What innovation really is and why it matters for startup success

Some words are used so much that we forget to ask what they mean. One of these words is ‘innovation’. But what is innovation in the context of startups? What do we mean when we say: “they have an innovative product!” Or perhaps more frequently among investors “there is not enough innovation!”. I asked myself this question, and here is the answer.

Startups innovate. We all know that. But have you ever asked yourself what innovation really is?

After having witnessed hundreds of startups during the past decade I have finally realized what startup innovation is.  

Startup innovation has two main components. Those are Novelty and Value. Put differently, innovation is really the outcome of mixing novelty and value.

Novelty is objective newness. Most founders have the urge to introduce something new to the world. To ensure eternal legacy by having been “the first”. Like Henry Ford’s first assembly line, Steve Jobs’ first smartphone or Elon Musk’s first reusable rocket. Sometimes novelty can be patented. Most often though founders just claim novelty.

Value is a subjective assessment by the customer. Most founders assume that their product is valuable. The reason is that value is subjective. And because the founders love their product, they also blindly assume the customer will.

Because innovation is the outcome of novelty and value, the level of innovation is a function of the individual levels of novelty and value. Both novelty and value come on a spectrum. A product can be more or less novel. Similarly, it can be more or less valuable.

Imagine novelty and value on two different axes.  Then it would look like the matrix below. I call it the innovation matrix:

The Innovation Matrix by David Ventzel 2020

The matrix has four generic quadrants. The low left corner is the ‘low novel and low value’ quadrant. The top left corner is the ‘high novelty and low value’ quadrant. The top right corner is the ‘high novelty and high value’ quadrant.

Because innovation is a function of novelty and value. Any innovation can be defined by its place in the matrix. In this light, we now know what we mean by “a high degree of innovation”. What we mean is that the product has a high degree of novelty and the customer place a big value on it.

How does this help?

In my experience, different places in the innovation matrix define the main challenge of the startup.

Obviously, the main challenge for startups in the low left quadrant is to move out of this quadrant. I call it the ‘Pit of eternal pivoting. The reality is that a lot of startups are in this quadrant. They are attempting something that has already been tried multiple times, and they have not adequately developed customers and validated their value proposition.

These companies need to start talking to customers to understand how their products can be more valuable in the eyes of their customers. Also, they need to clearly position themselves in relation to their competitors. Often done by focusing on unique features and branding these.

For startups in the top left corner, the challenge is that they have made something that does on Kickstarter, but not anywhere else. I call it the gadget quadrant. The product has high novelty, but it does not solve a serious problem for anyone.

These companies quickly need to develop a product line of adjacent products that together will solve a bigger problem. Or find a niche customer segment who actually need it.

For startups in the top right corner, the challenge is that none understands what they do. I call it ‘New categories. Those who do understand are skeptical of the claims. It is almost too good to be true, and customers are wary and want lots of proof.

These companies need to produce expensive showcasing (Like the Tesla Roadster, test-flying a reusable rocket, going through clinical trials). The time and money required to verify these claims and educate the market is expensive. Consequently, the founders must learn the art of raising large sums of money.

For startups in the low right corner, the challenge is simple. To beat the competition. Often these startups face fierce competition because customers are willing to pay for this product or service. (think food delivery, scooter sharing, and CRM software).

These companies need to build a high-performance culture and headhunt the best managers. A big war chest to starve out competition also helps.

When evaluating startups, I mentally place them in this matrix, and it helps me understand the actual level of innovation, and how to best the help founder team based on the challenges imposed by their place in the Innovation Matrix. I hope it helps you as well. 

To get help on your challenges, contact Accelerace and Overkill Ventures where I serve a Partner.

How to invest in startups at just the right time

In 1872, something strange took place in a small town in Pennsylvania. A seemingly mad man of Scottish origin was constructing a mysterious plant.

It turned out that the man was named Andrew, and that he was planning to produce steel in huge quantities.

The strange part was not the steel part. Steel had been around for thousands of years. The strange part was his ambition to make so much of it. Because at the time, steel was mostly used by artisans for jewelry. And they did not need much.

But Andrew was convinced that steel had superior properties. He imagined that steel could support buildings tall enough to scrape the sky, and bridges long enough to cross mighty rivers. To most people, it sounded like science fiction.

However, Andrew did not just make steel. He perfected it. Andrew refined the processes of steelmaking and broke new grounds in quality and cost.

Still, he produced more steel than was needed, and things looked bleak. In response, Andrew bet his future on a single audacious project. One that would either prove he was right or utterly humiliate him.

In 1874 Andrew revealed the world’s longest bridge (of its kind). The first bridge to cross the massive Mississippi River. Built entirely with his steel.

The immediate reaction was disbelief. Everyone knew that nothing sizable could be made with steel. And certainly not a bridge. But Andrew fetched an elephant he had borrowed and crossed the bridge with the enormous animal. This inspired confidence and hordes of people followed while newspaper photographers secured the frontpage.

Following the opening of Eads bridge, steel became a critical enabler of the Industrialization. At the time of Andrew Carnegie’s death in 1919, American cities had been utterly transformed. Iconic skyscrapers towered over Chicago and New York. Science fiction, indeed.

The real value of steel

Telling the story of magnificent steel skyscrapers paints an illustrious picture. However, it does not do steel justice. In fact, skyscrapers were one of the lesser impacts of steel.

The real benefit of steel was for machinery. The properties of steel made it uniquely suited for tools and machines that entrepreneurs could use to produce a wide variety of new innovative products.

In the years following the adoption of steel, a famous cohort of entrepreneurs used steel machines to make: Proctor and Gamble soaps, Levi’s jeans, Ford cars, Edison light bulbs and Heinz ketchup. Just to mention a few.

In other words, steel-based machinery served as infrastructure to produce new products. And as we will see, the distinction between infrastructure and product is key when timing investments.

Infrastructure before products

Entrepreneurs have limited resources. For this reason, their ideas need a mature infrastructure. A crafty entrepreneur prior to 1872 might have envisioned a skyscraper. But before Carnegie steel, eighty story buildings were not possible.

More than a century later, Reed Hastings of Netflix also had to wait for broadband internet to mature before he could realize his vision of streaming (until then he had to make do with enveloped DVDs).

Unfortunately, it is hard to know when infrastructure is mature. Those who invested in electric cars in the 1980s, webshops in the 1990s, and mobile applications in the first half of the 2000s learned exactly how hard.

In these cases, it turned out the investors were too early. But, why exactly do investors lose money when being too early? Because the products never get good enough before the companies run out of money. And why don’t the products get good enough? Because the technologies powering the products are neither powerful nor cheap enough to serve as effective infrastructure.

Electric cars in the 1980s did not have the lithium-ion batteries and AI that power a Tesla. Webshops from the 1990s did not have the payment processing and high-resolution imaging that power Shopify. Mobile apps before 2007 did not have touch navigation and GPS that power Pokemon Go.

The entrepreneurs behind electric cars, webshops, and apps need the infrastructure to reach maturity. Or more precisely, they need the many individual pieces of the infrastructure to converge and reach maturity in unison. This is an important detail because the infrastructure of most innovative applications are a mix of many individual innovations. A fact so important, it warrants the naming of a law.

The law of compound innovation

The story of Carnegie left out an important detail.

As you have already surmised, steel was not the only innovation required for Henry Ford to produce a car. Nor was it true for soap, ketchup, and jeans. In fact, the infrastructures were a mix of different innovations that converged and matured in unison. Besides steel, simultaneous advances in electricity, gasoline, and rubber were essential for car producers.

When products are built on infrastructure consisting of multiple innovations, two things happen. First, the timing of the maturity of the infrastructure becomes harder to predict. Two, the products that can be built, become harder to imagine. And as complexity theory teaches us, this effect is exponential. One might call it: the law of compound innovation.

But why does the law affect investors? Because investors cannot be too late either. In fact, it is the very nature of venture capital to invest before everyone else sees the value. That was how Light Speed Venture Partners made 2345x return as the first investor in Snapchat.

Talking about Snapchat, let us apply the law of compound innovation. It is fair to say that no internet expert in the late 1990s had foreseen the disappearing picture sharing app. Why? Because Snapchat required more than the internet. In fact, it required several innovations to compound.

To create Snapchat the infrastructure had to become mature enough for a couple of youngsters with no budget to build the first version. It required 4G connectivity, high-resolution mobile cameras, and app store distribution.

And when did these underlying innovations converge and form the necessary infrastructure?

The app store came in 2008. High-resolution mobile cameras started appearing in 2010. 4G was rolled out globally during 2010. The result: Snapchat launched in 2011. And so did all its cousins: Line, Viber, and WeChat.

Projecting compound innovation. Timing the future.

Venture Capitalists bet on the future. And for investors, the future is synonymous with timing.

Consequently, investors must construct a thesis about the future. And not just about what will happen (we all know that). But when it will happen.

In order to construct a valid thesis on timing, one must first understand the innovations that are forming new infrastructure. And the law of compound innovation hints that this becomes exponentially harder the more complex the infrastructure is.

Consider an emerging infrastructure like VR. In 2012, Oculus revived the forgotten dream of virtual reality. Almost eight years have passed, and very few people use VR. To understand why one must first understand the infrastructure for virtual 3D immersion.

In order to deliver a quality experience, one could theorize that the following infrastructure is needed: Wireless lightweight headset with long battery life and a screen resolution of 8K with 180 degrees field of view. 5G to stream the content. And controllers with individual finger and joint sensors. All within a price point of a mid-range smartphone.

In this light, it has clearly been too early for investors (and entrepreneurs) to bet on products like VR games, software, and films. Instead, investors should have been focusing on pieces of the infrastructure. Like controller and screen technology. (A topic for a later post).

But the thesis also hints that successful VR products could be close. The Oculus Quest headset from 2019 is not too far from the headset described. And 5G is being rolled out this year.

Consider a more complex infrastructure. The convergence of Blockchain and VR. An infrastructure that could be called “Virtual Society”. Blockchain is an infrastructure that allows to track and manage ownership. For Blockchain infrastructure to reach maturity, one could theorize that it needs: the ability to handle millions of transactions per minute, wallets to be pre-installed in browsers, and non-technical vocabulary for normal people understand it.

When VR and Blockchain mature and converge, the combined infrastructure will lay outside our experience. Much like the convergence of 4G, high-resolution cameras, and app store distribution was an unprecedented infrastructure that gave birth to the equally alien apps.

Perhaps we are already witnessing the first of such products. In February 2020, Decentraland launched. It is an immersive social network with blockchain-based ownership. An early example of products based on the convergence of VR and Blockchain infrastructure.

It is fair to say that Decentraland would be very hard to imagine a decade ago. But looking at the infrastructure powering it, you might be wondering if it is too early. And if you are, you are asking exactly the right question.

Perhaps the law of compound innovation can help you. See my first crude attempt at depicting it below:

Law of compund innovation

At Accelerace and Overkill we are pondering these things, and if you have views of your own, we would love to discuss them with you.

Why founders should never build the one-stop-shop

Are you okay? The founder was reacting to my painful facial expression. The pain I felt wasn’t physical, but it was real, nonetheless. The unpleasant sensation stemmed from a proclamation the founder had just made. One I have heard too many times before.

We are going to build a one-stop-shop platform! the founder had stated seconds earlier.

Right then, I knew I had a long and difficult conversation in front of me.

I began (again): Look. Many startups founders get the idea of building the one-stop-shop. The logic is obvious. Each individual element to a platform has value. If the platform has a lot of elements, it has a lot of value. And if the platform has ALL elements possible, then it has the most value. Thus, it will be superior to competing products.

The founder nodded.

Unfortunately, the logic is wrong, I said. The founder looked a bit confused.

I continued: Imagine we do a startup. We decide to build an online room planner for private homes. Millions of people need to design their home when moving or renovating, and we know the pain from having moved our self.

We launch, create some buzz, and a few hundred people start using it. However, the number of users is less than we have hoped for. And after a while, we realize that the hockey stick isn’t happening.

The scenario was exactly what the founder was currently experiencing. So, she was very attentive.

What do we do? I asked rhetorically.

Well, maybe there aren’t enough people who need a room planner for private homes, we might conclude. But if we add an office layout, then office managers could use it too. It is easy to add office furniture to the inventory library, so we do it.

What we hoped for happens. Offices are being designed on the platform. But it is still not a hockey stick. At the same time, we learn about multiple competitors that offer office planning. What to do? I asked again, rhetorically.

Well, we just learned that when we added the office elements, we broadened the scope of our product. This meant more people could use it. So, we decide to add more elements.

Factory planning! We add factory layouts and create 3D models of conveyor belts and machines. Now we have the only platform where users can plan homes, offices, and factories. We have no competition.

Still, the hockey stick eludes us. Worse still, we see a reduction in the number of private homes being planned. Maybe because we haven’t fixed all the bugs before we started focusing on the factory elements. Anyway, we have found a way to grow and escape competition, we think.

Next, we enable planning for yachts. Then restaurants. Then concert halls. With each element, we broaden the relevance of the product to even more people. Or so our logic goes.

Finally, we have built the ultimate room planner. The only place you can design any space regardless of function or size. We are the “standard”. The go-to-place. The one-stop-shop. Nobody else offers anything as complete as our software. And then God abandons us.

The founder looked a little confused. Maybe it was because I brought God into the picture. So, I elaborated:

What we would learn is what eBay learned when they added video conferencing (Skype) to its auction site. Or Burbn founders learned before they simplified their app and renamed it Instagram. Or Endomondo experienced when they added e-commerce and social networking to their running app. And these companies are among the surviving examples. The failed projects that have learned the same lesson are endless.

I looked directly at the founder and said: We would learn that the impressive breadth of use cases our software handles is utterly worthless to our customers. I continued:

The thing is that additional elements only provides value to the user if they are integral to the same problem. As an example, it’s valuable if a webshop also offers payment and delivery. The problem the user is trying to solve is to obtain a specific item. If users had to go to a third-party payment solution to transfer money. And to go to another service to arrange delivery, the friction would be unbearably high.

The question is: how integral must problems be to add value to the same platform? Well, more integral than you think, I said.

Take the running app Endomondo, I continued. Endomondo enables runners to track their runs. But runners also need running apparel. So, would Endomondo be a better product to runners if it also featured a shop with running apparel? I asked. The founder looked unsure. So, I continued: It turns out not. Endomono tried that, and it wasn’t a success. Why. Because tracking your run and buying apparel are very different problems. And no runners have these problems at the same time.

Our imagined room planner startup would suffer the same lesson. Nobody needs to design a home, an office and a factory at the same time. The section that supports office planning is worthless when you want to plan your bedroom. In fact, it’s confusing and adds clutter. The idea of the one-stop-shop is false.

Now, it was the founder who felt pain. And then came the inevitable question. But what about Amazon? The founder asked. I had expected it and said: Amazon is a perfect exampleAmazon sold only books for a long time. In fact, they decisively refrained from selling anything else before they had nailed the book problem. Amazon did not become successful because they sold everything. They became successful, exactly because they did not sell everything. Later, they added another element one by one. And so, should you, I said.

The founder was quiet, but slowly her painful facial expression lifted. Then she said: I guess Uber did the same thing. They started out offering expensive limousines, and not until later added cheap taxis and food delivery. Because….well none needs the same thing at the time. She let it sink in.

Then I could see her facial expression change into a very familiar one. Determination. Thank you, she said. I know what I must do. She got up and left. I looked out the window and thought about how often I have had this conversation. And then, I started writing this blog post.

How to spot a scalable startup and why I got it wrong in the past

There is a lie that permeates the startup industry. And venture capital especially.

The lie is this: startups are binary outcomes. They either become big or die trying.

After having logged my first decade as a VC, I know it’s not true. On the contrary, most startups become small businesses. They simply fail to scale.

This is an important fact. Because studying these non-scaling companies offers valuable lessons about the true nature of scalability.

What scalability is not

Economists teach us that scalability is about low marginal costs. Meaning it is cheap to serve an additional customer. In this view, services are never scalable because the cost of servicing one more customer isn’t falling.

In contrast, production can be scalable because a machine can produce one more widget cheaply. And SaaS is very scalable because letting one more customer access the software costs next to nothing.

The theory of low marginal costs makes investors love SaaS companies. And for good reason. There is just one problem. Most SaaS companies never scale.

Clearly, low marginal costs do not define scalability.

What Scalability is

After a decade of investing, I have come to understand scalability somewhat differently.

In venture capital, scalability is defined by a time constraint. Funds must exit the companies with 7-9 years. This means scalability is more about the speed of growth than marginal costs. Put differently, a scalable company is one that can grow fast. To this end, marginal costs matter very little because marginal costs define profitability, and not speed.

Growth can come from two sources. Beta and Alpha. Beta defines the growth rate of the market. Alpha defines how fast the company can grow (relative to its competitors) in the market.

The strength of Beta and Alpha can vary. As an example, the SUV market has long enjoyed moderate Beta. The SUV market grows more than other car categories. But it is a far cry from the strong Beta the electric car market enjoys.

Extreme Beta also exists. It happens when a market is “unlocked” and all the new actors rush to the marketplace at once. Like it happened for Airbnb when they “unlocked” a global latent market of private hotels. Or Uber did with ridesharing.

Strong Alpha occurs when the product enjoys a reinforcing value loop, and the loop spins faster than the competitor’s loop. A reinforcing value loop is one where the product becomes more valuable when the company wins more customers, which in turn makes the product more valuable, which will attract more customers, and so on. This self-reinforcing nature of such a dynamic means that the company will quickly become dominant in its market.

A company like Templafy (Accelerace alumni 2014) enjoys such s value loop. Each new customer creates new templates than can be added to the product for the next customer. This means Templafy has strong Alpha.

A perhaps even stronger example of Alpha is a company like Trustpilot (Accelerace alumni 2009). For Trustpilot, new users create reviews, that make the site more valuable to other users, who will create even more reviews that in turn increases the value of their product offering to the businesses who are reviewed. The businesses start using Trustpilot ratings in their marketing, which makes new users aware of Trustpilot, who then create more reviews. And so, the reinforcing value loop accelerates.

And as you will see, these forces greatly influence scalability.

What Scalability looks like

In our first fund (vintage 2011) with 49 investments, I have witnessed cohorts of very similar companies start around the same time. But over the ensuing years, they experienced unbelievable different trajectories.

A few have become bigger than even the founders imagined. And many never scaled, but still lives. For years the reason for this difference eluded me. Because it wasn’t marginal costs, market size, team, IP nor competition. In fact, one company is by far the strongest in all these parameters. But it still failed to scale.

In 2012 we invested in a SaaS company in a vertical with very little competition. We will call it WorkWeek (not the real name). The founders have industry insight. The product is great. The customers love it. The market is worth billions. The CLV is very high because customers never churn. The board is among the strongest I have seen.

We did the seed round, and the company projected to reach 10M ARR within three years. Today, eight years later they are at 3M ARR.

The problem is that WorkWeek enjoys no Beta. The market is stagnant. There are hundreds of thousands of customers in their vertical. But if the market is not growing, no new customers are appearing without a solution to their problems. Consequently, their Beta is zero.

In addition, WorkWeek enjoys no Alpha. There is no reinforcing value loop within their business. The product does not become more valuable to the next customers, regardless of how many customers they have.

The founder team estimated they would have “conquered” Germany within two years. It would take them five years to get the first German customer.

The problem was that the customers in Denmark didn’t make the product any better for the German prospects. On the contrary, each new sale gets harder because all the “low hanging fruits” have been sold to. What remains are customers who are hard to convince to change their ways.

WorkWeek is what you get when both Beta and Alpha are absent, but everything else is great. The company grows 50% per year and have done so since inception. Such growth rate means that if a company has 50.000 EUR in revenue year one, they will have less than 1 million EUR in year seven.

In contrast, Trustpilot and Templafy are what you get when strong Beta and strong Alpha are present simultaneously. Trustpilot rose during rapid growth in e-commerce which gave them strong Beta. And their Alpha is simply unique. Templafy enjoys strong Beta from the seismic shift to cloud-based office programs, and the user-generated templates create strong Alpha.

Today, I understand that to be truly “scalable”, companies must enjoy both Beta and Alpha simultaneously.

If both factors are in place, the growth from each source will compound, creating the famed hockey stick as a result. Witnessing a hockey stick unfold in real-time is quite remarkable. But low marginal costs and big markets are not enough if you want to see it for yourself.

The Art of Startup

2500 years ago, a true polymath authored a book so powerful that it made emperors, kings, and generals.

When I first read the Art of War by Sun Tzu in my youth, I set a goal. To one day understand my own domain well enough to produce a similar set of insightful directives.

About 15 years into my quest, 2 startups founded, personally mentoring more than 100 founders, managed 3 VC funds, and made a few angel investments I feel, for the first time, that I can produce my first version of these directives.

i. On startup ideas

  • When conceiving of an idea for a startup, write it down and return to it two weeks later. If the idea still seems good, pursue it.
  • When conceiving of an idea for a startup, ask yourself if you have empathy for the customer. For the first couple of years, the customers will reject you. Make sure you have enough empathy to see it through.

ii. On (founder) team formation

  • When forming the team, everyone must have a profound trust in and respect for each other.
  • When forming the team, everyone must be willing to work for the lowest possible salary to stretch the runway.
  • When forming the team, it must be complete enough to design, build and sell the product for the first year without relying on other people or money to pay other people.
  • When forming the team, it must have a person with an intimate insight into the life and thinking of the customer.
  • When forming the team, the members must select a clear leader who is given the title of CEO, and whom everyone agrees will have the last say in case of a dispute.
  • When forming the team, the members must select an advisor who can bring perspective and be a sounding board.
  • When distributing shares, all members must own enough shares to give up all other projects and keep motivated during the hard times.

iii. On culture

  • The culture must be written down as a simple list of commandments about behavior everyone obeys.
  • The culture must be one of honesty, clear and timely intellectual communication and debate, and utter and complete acceptance of whatever decision is made in the end.
  • The culture must be one where time is regarding a scarce and valuable resource.
  • The culture must be one that celebrates every win and victory with feasts, toasts, and hugs.

iv. On hiring

  • When hiring, the founders must perform the interview themselves.
  • When meeting a candidate, the founder must tell a breathtaking purpose that will offset a non-competitive salary.
  • When evaluating a candidate, the founders must devise practical samples of relevant work the candidate must complete.
  • When evaluating a candidate, the founders must prioritize culture fit, curiosity and helpfulness highest.

v. On employees onboarding

  • When onboarding a new team member, make sure everyone else knows the new team member’s name and background before the first day at work.
  • When onboarding a new team member, place a welcome card the desk signed by the founder or CEO.
  • When onboarding a new team member, explain to the person exactly how his/her job contributes to the success of the company.
  • When onboarding a new team member, explain to the person exactly how his/her job affects the job of other team members.
  • When onboarding a new team member, explain exactly what behavior will impress and what behavior will disappoint.
  • When onboarding a new team member, give the person everything they need to do their work on the first day. Expect them to work the next.

vi. On employees

  • When having employees, the founders must embody the culture and always act like they want employees to act.
  • When having employees, the founders must attribute all success to their employees internally and in public.
  • When directing employees, the company must have no more than 3 company KPIs that is always pointed to.
  • When directing employees, the employees must be told exactly how their role contributes to the 3 KPIs.
  • When directing employees, the employees must be told what the priorities are, so they can make individual judgment calls.
  • When an employee does not perform, the founders must exclude that employee immediately and then help that person find something better.

vii. On fundraising

  • When fundraising, focus on investors who are known to invest in the stage, geography, and industry you are in.
  • When fundraising, ask other founders for introductions to their investors.
  • When fundraising, have a world-class pitch deck because it might be all the investor sees.
  • When pitching, only ask for an amount that the investor normally invest.
  • When pitching, know the other companies the investor has invested in.
  • When pitching, tell the investor why you are seeking investment from that investor specifically.

viii. On investors

  • When finding investors, founders must find one of two kinds. Investors who bring money and stay away. Or investors that bring money and provide a recent and relevant experience. Anyone else is harmful.
  • When having investors, founders must update the investors monthly. And whenever something interesting happens.
  • When having investors, founders must attribute the success to the investors in the press and on social media. This will make the investor even more vested in your success.
  • When having investors, founders must invite investors to any celebrations of success.

ix. On sales

  • When starting to sell, the founders must learn how to do it themselves until the task can be given to anyone else.
  • When starting to sell, the founders must focus on the smallest possible sub-segment of the market (the beachhead) until they have a monopoly in this segment.
  • When starting to sell, the founders must emerge themselves with their customers until the founders understand their customers better than the customers understand themselves.
  • When the customer has bought the product, the founders must make sure the customer actually starts using it. Only then, the sale can be considered successful.
  • When the customer has used the product for a while, the founders must ask for a referral.

x. On marketing

  • When making noise, make sure the message is so compelling that people will share it. Also the employees.
  • When making noise, distribute free education to potential customers in return for contact information.
  • When making noise, use referrals from happy customers.
  • When making noise, distribute free samples or free accounts of your product to the first critical mass of customers.

xi. On boards

  • When forming the board, select a chairman who is not a shareholder.
  • When forming the board, have no more than five people.
  • When having board meetings, place plenty of drinks and foods so people are not distracted by thirst and hunger.
  • When having board meetings, have a standard agenda and follow it every time.
  • When having board meetings, if a board member comes unprepared, let the board member know he/she has no business showing up.
  • When having board meetings, only have the founders and investors in the room.
  • When having board meetings, spend most of the time on sparring and decision making.
  • When having board meetings, and if big issues arise, form a separate working group to deal with.

xii. On exits

  • When receiving acquisition interest, deny it. If they really want it, they will try harder.
  • When getting an acquisition offer, hurry and talk to their competitors.
  • When negotiating an acquisition, be most interested in how the company/product will become a success with new owners.
  • When negotiating an acquisition, negotiate great terms for your employees.
  • When negotiating an acquisition, ask for cash with no handcuffs for all owners.

Why Urban Mobility, Global Mobility, Health, and Omnipresence remains to be my meta-thesis going into 2020

When my venture capital career began about three years ago, I formulated a meta-thesis around four areas I believe will be continuous themes of innovation in the next hundred years. Those were: Urban Mobility, Global Mobility, Health, and Omnipresence. When revisiting my thesis going into 2020, I find that the framework holds. But I have updated the thesis to reflect my current views and provided some recent startups examples from Accelerace (Copenhagen) and Overkill Ventures (Riga) where I serve as General Partner.

Urban Mobility

Originally, cities were a solution to reducing transaction costs. The Egyptian invention meant that we could easily interact and get our business done. Traveling for three days to get stuff sold on the market was a thing of the past. Productivity skyrocketed. However, this only worked to a point.

The continuous urbanization has enlarged cities to a size where friction returns. During my frequent family-related visits to China, I experience this first hand. Getting simple things done, like buying a new kitchen sink easily takes an entire day. First, you have to move through insane traffic. Then you have to negotiate prices. Finally, you have to validate that the product you receive is the item you intended to buy. Millions of people face this daily.

Luckily, technology will increase the mobility of people and goods in urban environments. Drones can circumvent traffic. Collaborative consumption can create liquidity in the availability of cars, housing and storage space. Review and trust systems make quality providers easy to find. Payment technology saves us valuable minutes in every transaction. We want the benefit of cities without the pain.

Going into 2020, recent Accelerace and Overkill startups such as Donkey RepublicDigura and Minrecept are examples of startups that make cities scalable.

Global Mobility

The division of the world into independent countries happened because of limited mobility.

Ancient empires attempting “globalization” struggled with the mobility problem. Collecting taxes in Britain and transporting the coins to Rome was a problem. And every attempt to sustain these empires failed. Consequently, countries grew independently and developed distinct laws, languages, and institutions. Today, we suffer from this. The asymmetry of laws, languages, and institutions makes little sense in a world where the next generation expects to travel, study, work and live anywhere.

Technology like Blockchain can help circumvent institutions such as banks, courts, and government. Consequently, it will be easy to buy assets in other countries, easy to enforce rights and agreements across borders and eliminate the friction of language differences.

Going into 2020, recent Accelerace and Overkill startups such as DiplomasafeOrangebooks, and Clockwork are examples of startups making the world a smaller place.

Health

Life expectancy has more than doubled in the last 100 years. In large part because of medical advances. Sadly, we mostly extend old age. 6 out of 10 people end their life in prolonged states of frailty and growing incapacity. In practical terms, it means that you don’t recognize your children and you are being spoon-fed while wearing a diaper. Needless to say, we still have some work to do.

Health is the answer and technology is the remedy. Health adds to the other end of life. It extends our youth and vitality. Technology can provide accurate health information, ensure the mental stability and hack our biology.

Going into 2020, recent Accelerace and Overkill startups such as InnovosensManpremo, and Studymind are examples of startups prolonging our youth and vitality.

Omnipresence

All living creatures depend on information. We use it to make decisions. Biological evolution has formed bodies with sensors that obtain information in our surroundings. Humans obtain information from five senses (sound, taste, touch, sight and smell).

However, our senses are not particularly good. Animals often have far better senses than humans. Instead, humans have superior processing of the information. Still, imagine we had senses on par with dolphins, fish, and bees.

Indeed, humans have always dreamt about owning superior senses. In fact, ancient Gods were just that. Odin and Zeus were people who could see and hear everything. They were omnipresent. And because of this advantage, they ruled Earth. Seeing and hearing everything is the ultimate state of being.

Technology is bypassing evolution. Instead of waiting for nature to give us the sight of an eagle, we can fly drones equipped with high-resolution cameras. We can participate in lectures at universities on other continents, and we can follow packages on the way to our door. We are becoming omnipresent and our adoption of this kind of power will be quick.

Going into 2020, recent Accelerace and Overkill startups such as MemorixDorothy, Fabcontrol and are examples of startups making us godlike.

The best startup advice you have never heard

Startup advice is everywhere. This is not one of them.

A story goes like this: In 1963, Martin Luther King was attacked by a white supremacist while preaching at the 16th Street Baptist Church in Birmingham. The hateful man threw himself at Martin Luther King, fist first. Instead of fleeing, the preacher responded by quickly closing the distance and embracing the man. King held him tight while saying: my brother I love youmy brother I love you. The man furiously tried to pound on King, but the preacher maintained his embrace while repeating his sermon. Upon hearing these words from the very man the supremacist was trying to hurt, the attacker went limp and burst into tears.

The story is beautiful, and maybe even true. Regardless, it holds a rarely told truth for startup founders. One that I learned myself.

My own lesson began around 2006. Rumors began circulating about Apple turning their next iPod into a phone. Then came the vision that would define me.

I foresaw that our phones would be on the internet. The clarity of my prophecy made me evangelistic, and I preached the coming revolution to everyone that wouldn’t listen.

I turned a couple of friends, and we decided to lead the revolution and built a product that would demonstrate we were right.

The product was a ticketing platform. We knew that events are fundamentally a social experience and that most people buy tickets together with their friends. So why not create a platform that allowed people to buy tickets directly from their phones.

We started pitch event organizers and demonstrate our platform. If they created events on our backend, users could buy the tickets from a mobile device. I told them it was the future.

The problem was that these people did not live in the future. On the contrary, they very much lived in the present. And in their reality, they had an event next month that they needed to sell enough ticket to. Because our platform had no users, we did not alleviate their anxiety.

I responded the way most self-development books tell you to. I persevered. But at large, the event organizers remained dispassionate. And then something important happened.

I started to hate our customers. Not immediately. But a resentment towards these dispassionate naysayers grew in me. Gradually, the feeling spread to the rest of the team. Perhaps because I started referring to our customers as idiots, dinosaurs and stupid.

Unsurprisingly, our emerging company culture of hating our customers did not produce a healthy environment for building a great solution to event organizers. Ultimately, it became a core reason for our failure.

Since then, I have seen customer resentment develop in multiple other startups. What happens is this: the founders create a piece of tech. They do customer discovery. Pivot a couple fo times. Finally, they find themselves targeting a customer segment that is somewhat alien to them. But the segment has money and a definable pain point. Advisors and investors agree.

The founders have built a product that is objectively valuable to their customers. It saves time, money and unlocks new opportunities. But for some unfathomable reason, the customers are wary. And most of them don’t convert.

At this point, resentment creeps in. Taking rejection upon rejection from people you are trying to help simply does that to a person. That is unless you are Martin Luther King, and have true and deep empathy for those you are trying to convert.

When founders ask me if they should go for market X or market Y, sometimes I put all the data aside, and simply ask them this: Who do you want to spend your life trying to help, knowingly they will reject you over and over?

Doing a startup is in large part an experience of suffering rejections from the very people you are trying to help. And in order to succeed, your natural response must be embrace. Something that is only possible if the founders truly empathize with the people they are trying to turn. Surely, Mr. King would agree.

Choosing a customer segment for whom you have deep empathy for might not be the most business-savvy advice. But sometimes, I find it is the most important.

Also, check out Acceleraceand Overkill Ventures. We invest in startups.

Why Milestones Kill Startups and how the Roman Empire points to a better way

Most startups founders are faced with milestone provisions by their investors. The investors do it because they think it helps them steer the startup in the right direction. And because they think it gives guidance for deciding on further funding. The headline reveals it is a mistake. This article will explain why milestones kill startups and suggest how to actually measure progress. 

When Octavian was 19 years old, his ruthless uncle was brutally assassinated by a group of political opponents. The young man resolved to achieve what his uncle had not. Founding the world’s largest and longest-lasting empire.

And so, Octavian began materializing his vision. He called it Pax Romana. We know it as the Roman Empire.

To people of his time, Octavian wasn’t a celebrity. He did not display the same early sweeping conquests as his assassinated uncle, Julius Caesar. Nor the bravado and charisma.

Instead, Octavian was a founder. His ambition went beyond military success, fame, and power. He wanted to create something lasting.

Gauging the career of Octavian, one notices the wide range of things he accomplished. Surely, he enlarged the empire through military campaigns. But more importantly, he created structural development. Like tax reforms. Setting up a firefighting brigade, and a professional police force. And obviously erected many buildings, temples, and monuments.

The result was peace. The reward was a natural death at an old age. Something rarely bestowed rulers of his time. And as you will see, the story of Octavian holds an important lesson for startup founders and their investors.

Lasting companies and lasting empires are similar

Small projects can be planned, managed and tracked. In contrast, Large projects, like building an empire cannot. The complexity, timescale, and unknowns will not allow it.

Instead, large projects require a founder (or founder team) with a deep resolve to materialize a vision that is larger than himself/herself. Just like Octavian. But more importantly, the founder must focus on a wide range of issues. Also, just like Octavian.

The large range of elements that goes into building a lasting empire requires something quite different from a plan. It requires awareness and courage. Awareness of coming issues and the courage to do something about them. It was true for founders of lasting empires. It is equally true for founders of lasting companies.

The elements that go into building something lasting are entangled and interdependent. In other words, a lot of things depends on other things. Revenue requires sales channels, that requires partnerships, that requires multilevel value propositions, that requires customer insights, that requires nurtured relationships and so on. When one thing changes, most other things changes. Octavian knew this. So do most startup founders. But for some reason, many investors seem to have missed this.

Milestones are flawed and destructive if not done right

Many investors place ‘milestones’ in their investment agreements. And these milestones tend to be flawed, if not downright destructive. The problem is that the milestones often have little connection to the actual job of building the company.

Instead, the milestones seem to reflect the faulty idea that the progress of large projects can be measured on a single dimension. Like the number of users. Downloads or revenue. But that would be like evaluating the progress of an empire by area or population. The first could easily be achieved by annexing uninhabited desert. The second by paying people to become citizens. Octavian did none of those things. Why? First of all, he wasn’t stupid. Secondly, he didn’t have investors who were.

Octavian focused on whatever made sense. He shifted his focus to what was needed to advance his project to the next stage and ensure its long term viability. So do the best startup founders. At one point they recruit. Then they release the next version. Then they build partnerships. Then they fundraise.

Founders successively focus on specific dimensions of their company. And when they do, the company progresses. But not in a linear function. It happens in steps. That means each dimension is stagnant for a period until the founders find it relevant to focus on it.

When investors make founders focus on a single dimension by enforcing simplistic milestones, they do one of two things. Either the investor presumes that he/she knows better than the founders what dimension needs focus. Or the investor is ignorant of the mechanics of large complex projects. Both should be colossal red flags to a founder considering an investor.

In cases where milestones are put in practice, the result is that the founders start doing stupid things. Why? Because humans follow the reward. And the easiest way to hit the milestone and claim the reward is rarely to do the right thing. Those who experienced the Great Leap Forward in China between 1958 to 1962 would agree.

That said, milestones make sense. Both for the founder and the investor. Understanding if a project progresses is important to avoid what economists call the sunk cost fallacy. In other words, keep doing something you should stop doing.

However, milestones only make sense if they actually capture the progress that is natural to the development of the company. What is natural, changes almost daily. And only the founders have the information to make this judgment.

Still, it is possible to define the potential areas of progress. An early-stage startup can grow in four dimensions. Those are: human capital, technology capital, customer capital, cash capital. E.g. if a startup recruits a rock star, it is progress. If a technology breakthrough happens, it is progress. If customer loyalty increases, it is progress. If the free cash flow increases, it is progress.

Consequently, the only sensible way to craft milestones for early stage startups is to include any and all type of relevant progress, and simply trust that the founders know where to allocate their attention. If investors do not trust founders on this, it is not the milestone that is wrong.

The Startup Adoption Lifecycle

This article tells the story of how farmers in Iowa shaped the way startup founders think. Furthermore, it argues that we need a new way for startups to identify their early customer segments. In the end, founders will know how to obtain product-market fit, and why the article features a picture of an airline crew on heavy cases.

In 1927, scientists developed a new hybrid seed-corn. They knew their invention would give farmers 20% more yield. What they didn’t know was that the seed-corn would define how we came to understand innovation.

The new corn was offered to farmers in Iowa. Oddly, not everyone adopted it. The situation caught the attention of two sociologists at Iowa State University.

In 1941, the two researchers Bryce Ryan and Neal Gross went to interview the farmers. What they learned was puzzling.

Even though the new hybrid corn was objectively better, some farmers simply resisted using it. In fact, it would take about 10 years for all the farmers to adopt the new corn. And that was just Iowa. It then took another decade before it was fully adopted throughout the US.

Bryce Ryan and Neal Gross concluded that some people are just prone to try new things before others. Today, we know their theory as the Technology Adoption Lifecycle. For close to a century, the theory has defined how we understand the adoption of innovation.

The-technology-adoption-life-cycle-1024x336

Why the Technology adoption lifecycle is important and useless

The Technology Adoption Lifecycle basically explains that in the beginning, only a small group of people adopt a new product. Later, the majority follows suit. Finally, the last little group of resisting people gives in.

As trivial as it sounds, it was an immensely important realization. Because it provides a frame for innovators to view the world. I know this first-hand.

When I started my first startup in 2006, I was graduating from business school. And like any graduate, I knew the Technology Adoption Lifecycle. It helped me formulate our go-to-market strategy. First, we would go for the innovators and early adopters. Sounds right on paper.

But most startup founders learn that understanding who those innovators and early adopters are is much harder. In fact, the framework does not provide any guidance for this problem. At all.

The thing is that the Technology Adoption Lifecycle was never meant to help tech entrepreneurs. It was a retrospective view of a category over its entire lifecycle. That means it spans decades and each block of adopters represents years of slow gradual adoption. Although important, it is useless as a practical startup tool.

In reality, most startups face less than 12 months of quickly evaporating runway. And the next months are the only period of any importance because it’s all the time a startup is sure to have.

Unfortunately, the Technology Adoption Lifecycle is of little help. The model just says: innovators and early adopters. Whoever adopts the technology first, are the innovators and early adopters. That is called circular logic.

600 startups later a pattern emerges

Today, I am a partner at two accelerator-funds. And for the past seven years, I have met about a hundred startups per year, helping them obtain product-market fit. Or at least tried.

One consequence of specialization is a very granular understanding of a narrow field. In my case, I suspect my expertise has become the early phases of the Technology Adoption Lifecycle.

Having observed so many startups go from zero to their first hundred business customers (or first million users), I have witnessed a clear pattern.

The startup adoption lifecycle

All successful startups I have worked with have experienced adoption through the same sequence of micro-segments within the very first part of the adoption lifecycle. Let’s shrink into the micro-cosmos of the very first adopters. What I call the Startup Adoption Lifecycle. Here we go:

The first adopters are always friends, family, and colleagues. They sign up to support the founder(s) and cheer on. They rarely have a deep need for the product. This group constitutes the first 10 to 50 customers.

The second adopter group is always the “crazy” people. They don’t know the founder(s) personally, but for some reason, they are obsessed about the area the startup operates in. And I mean abnormally obsessed. This group often send something that looks like fan mail to the info@ or support@. This group varies in size but is probably the next 5 – 30 customers.

The third adopter group is by far the most important. This group is called the Beachhead. This group is also abnormal, but for a different reason. They are not “crazy”. Instead, they live under unique circumstances that impose extreme or unusual needs. Because this group is small, none has cared to serve their special needs. Consequently, they are somewhat “desperate” which makes them actively look for new solutions.

Examples were the first hardcore gamers on a live streaming website called Justin.tv. The founders realized the potential of this Beachhead and renamed Justin.tv to Twitch.

Another would be airline cabin crew. Few people fly every day, so why bother making wheeled suitcases for cabin crew who do. In 1987 someone finally did. Of course, cabin crew was the first adopters. Today we all have trolleys. (The crew members in the featured picture clearly needed them).

A third example would be victims of the Japanese tsunami in 2011 that starting using a chat app to communicate because the cell phone towers were gone. Today, that chat app has an estimated 500 million users and is known by the name Line.

Billede2

In truth, all successful startups eventually must find their Beachhead. It is the most important adopter group because they are the first people who adopt because of a true need. Their need might be unique, but that makes them willing to test a new product from an unknown startup.

Who is the Beachhead for any particular startup? It is the group that most founders overlook because it is far too small to fit the story of the billion-dollar market. It is the group that has an unusual job. Or live an unusual place. Or have an unusual interest. Or have been affected by an unusual event. Or perhaps a combination.

The Beachhead varies in size, but it is rarely bigger than 100 – 500 customers to begin with. Luckily, that is often the perfect size for a startup with an evaporating runway.

If startups can navigate the Startup Adoption Lifecycle, they will be well on their way. Because on the other side of the Beachhead is product-market fit. And with that, the beginning of twenty years of movement through the Technology Adoption Lifecycle. May your journey be smooth.

Tip: If you are a startup founder and want to get help finding your Beach Head, a qualify acceleration program might the right thing for you. At Accelerace and Overkill Ventures, we see this as our main job. Some other accelerators might do as well. At least check out my blog.

Why many startup investors are missing the point of acceleration programs, and should seriously start investing in them.

Many investors think acceleration programs are cute. Playgrounds where inexperienced and hopeful founders go to learn basic stuff. And where real successful people generously share stories to “pay it forward”. Like charity for young people. Those investors are mistaken. Not always. But the ignorant consensus can cause some investors to overlook what can be the most effective and best performing vehicle for startup investing. This post will explain why insider trading is illegal and how that makes quality Accelerators a must for investors. In the end, you will know how to evaluate Accelerators, and management teams will gain inspiration.

In 1934 the rules of the game changed. In the ensuing years, hundreds of people would be jailed. Among them a beloved housewife and self-made celebrity named Martha Stewart.

The US Congress witnessed how certain investors benefited immensely from possessing unique information about publicly traded companies. Because these investors knew something others didn’t, they could make timely and informed decisions. Economists call it asymmetric information. The public called it unfair.

In response, the US Congress passed the Securities Exchange Act in 1934 making it illegal to trade securities on asymmetric information. Today, we know it as “insider trading”.

In 2001, Martha Stewart learned the value of asymmetric information. The celebrity housewife owned stocks in a company called ImClone Systems but her stockbroker knew something other people didn’t. He knew that ImClone Systems would receive a rejection of their new cancer drug. He urged Martha to sell immediately. She did and avoided a loss of about 200,000 dollars. To her horror, it would also cost her five months in prison.

Asymmetric information in startup investing

The rules surrounding publicly traded securities do not apply to startups. And because asymmetric information is generally the most valuable element in investing, startup investors are furiously seeking to obtain it. To this end, most Venture Capitalists require startups to sign ‘exclusive term sheets’, meaning that only they get to due diligence the company for a period of time. The VC wants to know something other investors don’t.

The problem with asymmetric information is that it’s hard to obtain. That is because it’s sticky. The information resides within a few key individuals and is often non-codified. If it wasn’t, the information would diffuse and thus become symmetric. In other words, everyone would know it.

Sticky information must be extracted and the process of extraction takes time and effort. The individuals holding the information must trust the entity that wants to extract it. Simply put, the startup founders must trust the investor before they share what they know.

Furthermore, sticky information tends to be unstructured. Maybe a startup founder recently got the impression that most of the customers will upgrade their subscription next year because of a new feature. This information is not just important but is also unstructured. To obtain this information the investor must spend time with the founder asking random questions until the topic might come up. Needless to say, this is expensive at scale.

How great Accelerators extract asymmetric information at scale

Interestingly, an acceleration program can be regarded as an institutionalized and methodical system for extracting information. And a well-run accelerator does this at scale.

Quality programs have lengthy and deep relations with hundreds of startups per year. During the program, the startups and the Accelerator enter into a mutually beneficial exchange. The Accelerator provides value in form of content, help, and resources. In exchange, the Startup provides information, such as in the application forms, office hours and workshops etc. Much of this information is asymmetric and can be called ‘Insight’.

Great Accelerators understand the value of Insight. And they design their program to obtain it. Less sophisticated programs will not.

To obtain Insight, the Accelerator must do two things. First, establish trust between the founders and the Accelerator. Second, provide content, help, and resources of high perceived value. If the founders trust the Accelerator AND believe the program will be valuable to them, the founders will be willing to provide Insight in exchange for benefiting from the Value of the program.

How Accelerators develop trust

Trust is an outcome of earlier beneficial interactions between the parties. If two people have engaged in numerous trades in the past and both parties feel they benefited from those exchanges, they most likely trust each other.

The speed at which trust develops seems to be a function of multiple factors. Such as the number of interactions, the depth of the interactions, and the environment the interactions take place in. This equation of Trust is depicted in the table below:

Fig 1: The equation of Trust. (Completely non-science based)

trust

According to the equation above, Trust develops quickly if the parties have many rich interactions in unfamiliar environments. And that is exactly what marks great Accelerators. Many programs start with an intense kick off period. The founders fly in and spend long days in workshops, mentor sessions, and social activities. The result is trust, at scale.

How great Accelerators obtain insight

Data is the ingredient of Insight. Not all data is Insight, but all Insight is data. Because data and Insight can be hard to distinguish, the way to obtain Insight is simply to obtain large amounts of data. Consequently, the best Accelerators collect data at every possible instance.

In order to obtain data, the Accelerator must solve the biggest problem with data collection. The problem is that data collection often incurs significant costs on the side of the startup. This is because the data is rarely readily available.

Often, the founders must spend time and energy to clean and codify the data before it can be provided. An example would be a lengthy survey. Not only must the founders spend time and opportunity costs answering the questions, but must also look through documents, search for old e-mails, and make calculations to answer the questions. The cost of a lengthy survey can easily seem insurmountable to a startup founder.

That is why the best Accelerators are solving this problem in two ways.

One, they provide Value of such a high quality that it offsets the costs of the “intrusive” data collection. This enables the Accelerator to obtain insight through conversation, surveys, and participation in customer meetings etc.

Two, they implement systems that collect data non-intrusively. Like tracking the attendance rate of the founders, their KPI reporting, and development in team composition, etc.

The collection of data at scale is making great Accelerators the most knowledgeable entities for startup Insight. Period. No other entities have had deep trust-based interaction with thousands of startups over extended periods of time. While collecting valuable data.

If done right, an acceleration program is simply the most efficient system for obtaining Insight into a large number of startups. And for investors, the best programs represent a golden opportunity to benefit from true asymmetric information. Wall Street would be envious.

Written by David Ventzel. Partner at Accelerace, a Copenhagen based accelerator and seed fund. Also General Partner at Overkill Ventures, a Riga based accelerator and seed fund.