1. What is valuable?
2. What can I do?
3. What is nobody else doing?
What important truth do very few people agree with me on?
What valuable company is nobody building?
Question/answer needs to be:
Most people believe in X. But the truth is !X.
Knowing which 0 to 1 endeavour to pursue is incredibly rare, unique and tricky. But the process if not the result can be rewarding.
- history of 90s tech
To understand startups need to do contrarian thing
- software companies are often valued at 10x revenues
- P/E ratio- market value per share / earnings per share
- price/earnings to growth- (market value / earnings) / annual earnings growth
- net present value
- business in decline most of value is in near term: analyse of cash flows
- value is captured by late movers at back end of company life. 2/3 in years 10 to 15+
- if growth rate g is higher than discount rate r
- don't confuse things that are hard with things that are valuable
- can you get away from competition and posture towards monopoly
- don't want to start in competitive market
- non- monopolies always narrow their market, monopolies insist they're in a huge market
- Asking what is the truth about a given market is crucially important
- how market defined is relevant: Google for example search, internet advertising, global advertising or consumer tech
To own market, need some combination of brand, scale cost advantages, network effects or proprietary technology
- scale cost advantages: where high fixed costs and low marginal costs
- network effects: where there's lock in
- proprietary tech: no one else can develop what you do
There are three steps to creating a valuable tech company:
1. Find, create or discover new market
2. Monopolise that market
3. Figure out how to expand market over time
1.Should not be too small or too large. Too small means no customers, too large too competitive.
Doing original thing that people need done is good.
Not about words. Need to figure out the objective truth about the market
2. To be here, need to have compelling narrative of what market is and how it can scale.
- a plan to scale is critical
The best business is one you can tell a compelling story about the future: find a small target market, become the best in the world at serving it, take over immediately adjacent markets, widen aperture of what you're doing, capture more and more value. Once large, combination of network effects, technology, scale or brand will make it hard for others to follow.
Need to think about that narrative.
A good way to tell whether you've found a good frontier is to answer the question "why should the 20th employee join your company when they could go to Google and get more money and prestige."
- answer needs to be you're creating some kind of monopoly business
- early business driven by the quality of the people involved
Hard to know what makes for ideal culture
- want to be in the middle of constant-nihilism to cultish dogmatism
- robust culture is one which people have something in common that distinguishes them quite sharply from the rest of the world
- if core people share relevant and unique philosophy about something important you're onto something
- need to strike balance between athlete (fighters, competitors) and nerds (creators)
- lack of diversity in people worked well at the outset
- whenever there's any doubt, there's no doubt: don't hire
- in the short term most start ups fail internally, not externally
- great advice on hiring engineers
- the beginning of things is incredibly important
- founding said to last from first hires to first capital raise
- also, founding is as long as 0 to 1 in place, 1 to n is execution
2 x 2 matrix of people and structure
- equity is one of the key ways to align people in a start up
- as equity division occurs, key to think about how to get all stakeholders aligned so company can succeed - whether founders are aligned with each other dominates. If in sync, can move on to rest of the equation. If not, will blow up the company
- good relationships amongst founders tend to drive a company's success
- founders who do interact with VCs don't necessarily do that early on
- first get founders together and get working
- then angel investment
- profits go back to LPs as return
- VCs take a cut: 2-and-20 is typical. Annual management fee of 2% plus 20% gains
- VC works on power law dynamic. Bad go to zero, mediocre do 1x and great companies do 3-10x. - given power law dynamics, VC asks "is there a reasonable scenario where our stake in this company will be worth more than the whole fund?"
- flat rounds are driven by people who think they might get a 2x return from an investment
- given power law dynamics, where a company is one the power J curve can matter more than % equity stake
- better off being 100th employee at Google than average venture-backed CEO in last decade
- trend to power law dynamics will continue, not just in VC but across economy
- VCs suffer short term bias like everyone else
- jokes are helpful in pitch
- need two goals: raise right amount of capital, and keep control of the enterprise
- can't change partner/VC: think carefully about this is target VCs
- operating expenses for one year x 1.5 and ask for that
- higher valuations aren't always in your interest
- playing to audience is important. Need to psychoanalyse, try to understand from their perspective
- must pitch early in the day
- keep choices simple
- remember, no VC needs to do your deal, inertia is against deal
- VC have own biases and motivations, question is how can exploit them to mutual advantage
- junior people need to make deals to make their career, so contrary to popular wisdom do pitch them
- affirmative arguments to senior people weak, therefore must sell fear of loss
- they don't want to loose a good deal to a competitor
- pitch when you don't need money
- average financing takes 3 months, so don't pitch when you have 6 months in the bank
- if you are CEO you are salesman and half your job is selling
- every quarter Larry Ellison pitches Wall Street on why should not sell Oracle
- don't do this for that
- your market is different
- problem + solution = money
- tell a story: logos, ethos (your character), pathos
- need a deck because it's emailed around: it is fundamentally a means to present data within a narrative that people read by themselves
- help junior analyst with info rich deck
- have the deck there but try to have a real conversation as soon as possible
- put files in a data room
Distribution (sales, marketing, advertising)
- the best product does not necessarily win
- customer lifetime value: CLV
- average revenue per user (per month): ARPU
- retention rate (monthly, decay function): or r
- average customer lifetime: 1 / (1-r)
- cost per acquisition
CLV = ARPU + gross margin + average customer lifetime
- is CLV > CPA
Pg. 67 salary figures
- methods of distribution vital: great distribution can differentiate
Complex sales ($1M - $100M deal size):
- government and large financial institutions
- traveling CEO-salesman, eg SpaceX or Palantir
In person sales ($10K - $100K deal size):
- more cookie cutter
- have to figure out how to build a scalable process and a sales team
Missing section in the middle size
- bottom up, inside sales?
- marketing and advertising creative but competitive industries
- goal is to figure out which segments grow faster
- probably won't have multiple equal distribution channels
- distribution is also about selling company to employees and investors
- PR and media relevant as well: especially for investors and employees
- can't ignore distribution
- on raising, once valued at $30M should have full time person whose job it is to find prospective investors
2 x 2 matrix
Compete with computers > work with computers
Compete against China > work with China
Computer value increasingly software, not hardware. For example shift to cloud
Marc Andreessen: at a16z we do things that are based on software.
What important truth do very few people agree with you on? Correct answer is a secret.
Business context: what great company is no one starting? Should be many possible answers to start a great company.
Spectrum of secrets: accepted conventions through to mysteries.
What important truth do people not agree with you on? Focus on the big secrets that are true. They do exist, just hard to find.
Hard but solvable problems exist (secrets).
- important ones are big and true (ignore small and false)
- secrets about people and secrets about nature
Basic challenge is to find things that are hard but doable.
The road isn't infinite. It's possible that, just around the corner, there's a secret gate leading to a secret road. Take the hidden paths.
Notes on War mentality and competition
- you become your enemies: choose them wisely
- if you can't beat them, merge. Only fight if you will win.
Determinate vs indeterminate future
- 2x2 matrix
- optimism pessimism
- design and strategic plans important for startups in determinate/optimistic world view
Analysis of energy / resource problem for this century
Having a plan is key
To have successful startup must have good answers or good plan to getting answers to:
- mimesis and competition
Further look at energy market
Sales works best when disguised.
If you want advice, ask for money. If you want money, ask for advice. Political version is affirm no interest in running for President. Acquisition version is declaring will never sell the company.
To raise money have to find people who have opinions that dovetail with your mission.
Look at stem cell
Look at AI
Founders: inverted bell curve of extremely opposite traits?
A look at mythology and power structures as it relates it founders.
Build something that if you don't build it, it will never get built. (ala Elon Musk SpaceX: if Elon doesn't try to reach Mars no one else would).