjoyed reading a blog post this week written by Eric Paley which deals with an underappreciated cause of unnecessary dilution and shortened financial runways:
“We had a saying at my last startup that “every dollar that we spend is a dollar of dilution.” While that was probably a good mindset, the wording suggests that investing in a business with strong return isn’t worthwhile. Today I’d revise that saying to ‘every dollar that we spend that doesn’t create more than a dollar of value, is dilution.” May your burn rates be accretive and your financings increase your ownership value.”
- “At some point there is a shift from being a product focused company to a company that is about distribution.”
Gil is talking about a critical aspect of shift that happens when a company moves from zero to one to one to n. The goal of the business in this second phase is to create scalable and repeatable growth and that means distribution systems. The number of businesses that are actually able to create these distribution systems at scale is far smaller and more valuable than people imagine. When you look at the businesses that are prospering in the markets today, they inevitably have powerful distribution engines.
Gil’s interview of Marc Andreessen in the book covers the topic of distribution. Among the points made by Andreessen are:
“A lot of product market fit is with the early adopters. … the problem is that early adopters are only ever a small part of the overall market. And so a lot of founders, especially the technical ones, will convince themselves that the rest of the world behaves just like early adopters, which is to say the customers will find them. And that’s just not true.” …people have plenty of things they can spend their time on. They have to be convinced to try the next new thing. And so whether you want to call that marketing or growth hacking or user acquisition or whatever you want to call it, there’s some distribution function there, for all these things, that’s critical….
It may be that the product is what created the distribution engine that a business has but in the long runs it is very likely that the distribution engine is as or more important than the product itself. Andreessen describes what every business faces:
“We are in a product cycle business. Which is to say that every product in tech becomes obsolete, and they become obsolete pretty quickly. If all you do is take your current product to market and win the market, and you don’t do anything else — if you don’t keep innovating — your product will go stale. And somebody will come out with a better product and displace you. So you do need to get to the next product. Of course that’s a punishingly hard thing to do. It was hard enough to get to the first one, and to come up with the second one is often even harder.”
- “Startups tend to succeed by building a product that is so compelling and differentiated that it causes large number of customers to adopt it over an incumbent. This large customer base becomes a major asset for the company going forward. Products can be cross sold to these customers, and the company’s share of time or wallet can expand. Since focusing on product is what caused initial success, founders of breakout companies often think product development is their primary competency and asset. In reality, the distribution channel and customer base derived from their first product is now one of the biggest go-forward advantages and differentiators the company has.”
This can be a hard concept for technical founder in particular to grasp. After all, the team developed a product and found product market fit. Why not just focus on repeating that process with a new product? The answer is that it is a mistake not to take advantage of the distribution platform that company has developed since it may be more sustainably valuable than the original product that mad the business financially successful. The Andreessen interview in Gil’s book discusses this point:
“One of the things you see crystal clearly in VC is how much competition emerges whenever anything works. Every single time we say “Oh, this startup is unique” invariably six months later there are 20 venture backed competitors doing the exact same thing…. true defensibility purely at the product level is very rare because there are a lot of good engineers…. I think pure product defensibility is obviously very desirable, but it actually quite difficult.…At some point distribution engine itself is the moat. That might be an enterprise sales team for a SaaS company or it might be a growth team at a consumer company.”
- “Things to focus on include margin, customer churn, and organic adoption. If you have a high margin, negative churn business and a good acquisition funnel, you will do great 99% of the time. The 1% is due to competitive pressure.” “If you grow fast but keep churning you will die. Recurrence is key unless you are monetizing via a secondary mechanism (e.g. data).”
Gil’s focus on creating solid unit economics is something I have written about often on this blog. A lot of cash coming in from investors can hide poor unit economics for a long time, but unfavorable unit economics will eventually arrive and when they do it will not be a pleasant experience. Gil said in his podcast with Chris Dixon that he believes that a lot of today’s “unicorns” will not have the billion dollar valuations they claim once this reality arrives. My view is that it will be unit economics that will determine valuations the long run. I read quite a nice blog post this week about these issues written by a data scientist at Uber:
“…Boosting retention certainly helps to sustain growth rates, but it’s no easy feat and can’t be accomplished overnight. Marketing is an easy lever to pull and will “delay” the flat part of the S curve. But it also creates an addiction that isn’t sustainable and CACs will accelerate. If we do choose to increase marketing spend to drive growth, it should be coupled with strong retention efforts to get long term benefits. Perhaps the best way to drive continued growth is to think big! Find new S curves to climb by entering new markets and launching new business lines. “
Having a strong growth team is essential. In Gil’s book Andreessen talks about this in his interview:
“One interesting question is: Would you rather have another two years’ lead on the product or two years’ lead on having a state-of-the-art growth effort? I think the answer is actually that you’d rather have the growth effort. …Network effects are great but they are overrated. The problem with network effects is they unwind just as fast. They’re great while they last, but whether they reverse, the reverse viciously. Go ask MySpace how their network effects are going.”
- “Many founders spend time on unnecessary areas (constant speaking events, over-hiring the team, constant fundraising, chasing fake signals from their customer etc.).”
I am fond of quoting Jim Barksdale who famously likes to say: “It’s important to keep the main thing the main thing.” Founders, CEOs and other companies employees need to do a lot of things and unnecessary distractions are not a good idea. For example, using a founder to create a brand can be valuable at the right time, but not if it interferes with other mission critical functions. Sometimes one founder focus on the business and the other is more of a public facing personality and evangelist. Gil’s book has very specific advice on issues like how many events a founder should speak at and what sorts of meetings and networking are important.
- “Great product management organizations help a company set product vision and roadmaps, establish goals and strategy, and drive execution on each product throughout its lifecycle. Bad product management organizations, in contrast, largely function as project management groups, running schedules and tidying up documents for engineers.”
I have started writing a post on product management topic several times. It is a controversial enough topic that I will probably never finish writing it. It is in some ways like writing about a crypto currency topic – you are inevitably going to take incoming fire from many directions. That is a good enough reason for me to punt on writing about product management for now at least to other people. I suggest you read Gil’s book or a book from Steven Sinofsky and Marco Iansiti called One Strategy.
- “People too often view a culture as static. Culture is something that evolves over time.”
In a chapter of Gil’s book on culture he writes: “Culture acts as an unwritten set of rules and values that drive behavior and cohesion across the company. Cohesive cultures are more resilient and can withstand shocks (fierce competition in the market, bad press cycles, a product failure, or other issues).” Gil gives some great advice in the book about the link between hiring and culture and the consequences of “bad hires.”
- “Going through hyper-growth is very chaotic. Things are going to be messy. If a business is growing rapidly, you are working in a different company every six months.”
Gil is tells a great story contrasting his time working at Google going through a hyper growth stage at a company for the first time with the period in his life when he was working at Twitter in another hyper growth period. He writes that the first experience made him more comfortable with the second experience. You develop a kind of muscle memory that is helpful each time you go through experiences. If you are not comfortable with a relatively high degree of chaos a business going through hyper growth may not be the best place for you to work.
- “One of the reasons I’ve always invested in a broader range of companies is my background as an operator. I am much more market driven that many other Angel investors. I believe that when a great team meets a terrible market, the market wins.”
Leaving aside what venture capitalists do to raise funds, manage investors and source deals, one topic Gil has talked and written about is how venture capital has three elements/skills/tasks that are not necessarily present in all people. The elements he describes are: (1) investing (2) governance and (3) advice of running a business. Some venture capitalist will have one or more of these elements but not the other(s). Gil notes that some venture capital firms are using approaches like board partners to unbundle these elements and to scale the amount of capital they can have under management. Everyone has more or less passion for one of these elements. For example, some people are only interested in assisting founders founder build the products and the business.
- “My role at Twitter was effectively to help scale the company. Since I was involved in a lot of aspects of managing hockey-stick growth — internationalization, user growth, scaling recruiting process, M&A, analytics, product, etc. — a number of later-stage breakout companies have asked me to get involved as an investor or advisor as I have been through the same terrifying growth curve they are now seeing.”
Gil recommends that people going through something like hyper growth for the first time as a founder benchmark (1) what other people in other businesses have done in similar situations and (2) the level of talent that will be required in key positions to successfully grow the business. For example, when a business is about to hire a CFO it is wise for founders to talk to a few great ones to see what it is that they should be looking for even if they have zero chance of hiring them.
The mission of every founder or CEO is to kill or lower risks, uncertainty and ignorance and to hit milestones that will establish that the business has created value and has momentum to create even more value. The list of questions that Gil’s book asks and answers is very long but many of them are related to building the right team with the right talent at the right time. For example, there is the question of when should you hire a human resources professional is asked ab answered in the book. Lowering hiring risk alone is a critical success factor as are tasks like creating the right compensation structure.
- “From a purely financial perspective, I only invest in companies that I think may have anywhere from 10x to 1000x upside left. Obviously, that’s easier as an early-stage investor.” “I will invest at any stage as long as the investment has the potential to increase at least 10X in valuation.”
Gil is seeking convex investment opportunities (massive potential upside and capped downside limited to the amount he invests). There are lots of business that may provide a good living and financial return for someone, but that is not really venture capital investing. Venture capital when done right captures a positive Black Swan. As an example, a group of investors invested $1 million a $4 million pre money valuation in the seed round that group included Tom Alberg, Nick Hanauer, Eric Dillion and others. The most they could lose was what they invested and the upside was, well, massive by any standard.
Some founders react to being told that their business is not right for venture capital like the venture capitalist making that statement took out a rifle and shot their dog. That a particular business is not right for venture capital is not a tragedy. Most successful businesses don’t raise any venture capital and fund themselves in many different ways. If it is you dream to build business X but no venture capitalists will fund that business it does not means that you should not build business X. It also does not mean you should go out a build business Y that is fundable by venture capitalists, even though you do not have passion about business Y. I was up very late last night reading a great book that will appear in stores soon written by Scott Belsky entitled The Messy Middle that explains why this passion is required. I will write a blog post on Belsky’s book soon.
- “Getting very large multiples on an investment made at a valuation of $1 billion or more is very hard to do. The number of companies that sustainably grow to be worth $5 billion to $10 billion in market cap is very small.”
This blog post is already too long and so I am passing the ball to Fred Wilson who describes the venture capital “math problem” here that Gil is referring to in these last two sentences just above.
High Growth Handbook https://www.amazon.com/dp/B07DRPGGQ7/ref=dp-kindle-redirect?_encoding=UTF8&btkr=1
Chris Dixon podcast with Gil: https://twitter.com/cdixon/status/1020328765325336576
Strictly VC Podcast: https://www.strictlyvc.com/tag/elad-gil/
Gil Tweetstorm: https://twitter.com/eladgil/status/1006623806234898432
Kim Larsen (Uber): https://firstname.lastname@example.org/the-tyranny-of-the-s-curve-b791772ba8af
20 Minute VC Podcast: http://www.thetwentyminutevc.com/eladgil/
Building a Great Product Management Organization: https://stripe.com/atlas/guides/building-a-great-pm-org
Steven Sinofsky’s and Marc Iansiti’s book One Strategy: https://www.amazon.com/One-Strategy-Organization-Planning-Decision/dp/0470560452/ref=tmm_hrd_swatch_0?_encoding=UTF8&qid=&sr=