Why all startup investors are dumb (and why that’s good)

Advisors will tell you to look for smart money. This post will not. Instead it will do the opposite. It will tell you to stop looking for smart money. It will disturb what you know. It will mess up your vocabulary. But in the end it gives you a new perspective on investors. Perspective is power. Use it.

I used to be smart. When startups asked for smart money, I felt they were looking for me. Then something happened to me. I turned Dumb. This is the story of how it happened.

It all began in front of a stage

I was in a big white room with a beautiful ceiling. I was facing a stage. I took notes. I was a judge in a pitch competition. I felt at home. I was flanked by other smart people. Maybe except for the accountant on my right.

The pitches were good. The founders had practiced. They wanted to change the world. They looked for “smart money”. All founders do. It makes sense. Nobody wants stupid investors. I could sympathize. I remembered why. The memories and feelings came back. It was almost 10 years ago….

I started feeling smart

I was graduating business school. Jobs were plenty. I didn’t want one. Instead, I co-founded my first tech startup. We pitched to investors. They all seemed dumb. They just didn’t get it. I knew because they didn’t invest. Then one day we got lucky.

We met smart people. They asked the right questions. They were smart. I knew because they invested.

After my first startup I did another one. We sold it. I felt smarter than ever. Then Accelerace called me. They wanted me to join as an Investment Manager. I said yes. They could use a smart guy I thought.

My job is to spot startups, mentor them and invest in them. Pitch competitions seemed like a good place to be. So I went. And went. And went. Until the day I found myself in the big white room with the beautiful ceiling. I had grown smarter for so long now. Little did I know that it was about to change.

The question that changed everything

The next day I met with one of the pitching startups. I felt I should. They seemed like me in 2006. They repeated they were looking for smart money. Then it happened. My descent to stupidity began.

I don’t know why. But I asked an odd question.

I asked: what do you mean with “smart” money?

They looked puzzled. It was a strange question. They said: You know… smart investors.

I was silent. It was awkward.

Do you mean someone with a high IQ? I asked, knowing that it was a silly question.

They laughed. Of course not, they said. Good, I was thinking. I knew that Lewis Terman had proved long ago that high IQ and success is not related.

They clarified: We want someone who provide more than just money. We want someone who can help us.

So you mean, active investors? I asked. I was surprised to hear myself probe deeper.

I guess, the CEO said. But it must be someone who knows what they are talking about.

So you mean, investors with domain expertise? I asked. They started getting a little annoyed.

Well not necessarily, they said. Someone who has been successful themselves!

Do you mean someone who has made a lot of money? I asked.

Yes, they said. But we don’t want a guy that made money being lucky. We want someone smart!

By then, they thought they had settled the question. They hadn’t. Instead they left me shell-shocked.

I couldn’t sleep that night. The meeting was replaying in my head. What bothered me was this: If we use the term “smart money”. Then shouldn’t we know what it means? Why couldn’t they define what they meant? Could they have used the term without themselves knowing what they meant. Do we all do this?

Also, if smart money exists, then dumb money exists too. Who are the dumb money?

Oh right, investors who aren’t active. Wait, they would be inactive investors. Not really dumb.

Oh yes, the non-experts. No wait, the opposite would be generalists.

Right! Got it! People who made money, and had NOT been lucky.

The last phrase just didn’t seem right. I couldn’t even lie down anymore. I had to go for a walk.


The problem was this: Everyone I know who made money, have also been lucky.

I have a friend. He co-founded a startup in 1998. His co-founder could code. My friend could sell. It was a match made in heaven. They worked hard and made wise decisions.

They did everything with “The Internet”. Everyone wanted it. The Internet. So they took the company public. The stocks soared. The co-founder wanted a house. Or maybe his wife did. So he sold his stocks. He made tens of millions. My friend didn’t need a house. He was single. He could wait. So he did. He never made a dime.

The difference. Pure luck. Or the absence of it. Today people think of the co-founder as brilliant. Who wouldn’t. The guy IPO’ed and drives a Ferrari. My friend. Well no one really knows him.

I walked around. I was recalling stories of successful people. Each story had moments of extraordinary luck.

Like the time IBM wanted to buy an operating system. IBM scheduled a meeting with the CEO of a software company in Seattle. The CEO didn’t show up. Instead, the IBM people went to see young Bill Gates. They had time to kill. They didn’t intend to buy anything from Bill. But they did. They called it MS DOS and that luck defined Microsoft.

Or the time a young Dane named Morten Lund helped his friends.  Morten handed them 50K to support their “project”. That project turned out to be Skype.

My head was clearing up. I was certain now. There is no such thing as smart money. Everyone who makes money is (also) lucky. And then it dawned on me. Like a lightning. I stopped walking.

I am dumb, I whispered. I am a dumb investor, I said, now a little louder. I am dumb! Stupid! a Moron!

Scientists would have shouted: EUREKA! My words were less elegant.

I turned even dumber

You would have thought that was the end of it. But it didn’t stop there. The more I looked the more stupidity I saw.

It is estimated that 99% of all mutual fund managers don’t beat the market over time. The number who do outperform the market is indistinguishable from luck. Like people who win jackpot multiple times.

It turns out that most millionaires simply did business in times of extraordinary economic activity. The year of birth is very deterministic for your wealth. Not exactly absence of luck.

So why did I write this post? I have a proposal. I think we should stop using the term Smart Money. I don’t think it exists. Reality is just too complex to plan success.

My advice to founders raising funding.  Try to be specific. Say, that you want active investors. Or investors with entrepreneurial background. Or investors with specific expertise. Or investors who like you.

If founders look for smart investors, I’m afraid they find none. They only find people who think they are smart. Like me some years ago. And I turned out to be dumb. Strangely, I feel smarter now knowing this.

Conclusion made:

  • Everyone who ever made money have been lucky
  • We (as an industry) need to stop use the phrase “smart money” and be specific instead

Why startups get rejected by venture capitalists (and why Warren Buffett is involved)

Accelerator programs will connect you to venture capital firms. This post will not. Instead it will do the opposite. It will distance you from venture capital. The distance will allow you to understand them. In the process I will tell you a personal story. I will over-generalize and simplify venture capital. I will even blame Warren Buffett. But in the end you will understand VCs. Understanding is power. Use it.

Most founders pitch to venture capitalists. Founders think they should. VCs exist to fund startups. Everyone knows this.

But this is not what most founders experience. Founders experience something like this: They got a startup. The team is good. The product is good. They have customers. They even got angel investors. But VCs don’t invest. So why don’t they invest?

I used to be puzzled myself. As a founder I thought they didn’t get my idea. They didn’t believe what I believed. They didn’t believe in me. I felt rejected. It hurt. I smashed my bike into a tree while being on it. Then I met someone. He was miserable. But that meeting changed everything.

I became an investor

But before this meeting something else happened. I got offered a position at Accelerace Invest. I became Investment Manager in a micro VC fund of €35 million. We invest in startups graduating our accelerator programs.

I started understanding the investment side of the game. We aren’t really a VC though. We can only do seed investments.  The “real” VCs still puzzled me. That was until the day I received a mail from LinkedIn.

It was an auto generated mail. But it caught my eye. It said that a friend had gotten a new job. He was now VP in a top 3 venture capital firm. I called him. He was excited. It was a dream coming true for him. He was mistaken. But it took two years before he learned.

The napkin that changed everything

I met him in London. It was rainy. The weather fitted his mood. He was miserable. With a tired voice he told me: For the past two years he had not invested in a single startup. I was shocked. What!?  For two years he had been doing nothing!?

Then he told me something that made all the pieces of the puzzles fall in place. Suddenly all the rejections from VCs I received as founder made sense. Now I knew. I felt at peace. It was awkward it the midst of his misery.

He explained that his firm manage multiple funds. He was investing out of a €100 million fund. He told me that it was a 10 year fund. They spend the first five years investing. The remaining five years they try to exit the companies. I knew how this worked. Almost all venture capital firms have 8 or 10 year funds and operate this way. It was the next thing he told me that really opened my eyes.

He told me that the LPs (the investors in their fund) expect 20% in annual gain. The gain is called Internal Rate of Return (IRR). Simply put, they expect the fund to increase in value 20% every year.

It made sense. I knew that good hedge funds generate 20% return per year. Warren Buffett has generated 20% on average the last 50 years. Naturally, the partners of the VC fund promise the same return. If not, the LPs will give the money to Warren Buffett.

My friend grabbed a napkin. He furiously started drawing a table with numbers. He almost seemed like a mad man. He asked me: Do you know how much 20% every year for 10 years is!? Do you know how much money we must return to our LPs!? I looked at the napkin. I found the intersection between year 10 and 20% IRR. It said 6.

6 times! We need to return the money 6 times, he said, while throwing the napkin up in the air. In other words, he had to turn €100 million into €600 million. If not, Warren Buffett gets the money. No wonder he looked tired.

But something bothered me. If he was under so much pressure, then why didn’t he invest like crazy? It made no sense. If he only had 10 years to turn a €100 million into €600 million, then why had he not invested yet? Actually he only had 8 years by then. I could almost feel his stress.

But I already knew the answer. This part was no different from my job at Accelerace Invest. We have the same problem. The problem is math.


One startup to rule them all

Most startups fail. They either go under or become zombies. A zombie can feel like a success to a founder. The startup grows into 10 to 30 people. Maybe it makes a little profit. The founder has built a company. But it doesn’t hyper scale. In the eyes of an investor, it’s a failure. A zombie. The truth is that only 1 out of 10 startups hyper scale. No hyper scale means no IPO or exit to Google. The money is stuck. It’s a nightmare for investors. Imagine you couldn’t withdraw your money in the bank.

The problem is this: The one startup that exit must single handily make the 20% annual return. The fund must make €600 million on the sale. A VC typically owns a 1/3 at exit. That means the startup must exit for €1.8 billion. And in less than 10 years. Actually down to as little as five years for investments done in year five.

Suddenly everything made sense. Why I had been rejected so many times as a founder. It wasn’t because the VC didn’t get it. It wasn’t because the VC didn’t believe in me. Admittedly that might have been a factor. But probably, math was the main problem. I hadn’t made it clear how my startup could exit at €1.8 billion in a few years. I didn’t know that I was supposed save his fund from being outperformed by Warren Buffett. I just thought we should grow and make profit. I didn’t know. Most founders don’t.

I looked at my friend with an expression of understanding. I picked up the napkin from the floor. It’s hard to find a startup that can return that much money in so little time, I said. That is why you haven’t invested yet. He nodded. So hard, he said, while falling back in his chair. It turned out being a venture capitalist wasn’t fun after all. He just wanted to help founders. Suddenly I felt I had the better job.

Think twice

Before you open your pitch deck to correct your exit slide, stay with me. It is not about convincing the VC that you can save his fund. It’s not about the VC at all. It is about you.

Do you really want to play the VC game? Does your startup truly have that kind of DNA? If you do. A VC can turn you into a unicorn. You can become Mark Zuckerberg. If not, the math behind a VC will crush you. I have seen it happen. Many times. And I am planning to write about it. To illustrate what happens to a startup when VCs invest. What happens if the startup doesn’t really have that DNA. If you want to read that post, keep an eye on my blog.

Conclusion made:

  • VCs compete with other fund managers,  including Warren Buffett…ouch!
  • VCs want you to make the entire return of the fund in a very few years
  • VC funding is only for a very few types of startup and founders


How to build a Mastermind for your startup

This is a follow up post on my earlier blog post: ‘Why boards don’t work for startups and how to do it right’. If you missed that post, I suggest you read it first. It gives the right context for this post. Find it here.

My last post argued that boards were invented to solve a problem that startups don’t have. I argued that boards should be replaced with a Mastermind. This is a post on how to construct the Mastermind and how to make use of it. Ideas are power. Use them.

The purpose of the Mastermind

The fundamental purpose of the Mastermind is to help the founders turn their startup into a company. Startups are eighty hour weeks and burn money. Companies are forty hour weeks and make money. How can that be? How can input not equal output. Something isn’t right.

The difference is effectiveness. Companies apply their resources effectively. Startups don’t. And the reasons for this are relatively simple.

Startups need to spent time on plumbing. Founders need to set up payroll, implement a CRM system and assemble furniture. Companies got the plumbing done. Employees can spend all their hours on execution. But that fact only accounts for a tiny part of the difference in effectiveness. The big culprit is hidden elsewhere.

The real difference is this: Companies know exactly how to sell their products and who to sell them to. They know because a long time ago, their founder did eighty hour weeks. His picture is now framed on the wall.

Startups don’t know how to sell their products. Or to who. But they try. And try. And try. Trying is really experimenting. To be experimenting is to approach things differently every time. Founders approach customers in different ways. The times the approach doesn’t work is time spent that didn’t result in money. Bingo! We found the culprit of the ineffectiveness of startups. The main reason why twice the work hours do not equal twice the money. But how do we solve this problem?

Unfortunately, the problem can only be solved by continuous experimenting. By checking of things that don’t work and getting closer to what works. All human progress has been a result of experimentation. Thomas Edison knew this better than anyone.
The good news is that experimentation can be done wisely. So founders need a tool that makes them smarter. And by now you know where I am going.

The Mastermind is that tool. Groups outperform individuals every time. Humans have become the dominant species because of we are good at collaborating. Few would like to face a lion alone.

The Mastermind is the group that must help the founders experiment wisely. The question is how to create it?

Construction of the Mastermind

First the Mastermind must be constructed right. This is the most important part. Boards are constructed to protect interests and secure influence. Advisory boards are mostly constructed to look good towards investors. The mastermind must be different. It must be constructed with the single purpose of helping founders experiment smarter.

Now for the practical part. How to do it. And I want to start with an apology. I will give you a guide. I don’t like guides. They are simplistic and force multidimensional things into a linear format. I feel ashamed. But I found no better way to do it. I have rewritten this section over and over. Anything else than a “step by step” format becomes messy. Sorry. So here we go:

Step 1. Choose the right people. I mean the RIGHT people.

Getting the right people in the Mastermind is the most important. First of all, each member must want to do it. They must fundamentally want to help. They must be people who have experimented a lot and learned from it. Titles and career success can be a bad proxy for this. Take long walks to understand how much they have really learned. They must be reflective. They must fundamentally respect the other people. They must be factual and honest. If you doubt any of these qualities, find someone else. Find 3 people that match.

Step 2. Establish the Mastermind on a clear philosophy

The Mastermind must be constructed on a coherent philosophy that every member agrees upon. The philosophy should be something close to this: Every member is here to help the founders experiment wisely in order to speed up the process of turning the startup into a company. Any member not buying into this philosophy will disturb the work of the group. Be sure everyone is aligned. That includes the founders.Get everyone together and shake hands. Maybe even sign something.

Step 3. Execute meetings often and structured

Use the Mastermind. Make it your most important institution. If meetings are too far between, most the time is spent bringing everyone up to date. It becomes reporting. Each meeting should pick up from the last meeting. Weekly meetings work. Keep them short. Maximum 1 hour per meeting. Do long sessions once in a while.

The meetings should have a fixed agenda with only one topic. The topic should be experiments and learning. The founders must give insight into the latest experiments. The Mastermind will discuss how to interpret the results and what to do next. Limit the topic to this. Save the rest for other forums.

Step 4. Appreciate your Mastermind

Treat your Mastermind right. They have chosen to help. Don’t choose people who will only help if they get paid. But pay people who help. Most founders are not good at this. Pay them with recognition. Pay them with acknowledgement when you succeed and get interviewed. Pay them by showing respect for their time. Start meetings on time. End them on time. Make the time they spent productive and pleasant. Pay them money or stock if you want. Pay them anything you can. A true Mastermind is worth it.

Step 5. End the Mastermind

I said that startups are not companies. I said that companies have boards, but startups should have Masterminds. I said that the purpose of the Mastermind was to turn the startup into a company. Consequently, I must also conclude that the Mastermind must end. It will make itself obsolete. The day it happens the group should celebrate. They succeeded.

One day the startup has found an effective way to sell their product. One day they have identified the people who want to buy it. Now they just need to do more of it. The founders raise series B, C and so on. They go into hyper scale. They hire lots of people. Professional management will join. The founders will bring more investors onboard to finance the growth. New problems will arise. But the new problems well dealt with by the traditional board.

The board has stood the test of time. It works. But no governing structure has yet stood the test of time for startups. The modern tech startup is still a new invention. The Mastermind just might be what we have been missing.

Conclusion made:

  • The purpose of the Mastermind is to help the founders turn their startup into a company by speeding up the process of experimenting their way to a viable business model
  • The right construction of the Mastermind is vital
  • The successful Mastermind will make itself obsolete over time

Why boards don’t add value to startups and how to make them do so

Lawyers and investors will help you set up a board of directors. This post will not. Instead it will do the opposite. It will deconstruct startup governance into what really matters. In the process many board members of startups will dislike me. My intention is to ask the right questions and improve the way we built startups. Questioning is power. Use it.

Most startups have boards. Investors demand them. Founders feel they should have them. Everyone knows that a real company has a board. Founders want to build a real company. They are right. Real companies have boards. There is just one problem.

The problem is this: startups are not real companies. They are startups. They are potential companies. Boards work for companies. Do they also work for startups?

The answer is no. After doing two startups and three years of startup investing at Accelerace Invest, I know why. Lately, I have decided to tell people the truth about boards. And it begins a long time ago…..

Boards were invented to solve a corporate governance problem

Once upon a time companies were owned by individuals, families or small groups of partners. Then something was invented in the mid 1800th century that changed the world forever.

The invention was the modern Corporation. It was a huge success. Corporations allowed people to invest in companies without assuming personal liability. It became attractive to buy company stock. And people did.

As more people bought stocks, the number of shareholders rose. Companies were no longer owned by individuals, families or small groups of partners. They were owned by hundreds or even thousands of people. The shareholders. The money from stock offerings helped companies grow big. But a problem was born: Corporate governance.

In essence the corporate governance problem was simple. Before the corporation, the owners and the managers were mostly the same people. And they were few in number. They could fit around the kitchen table and have productive conversations. They knew each other intimately and understood what everyone was doing.

With the Corporation things changed. Not all shareholders could be part of the management. Only a few were. Sometimes none were.  But the shareholders still wanted to have a say and be informed. After all, they were the owners. But the kitchen table was too small now. So they had to rent a big event space and serve drinks. It was a lot of work. But an even bigger problem arouse.

The meetings were a chaotic. Everyone wanted to speak. Everyone had questions. Each topic got debated forever. No clear decisions could be made. It was frustrating.

Shareholders and managers started to hate these meetings. But the meetings were necessary. In the end everyone agreed on a solution: To limit these dreadful meetings to once a year. They called this meeting: The General Assembly.

The problem was solved. Managers and shareholders met once a year. The chaos was contained. However, a new problem emerged. An even bigger problem. Much bigger.

Now the shareholders only got information at the general assembly. Suddenly the shareholders felt uneasy. They didn’t really know what was going on. But they heard rumors. And they didn’t like what they heard.

They heard that one of the managers bought a yacht. Or the brother of the CEO won a huge contract from the company. Distrust started to surface. Distrust was bad for both managers and shareholders. Everyone needed a solution. Luckily, an ingenious solution was found. A solution that has lasted until this day.

The solution was: The Board. It was brilliant. The board was small enough to meet regularly. Shareholders could choose board members they trusted. These board members could assert influence and make sure the management served the shareholders’ interests.

Managers felt relieved. Now they could inform and interact with shareholders in a structured way. No more chaos. It was a win- win. It worked like magic. Until a new invention came along: The modern tech startup.

Conclusion: boards works well for companies

Startups do not have a governance problem

The modern tech startup was invented in Silicon Valley. Not by the entrepreneurs. They have always been around. Also other places than Silicon Valley. The modern tech startup was invented by another invention: Modern venture capital.

Modern venture capital was invented in the late 1940s. Second World War created a huge pressure to develop superior military technology. The epicenter of military research was Silicon Valley. Here brilliant people invented ground breaking technology.

Some people saw the value in these brilliant minds and their ability to develop technology. These people were called Venture Capitalists. The venture capitalists started to fund the brilliant minds. They didn’t just buy stocks. They invested.

The venture capitalists provided lots of cash a very early stage. In return, they got a large stake and significant influence. It was a small and closed party. Once again the people involved could talk around the kitchen table. And they did

And so we return to the core of the issue: The kitchen table.

A typical startup is so very different from the original corporation (I just call them companies). Startups do NOT have a large number of investors. Investors do NOT have limited access to information. Investors do NOT distrust the management (I hope not).

Everyone involved with the startup can fit around the kitchen table. And they should. The problem solved by the board is gone. The board becomes a medicine to a non existing problem. And taking the wrong medicine can have severe consequences.  Any doctor knows this.

Conclusion: boards solves no problem for startups

The problem in startups is fundamentally different from that of companies

Many startups have adopted the concept of the corporate board. Founders and investors think it’s “professional”. That’s how a real company does. And they are right. But startups are not real companies. The difference is fundamental.

The difference is best illustrated with an analogy. Ships.

A startup is like a treasure ship in unknown waters with icebergs are floating around. It’s risky, but the crew hope to find gold. It is a treasure hunt. And the investors are in it for the bounty.

A company is a cargo ship carrying goods from one port to another. It’s sailing a fixed route in a well known environment. The shareholders are in it for their part of the cargo. They know the worth of the cargo and just want to protect it.

The difference between the two ships is their environment and mission. And the difference demands two very different types of governance. The wrong approach can have fatal consequences.

Conclusion: startups and companies have very different problems

Startups need a Mastermind

If you were captain on a cargo ship sailing a known route between two harbors, how would you organize meetings?

I suspect you would do something close to a board meeting. You would have scheduled meetings. The crew would report to you.  You would just want to know if everything goes as planned. In most cases it does. If not, you would ask the crew for corrective actions. The cargo must arrive in time.

But what if you were captain of a treasure ship in unknown waters? The weather is rough and icebergs are floating around. Then, how would you then organize meetings?

I suspect you would do frequent status meetings. You would evaluate every new turn of event and constantly calibrate your plan. Everyone would have full attention of the situation and collaborate. Everyone’s lives depended on it. The treasure would be worth it.

When startups mindlessly adopt the traditional format of the board, they apply the wrong tool. They are trying to steer a treasure ship like a cargo ship. It will lead to frustration and mismanagement, at best. In most cases, it leads to something much worse. They sink.

Instead of a board, startups need something closer to a Mastermind. Not an evil individual as portrayed in James Bond movies. But a combined mind made up by smart people with a relevant and diverse set of skills. A mind that evaluate every new event and can make rapid decisions. A mind that works independently from individual shareholder interests.

The Mastermind can be called a board. I understand if you prefer that name. It can have any name you want. It can have rules of procedure. It can meet at fixed schedules. It can have an agenda. It can have any attribute optimal to do the job. But it cannot be established without first completely disregarding the traditional ideas and formats of the corporate board.

The mastermind must be built from the ground up. It must be constructed to fit the purpose. To go treasure hunting. Only then, are managing startups right.

And here I will leave you. I know. I have not adequately filled the void I created with my post. I have not provided a proper description of the Mastermind. I have given no guidance on how to construct it. But I will. I am thinking. And my conclusion will be posted in my next post. How to build a Mastermind for your startup.

Conclusion: startups need to rethink the concept of the board and built a mastermind instead

Subscribe to my blog to get the update. You will also find more posts like this.

Conclusions made in this post:

  • Boards works well for companies
  • Boards solves no problem for startups
  • Startups and companies have very different problems
  • startups need to rethink the concept of the board and built a mastermind instead

Why founders make bullshit competitor slides (and why my wife is better than yours)

Pitch doctors will help you to make cool competitor slides. This post will not. Instead it will do the opposite. It will deconstruct competition into what really matters. In the process I will offend you. I will use examples involving your wife. I will use women as product examples. Some will find it objectifying and sexist. My intention is to give you understanding. Understanding is power. Use it.

All founders claim that competitors are inferior. Competitor’s products are hard to use, outdated and lacks features. Founders can prove it. They have a formula that objectifies competition into a clear picture of exactly how superior their product is. The formula is called a 2 by 2 matrix. The picture is called the competitor slide.

Competitor slide(The slide is borrowed from Steve Blank. Hope he don’t mind)

Every startup has the competitor slide. And they should. Investors want to see it. Mentors want you to create it. It is a powerful slide. Maybe the most powerful in the deck. It eliminates any question. Any doubt. The facts are clear. We are good and they are bad. It’s quantified and obvious.

Except that it is not obvious.

I used to nod when founders pitched the slide to us at Accelerace Invest. But something about these slides didn’t seem right. After three years of startup investing, I figured out why. Now I will share it with you. And I will begin by offending you.

Competition slides are fundamentally flawed

What if I told you this: My wife is better than your wife. And you would be better off having a wife like mine! (If you have a husband, replace wife with husband in the rest of the post. Same with girlfriend or boyfriend)

Do you feel it? The sting. You probably like me a little less now. Maybe a lot less. The reason is obvious. I am incredibly rude. You probably think it’s a ridiculous comparison. First of all, what do I really know about you wife? Secondly, what attributes do I compare? Thirdly, can spouse-quality even be objectified? What if our values are different and you appreciate things, I don’t care about.

By now you know where I am going. I will use the logic from the wife example to build my case.

Most founders are in love

Most founders have an emotional relationship with their startup. It is important that they do. If founders were not emotional, they would either be psychopaths or not believe in their startup. Belief is an emotional state. Steve Jobs was emotional. Some say it helped him succeed.

The emotion that founders feel is something close to being in love. I felt it every time. Psychologists would call it positivity bias. Economists would call it escalating commitment. A phenomenon where people can no longer make rational judgments, and will continue down a path even though it is no longer the optimal thing to do. They have invested a lot in their current path and don’t face reality.

The emotional relationship affects founders. Here, we have the first point of similarity to the wife comparison. We feel love for our spouse. We feel love for our startup. In both cases we have positivity bias. We cannot make rational judgments.

Conclusion: Founders are in love and it clutters their judgment

Most founders don’t really know their competitors

When I claimed my wife was better than your wife, you most likely thought: I don’t really know your wife. You are right. I don’t. I only know what I can observe in public. I don’t know what she is like at home. Most people act differently in public. They show their best side. I know nothing.

When founders evaluate competition they use public information. They check competitors’ websites. Sometimes they test competitors’ products. Maybe founders pick up rumors. They are evaluating someone else’ spouse. Unless the founders use to be core team members at the competing company, they know nothing.

The founders don’t know the competitors’ product pipeline, their sales pitch, the strength of relationships to their customers, the marketing strategy or the culture. Companies don’t just compete on descriptions of features on their website.

Conclusion: Founders rarely know enough about competitors to truly evaluate them

The variables founders compare are random

You wondered which variables I used to conclude that my wife is better than yours. Did I use looks, intelligence, career success, value system or something else?

I used whatever supported my conclusion. I am in love. I think my wife is the best. I will justify it. And I pick the variables that support that picture. The game is rigged.

Founders do the same. The love for their startup convinces founders that their startups is the best. The conclusion is established. Now they just need to choose the variables that support what they already believe. The variables serve the purpose. They become random. In the end, they ensure a place in the right hand corner of the 2 by 2 matrix. The spot of superiority.

Wife matrix

Conclusion: Most 2 by 2 matrices are reversed engineered with variables fitting the conclusion

The startup serves other people. Not themselves.

I claimed that you would be better off having my wife. Or at least one exactly like her. That claim would require I knew you intimately. I would have to be your best friend or your brother. Anything further from that and the suggestion would seem preposterous. Few new friendships would survive such a suggestion.

The reason is simple. You are the one who must live with her. And I do not know you well enough.

The same is true for the product of the startup. It is the customers who will live with the product. Not the founders. Then wouldn’t it be important to know what the customers value? Do the founders know the customers well enough. Like a best friend or a brother?

In most cases founders do not know the customers to that degree. Do you see the problem?

What would a professional matchmaker do? She would interview her customer and ask him about his preferences. What attributes are important to him. Have him rank them. Only then would she score potential candidates to find his match.

Conclusion: Only customers can truly provide accurate variables


The score assigned to the attributes are assessed by the wrong people

Let’s say I interviewed you. The attributes you chose on the Y and X axis were the ones you proposed. Let’s say those attributes were physical attractiveness and parenting skills.

Let us even say that you knew my wife intimately.

I showed you my matrix. It looks right. Physical attractiveness and parenting skills make up the axes. However, my wife is in the upper right hand corner. Your wife is in the low left corner. Maybe you don’t agree.

The problem is the score. You might find blond hair sexy. I find black hair sexy. You might think children should have strict rules. I might think children should do as they please. Different people value different things differently. Who is right? You are. The customer.

I cannot count the number of times founders have told me that their software is the most user friendly. Well, my mother just returned her iPhone because she found it too difficult to use. My daughter cannot use anything but an iPhone.

The thing is that the score depends on the customer segment. If segmented right, customers will be homogeneous. They will be similar in the way they prioritize, make decisions and value things. In other words, the score is segment dependent. So when founders create their competition slide, they must understand which customer segment it represents.

Conclusion: The scores of the variables depends on the segment


The true picture hides in the mind of the customer

Okay. I have made my case. I have rendered the competition slide useless. I think I even used the word bullshit. I rarely curse.

Then what should founders do? Well, if they want to win pitch contests, stick with the 2 by 2 matrix. It just works.

If founders truly want to understand competition they must reverse the process. Instead of establishing the conclusion and then justify it, they must seek the truth. It might not pretty.

The truth is hidden in the mind of the customer. The human beings in the customer segment that the startup is focusing on. The users and the buyers.

Founders must talk to customers and identify what they find important. They must ask them to rank those attributes. And founders must ask customers to help score the different competing solutions on these attributes.

The picture will be muddy. The process will be painful. The result cannot be used in pitch contests. But it can be used to understand how customers really evaluate their available solutions. The true picture will help founders to make sure their product becomes truly superior.

Conclusion: Founders must include customers in their competitor analysis and snap out of love for a while


Conclusions made:

  • Founders are in love and it clutters their judgment
  • Founders rarely know enough about competitors to truly evaluate them
  • Most 2 by 2 matrices are reversed engineered with variables fitting the conclusion
  • The scores on the variables depends on the segment
  • Founders must include customers in their competitor analysis and snap out of love for a while