The weird secret of our most successful founders

"Let not to get a living be thy trade, but thy sport." - Thoreau, Walden

We meet a lot of founders every year. And we do have a shared view in the partnership of the characteristics of founder teams that we like. Top of that list is determination - persistence or grit. Further down are things like domain expertise, social cohesiveness, raw intelligence, and charisma. All very important.

But there's a secret weapon that our best founders share. And that they share - in our view - with the most successful entrepreneurs globally.


You see, our best founders aren't motivated by money. They're motivated by the thing they're doing. Which is making stuff. Building teams that make stuff. Striking deals to source, transform and ship stuff. Helping their people that make stuff have the right resources to be great at making stuff.

Building the product and building the company is what drives them. Making customers happy. Being straight with suppliers. Doing right by their people.

Our best founders are passionate. That passion extends beyond their love of creation to the organization that creates. Money is a consequence of these things done right. It is the fuel to be able to keep doing these things. But it is not the end goal.

Now, this "causality" might be tautological. Lots of our fast-growing companies get early acquisition offers. By definition, the founders that sell early don't go on to be our most successful.

But we've now chosen to look at "authenticity" of the founders as something to gauge before an investment. Is the business a creative extension of a long-standing interest? Or did they make a spreadsheet of the pros and cons of 30 different ideas? The latter teams often don't have the staying power to create greatness.

Very average analytics

"...and all the children are above average." - Prairie Home Companion

Venture capital pitch meetings are full of average numbers. This can lead to sloppy thinking.

What's the average order value? What's your customer acquisition cost? Who's your typical customer? What lifetime value are you calculating with? What are your unit economics?

The first thing to note is that these are all close-ended questions. You might as well be asking a spreadsheet. Conversations with founders are more interesting if you ask open questions. (Conversations with VCs who ask open questions are also more interesting. Raise from those.)

But the obsession with averages is more pernicious. Especially if you use them to actually run your company. Averages obscure the distribution. And it is in distributions that you can find a lot of truth about what's working in the business and what isn't.

I have a company in the portfolio that sells to businesses. The potential customer first has a chat with the sales team and then does a paid pilot. In the early days of that company, most pilots didn't convert. For a while, churn was above 70%.

Sales: it's clear the product isn't working. People hate it. Also, the leads are weak.
Marketing: it's clear sales is not explaining the product right. Also, coffee is for closers. 
Product: Look at my roadmap! I can fix this!
Finance: We are in trouble.
CEO: ...give me that spreadsheet again.

As the CEO found out, a good number of people loved the product. Except those customers had a specific profile. They were large employers and had a big and recurring problem that our product solved. These customers did not churn after the pilot. They had much higher order values and bought more often.

We stopped selling to the smaller clients and focused all our efforts on the right customers.

Whenever I see an average, I reflexively think about what the distribution looks like. Are there several businesses hiding in one? Is there stuff that's just not working? What's working phenomenally well? What predicts a happy customer? I like when founders pull a histogram out of their back pocket and start explaining that because they've been thinking about it all along.

One other caveat: at the stage we invest in - Seed and Series A - sample size is usually so low that the mean can wander a lot over time. Interestingly, as your business evolves, the distribution can wander, too.

It took me a few years to always go at least that one question deeper on everything that's presented as "average." Maybe I save you some of those years.

P.S. Another hard-earned lesson: always look at the actual cash-flow. Always. But that's for another post.

What leprosy can teach you about the modern world

My biggest issue with the Catholic faith growing up was its required belief in magic. Magic was dogma - the resurrection, immaculate conception, the lives of saints, Jesus the healer, winemaker, waterwalker.

Many of these, approached with logos and armed with the tools of exegesis, turn out to be the standard narratives of myth-making throughout human history: the virgin birth, the chosen people, the heavenly ascent, and so forth.

The entire Curia, most of the clergy, and a significant number of the lay people in the Roman Catholic Church know and fairly openly acknowledge this.

From what I can glean, this perpetuation of myth-magic is seen permissible from several perspectives: the belief that there are different levels of consciousness in the faithful, especially among the children and the poor; that there is a metaphorical interpretation that is seen as valid; and that the extension of such interpretation leads to a "right thinking" (hello, Buddhism!), which in itself is the miracle and mystery of faith.

Thus, the story e.g. of Jesus and the leper (Matthew 8:1-4) is not at all about the actual healing of leprosy, but about the radical inclusion within the community of an afflicated person. It is a radical break with the traditions, mores, ethics, religious precepts and so on of the time. It says: there is nothing within you that we cannot love. Unless of course you're in third grade or in sub-Saharan Africa, in which case the Church maintains the whole story is totally about leprosy (this is not acceptable). 

In one of my favorite heretical texts, A Course in Miracles ("scribed" by some psychology professors at Columbia University and a base text for the self help boom, having inspired Eckhart Tolle, Marianne Williamson, Tony Robbins, and many others) Lesson 341, which is rather towards the end, begins:

"A miracle is a correction. It does not create, nor really change at all. It merely looks on devastation, and reminds the mind that what it sees is false."

In other words, it is a change in perception - a change in consciousness. It moves from judgement of exterior to the acceptance of the inner perfection of the individual, no matter how wrong a turn they may have taken, how far in "sin" they've slipped, how disgusted you are by their actions. 

This lesson of universal acceptance, inclusion and non-judgement is one we'd do well to heed in societies that are slipping further towards tribalism, othering, authoritarianism. 

"Miracles fall like drops of healing rain from Heaven on a dry and dusty world, where starved and thirsty creatures come to die. Now they have water. Now the world is green. And everywhere the signs of life spring up, to show that what is born can never die, for what has life has immortality." (ACIM, Lesson 341)

Happy Sunday.

Music Saturday - Woodstock (Joni Mitchell)

Joni has always made sense to me. This song was first performed in 1969 at the Big Sur Folk Festival, about a month after Woodstock (which she didn't attend because her agent thought she should be on TV instead).  

"We are stardust / Billion year old carbon / We are golden / Caught in the devil's bargain / And we've got to get ourselves / back to the garden"

I wish I could have seen her live. 

Acknowledge & validate

Yesterday I wrote about empowering questions. It's a tool I took from my training as a professional coach. I've been applying it in my work as a venture capitalist ever since.

There's another tool I'd like to give a nod to. It generally comes before asking empowering questions. It's called "acknowledge and validate."

One of the most powerful gifts you can offer someone is to listen. By acknowledging what someone has said, we let them know we're truly listening. The most straightforward way is to paraphrase what they said.

"So what you're saying is..."


The second, and even more powerful part, is to validate their experiences. Everyone has feelings. Many people feel bad about how they feel. Guilt is a bitch. As a German Catholic, believe me I know.

Validating isn't judging what they're feeling as right or wrong - it's letting them know that you can see things from their perspective. Letting people feel "normal" by releasing their negative energy helps reset even the most difficult times.

"It's perfectly natural/normal/makes perfect sense to feel that way..."

It's straightforward to combine acknowledging and validating into one powerful statement:

"It's perfectly natural to feel [the feeling] (validate) given [the situation] happened (acknowledge)."

In the beginning, most people feel awkward using "acknowledge and validate" as a tool. It feels fake. But that feeling goes away if you mean it and practice it.

It also doesn't feel fake to the person you're saying it to. They feel like you're listening and understanding them. Which is what we all want.

Note: I'm not recommending you go all Dale Carnegie on them. Be Real.

I may make this coaching tools thing a series. There's a lot I learned from iPEC in my nine months of coach training last year. It feels like I should share some of it with you.

Thanks for reading and have a wonderful day.

Empowering questions

One of my favorite tools in coaching founders is empowering questions. When presented with a challenging situation, don't try to come up with a response. Don't tell - ask. Help increase others' search space for new answers, options, possibilities.

It sounds so simple. But it's powerful.

Empowering questions are open-ended. They clarify. They challenge. They're generally future-directed, solution-oriented. They take away the feeling of victimhood that comes with hard times.

Great examples are:

- What can you do about that?
- What other choices can you make?
- What's another way to look at that?
- What did you learn from that?
- What is really bothering you about this?
- What do you need to get that done?
- How can you find out more about that?
- Where do you believe that thought comes from?
- What will you get out of that?
- How can you make that more fun?
- Why is that important to you?
- What are the benefits in that?
- How is this an opportunity?
- How do you feel about that?
- If that doesn't work, what else could you do?
- What seems to confuse you?
- What beliefs are holding you back?
- How does that fulfill your purpose?
- Where are you limiting yourself?
- How can you stretch to get there?
- If you had all the time, energy and money to achieve your goal, what would you do?

You get the picture.

To use these, you need to recognize the situation as it arises. You need to increase the time between stimulus (stressor) and your response. Awareness is the only way I've found to do that.

Awareness, awareness, awareness! Tony de Mello was right.

P.S. Many of these questions are from the Institute for Professional Excellence in Coaching (iPEC)'s manuals.  

Valuation: what price should you go out with

I got a question this morning about getting an external, "objective" valuation with which to go out and raise financing. Here's my typical answer to that:

Early-stage valuations are straightforward to understand. But they have little to do with traditional valuations.

In normal valuation work, enterprise value is the expected value of future cash flows. For early-stage companies, the variance in those cash flows is very high. It's not a meaningful analysis if there's a good chance of your cash flows being zero or you being the next Facebook.

Early-stage valuations are a confluence of many different factors. You can only control some of them. Most important to understand is that a valuation is a market price. It's a price for a very specific asset - shares in your company - at a very specific moment. It's not what your company is "worth" or even what you could sell it for. Those are different market prices.

The way to maximize the market price of a venture financing is to be smart about the negotiations. That's why I tell all founders to never, ever talk about the valuation upfront. For one, it anchors you. If you set too high a valuation, people will walk away. If you set too low a valuation, it will create a ceiling. Bad news, either way.

The right thing to do is figure out the money you need to get to the next value inflection point. Build a model that shows the use of funds and how the investment makes you a much more valuable company. That should be the smallest amount you're looking to raise (plus a buffer). Divide that amount by the highest dilution you'd find acceptable. Now you have the minimum valuation you are looking for.

Figure out a timeline that means you'll get a few offers more or less at the same time. Then you start talking VCs. Stall or rush as necessary to get people onto the same timeline. You want termsheets submitted within days of each other. A sense of competition and urgency can help, but too obvious an auction process will turn people off.

When investors ask you for valuation expectations or "guidance" in meetings, don't answer that. Stress that you're looking for a long-term partner (you should mean it). Tell them your last valuation (if any) and all the progress you've made since. Paint the picture of the upside again. Don't give them a price - offering you a deal is _their_ job.

Once you have several offers, you've created your market. There are lots of unique things about the bidders. You may like one of them more than the others. But now you have liquidity. You can go back to the lower ones, if you like them better, and ask them to increase their bid to match others. Rinse, repeat a few times.

Using this process, many of our founders raise more money and at higher valuations than expected. The dilution (what VCs will own in your company) is often less flexible than the amount raised. A higher amount raised will generally mean a higher valuation.

There are lots of posts out there about valuation not being the most important factor in a financing. That's true, but it's also true that you owe it to yourself to optimize price as one factor of a financing. The process above is the way to do that.

Signals.vc

We've had a few new funds emerge in Berlin over the last few years. But I'm particularly excited about Signals.vc, run by Videesha Böckle. Videesha was previously at Redstone and before that at PROFounders, our co-investors in Berlin-based GetYourGuide

Signals is investing in European SME- and enterprise-focused companies at seed and Series A, in particular in frontier tech (AI, Blockchain, IoT). It's a segment that doesn't have a lot of dedicated investors and yet it's one that requires a lot of expertise to make conviction-led investment decisions. It's a €100M first time fund, which is also a great result.

Go talk to Videesha if you're doing something enterprisey. 


Fight the forces of endless distraction: turn off, tune out

It took just a decade and a half. 15 years to go from the hopeful, curious, rebellious days of the post-crash internet for the misuse of this tool to start ripping apart the social fabric, the basis of our way of life, to start gnawing at the core of what it means to be human. There are days it makes me a bit Ted Kaczinsky (sans bombs).

Our world is tumbling from obsession to obsession, from anxiety to anxiety. Look around you and no matter where they are, people are glued to their devices. Looking for that next feeble dopamine hit of pretend social connectedness. That brief elation in status from a Like or a new follower. Only to come home to lose themselves in the beautifully made, well-told but ultimately moral-free Netflix-original Marvel-adapted hogwash of sentimentality. Hook, peril, hero’s journey, MacGuffin, 5 seconds until another episode starts, skip trailer.

Everyone is distracted. It’s so constant, we don’t even notice anymore. I loved Roger McNamee’s essay earlier this year. And the news that former FB employees are coming together over the issue is encouraging. But on an individual level, don’t wait for people to educate and regulate. 

Resistance now looks like this: turn off, tune out (sorry Tim Leary). The world as it presents itself today is an incredible opportunity for those of us with the discipline for focus. Who realize that the algorithms are running us. And who think that we might want to walk upright, straight-backed, knowing-eyed into the inevitable merge of human and machine.

We recently backed a stealthy company in Berlin as one answer to this challenge. I’d love to see more - max@sunstone.eu. 

Narrowing my focus

I joined Sunstone five years ago this coming April. Half of the investments I’ve made are companies selling to consumers; the other, to businesses. 

For a long time I resisted narrowing my investment focus. The whole point of being a VC instead of a founder, I argued, was to retain the optionality of being able to do both. 

No longer. From 2018 onwards I’ll focus on consumer investments. It’s a combination of the market having grown to the point of where I can’t cover it all. But also that I don’t enjoy (and am not world-class at) selling to the enterprise. 

Consumer, for me, includes eg personal productivity software bought with a credit card. But it excludes all enterprise software, like databases or cybersecurity. It includes B2B2C-type marketplaces, which aggregate merchants selling to consumers. But it excludes eg all adtech that only touches the consumer for data. 

My favorite consumer investments are marketplaces/platforms/networks and DTC brands. I love travel. I’m spending a lot of time on crypto. And I think social is far from done. 

I realize all this is a bit contrarian. Most VCs I know have pivoted to enterprise. Many are focusing on “deep tech.” 

I’ll continue screening these types of investments for my partners at Sunstone and am always happy to intro them. But as for me, I’m 100% consumer now.