Why we chop onions with knives and why it matters to startup founders

Consider the problem of common onions. Most people face these bulbs daily because common onions are part of most dishes. The problem is that they are tricky to cut into the neat small squares made by chefs. It requires multiple difficult cuts on several dimensions of the onion. And the risk of getting hurt is significant. But perhaps the worst part of cutting onions is the gas they release. It hurts and makes you cry.

For most people, cutting a single onion requires between 2 – 5 minutes and causes physical pain. Not to mention the embarrassment of crying in front of children.

But there is a better way. Imagine a machine that can cut an onion in 10 seconds with absolutely zero physical irritation. That would be a game-changer. And it is called a blender.

The blender was invented in 1922. While the blender chops onions remarkably faster than the knife skills of most people allow, few people use a blender for chopping onions. And the reason is obvious. Rarely do one just chop onions.

The efficiency of processes
Onions are an essential part of most dishes. But they are a part, only. The thing is that cooking is a process. Put differently, cooking requires multiple steps. And the efficiency of a process is a function of the smoothness of the transitions between the various steps in the process. Some say that a good process flow.

Many aspiring startup founders are equipped with some technology and on the lookout for problems to solve. Sometimes, these founders identify some inefficiency that seems ripe for fixing. Something that their technology could solve. But if the founders are outsiders, they risk identifying a problem that only exists in isolation. Like someone with little experience in cooking looking at people chopping onions

These founders build a product to solve the problem. But they build the equivalent of an onion chopping machine. VCs call it: a feature not a product.
The problem is that the product does not solve the problem. Because the problem is to cook the dish. And the onion is just a part of this process. Even though a blender improves the step of chopping onions, it introduces friction in between the steps.

Instead of smoothly going from cutting meat and smashing garlic into onion chopping, one must open the cupboard, remove the toaster that is in the way, take out the blender, find the blender lid, plug it into the power socket, chop the onions, clean the blender, put it back into the cupboard behind the toaster. The friction is simply too great to justify the saved tears and extra knife movements.

A great example of such a product came from Accelerace alumni startup Pixelz. Initially, the company was called ‘Remove the Background’. As the name abundantly indicated, the company offered background removal from product photos.

But the founders soon realized that webshops do much more than just remove the background. Surely, that was one of the more unpleasant tasks. But it was only a part of a process of general photo editing. The process also includes retouching, color matching, depth correction, and collage creation.

Sending the photos to Pixelz for just background removal and then waiting for them to come back to continue the editing was like sending onions to chopping mid cooking and waiting for them to come back before one can resume the dish making.

Luckily, the founders were quick at realizing their lacking product-market-fit and adjusted their product to solve the entire problem. That of photo editing. Consequently, they renamed to Pixelz and currently serves the world’s biggest apparel brands.

But how do founders avoid making an onion chopper?
Founders must understand how their customers do their work today. And not just on a conceptual basis. They must understand the minutest detail of their workflow. That includes what tools they use, how long time they spend at the various steps, and who else is involved. Furthermore, they must understand how the customer perceives each step. Which parts do they enjoy and what parts do they dislike. Only by understanding the details of the workflow, can founders define the endpoints of the process and design a product that offers a radically more enjoyable process.

Conclusions made
• Onion chopping is unformattable.
• Onion chopping is only part of the process of creating a dish.
• The efficiency of a process is a function of the smoothness of the transitions between each step.
• The use of a blender to chop onions introduces friction and delay in the process.
• Successful founders understand the processes of their customers and design products that improve the process and not just a step in the process.

If you want to learn more about how to do startups right, then join Accelerace or Overkill Ventures where I serve as General Partner .

Why time is not money, and how founders should spend their time

Some say time is money. It is not. Money is time. And when startup founders run out of money, they run out of time. 

Time is Opportunity. And startups are defined by Opportunity. When Opportunity disappears, so does the startup. But every day the startup lives, Opportunity lives on.

But what exactly is Opportunity?

Opportunity is the freedom to perform actions of your choosing. Some actions will make great use of the time. And some actions will be a waste of the same time. 

Imagine being given chips to a casino valid for one night. One could spend the night posing in the bathroom mirror. Or one could spend the night playing the blackjack table. Or perhaps seducing the waiter.

The chips provide Opportunity. But the value of Opportunity is defined by the actions of the player. 

Great startup founders understand the value of Opportunity. And when startups fail, it is often because the founders wasted Opportunity. Like posing in the bathroom mirror rather than laying down chips on the blackjack table.

In the context of early-stage startups, one use of time is more valuable than anything else. To obtain original insight. Insight about future customers, the psychological makeup of their users, and their future needs.

When Templafy entered Accelerace in 2013, the founders had spent the past year obtaining original insight. And it was this insight that led to the product-market-fit that made them the global leader within template management SaaS. 

The founders knew that enterprises were considering switching from desktop-based Microsoft office to cloud-based versions such as Google Docs and MS 365. But at a more granular level, they knew that this change would leave the brand manager with no chance of controlling templates across the organization. At even further insightfulness, they understood that brand managers hate to police their colleagues about the correct use of templates. In effect, the founders had obtained insight into the very psychological makeup of their customers. 

At the same time, the Templafy founders had refrained from other things. When they entered Accelerace, they did not have a pitch deck. They had no incorporated entity. They had no brand t-shirts. They had not been to a single startup conference. They had no website. Eventually, they did turn their attention to these things. But they understood how to spend their time.

When startup founders allocate time, many look to successful startups for clues. And today many new SaaS startups would look at Templafy. But that would be a mistake. Today, Templafy knows its customers to the minutest and most intimate degree. Put differently, they already have original insight. This means that they can focus on other and more visible things. Such as experimenting with pricing models, doing content marketing, and employee branding. 

Mistakenly, many founders think such action courses success. They do not. Such actions amplify success. Instead, success is coursed by having original insight and then acting on it. But obtaining original insight requires the founders to focus their time on this activity.

How? By living with your customer. To see what their day is like. To understand which pages that open upon the start of their browser. To understand what the agenda in internal meetings are like. Understand what decision they can make, and which require approval. To understand their fears and their pride. Joys and sorrows. To understand what will happen to them in two, five, and seven years. And then understand how you can play a role in shaping this future.

Spend your time wisely, it may cost you Life.

If you want mentorship in spending your time right, then apply to our acceleration programs Accelerace and Overkill.

The true reason startups fail, and how to avoid it

In 2006, two different startups set sail to change ticketing for events. One became a global leader. The other failed miserably. I know because I was the founder of one of them.

In the early years, the differences between the startups were marginal. Both saw an opportunity to provide an alternative to Ticketmaster. Ticketmaster had no self-service platform. The internet empowered events to manage their own ticket sales. Both startups recognized this opportunity.

However, there was a small difference. And it turned out to be the difference between a billion-dollar market cap and folding after two years.

My startup went after venues with lots of ticket sales. Like concert halls, arenas, and nightclubs. We got lots of meetings and even some pilots. Everyone expressed interest.

The other startup went after customers that did not sell many tickets. Those were meetup organizers. A new type of event enabled by social media.

We made fun of the other startup at our board meetings. They had no market. But the joke was on me. Because my startup failed. And the other startup was Eventbrite.

The difference between interest and desperation


We pitched venues. They were interested in seeing what we had to offer.

However, venues used Ticketmaster. Ticketmaster did all the work for them, and sometimes even guaranteed a minimum ticket sale. We did none of that.

Still, that did not prevent the venues from meeting with us. Even being polite and saying that they might try it.

The truth is that customers have a myriad of reasons that deter them from buying something. They have no need. They have a good alternative. They have existing relations with a competitor. They can only buy within certain periods. They have bad experiences with similar products. They only feel safe buying something proven. The list is endless.

Because there are so many reasons not to buy something, the customer must have a very strong need to buy. Something close to desperation. Clearly, venues were not desperate for another ticketing solution.

Eventbrite did not go after venues. Instead, they talked to meetups. None had cared to serve meetups before. Consequently, they had no alternative, no existing vendor relations. Nor high requirements. But they were desperate. At least enough to give Eventbrite a shot.

The true reason startups fail


When startups fail, it is simply because they spend their entire runway speaking to customers who will never buy the product. That is it.

Instead, failing startups chase after the interested people that always surrounds anything new. And try to convert ‘customers who will never buy’ by improving marketing, sales tactics, and pricing. But none of that helps because the customer will never buy.

Signs that customers are merely ‘interested’ is that they are already served by competition or alternatives. At meetings they ask about you, your vision, and your product roadmap.

Inversely, startups succeed when they identify customers who are desperate. Because only desperate people will buy a first version product from a new unknown company.

Signs that customers are desperate are if they have hacked together their own solutions, or using ill-fitted tools meant for a different purpose. At meetings, they ask how your product can be implemented, when they can get it, and how they can get support.

At Accelerace and Overkill Ventures we call this desperate group the Beachhead. It is a small group of customers who always serve as the earliest adopter and reference group for later customers.

Today, Eventbrite serves more than meetups. But in the beginning, this tiny desperate group was their Beachhead. My startups chased venues for two years that would never buy.

We confused interest with desperation. And so, do many startups founders. Consequently, most startups fail. There you have it. That is the true reason startups fail.

Why the world of startups is the wickedest place of them all

Covid-19 is taking its toll on many startups. Many founders were already struggling to get their businesses off the ground before the virus hit. To them a natural catastrophe just hit. Opinion leaders are busy being optimistic and “glass half full”. But that does not acknowledge the devastating and brutal reality for the individual founders affected. Let alone, what it can feel like emotionally. Overcoming some of the darkest periods of my own startup journey, I wrote this poem (if it can be called that). I am not sure it helps startups founders in their suffering, but at least it can help portrait how founders can feel like.

Two worlds exist. One of causality and one of probability. In the world of causality, action creates reaction. In the world of probability, action creates opportunity.

The world of causality is kind. Like a garden. The world of probability is wicked. Like an ocean.

The world of causality rewards us for effort, and never fails to do so. It is the world we were taught as kids. Practice, and you will learn, our guardians proclaimed. And so, we did.

We learned to walk, ride a bike, and read through pure effort, and the kind laws of causality rewarded us. Over time, we built self-confidence through the law of causality. We learned that if we wanted, we could make it happen.

But beyond the borders of our familiar garden of causality, lies the wicked sea of probability. It is the world our parents did not dare to mention. For they too feared it.

The sea of probability is a place where nothing is certain. Throw a rock in water, and sometimes it sinks, sometimes it floats. The rules are in constant flux, and the motions unpredictable as the waves.

The world of probability does not reward effort. Instead, it rewards resilience. Resilience is different from effort because resilience assumes defeat. Effort does not.

Resilience is the capacity to sustain unjust defeat. To throw a line into the sea a thousand times and not catching anything. Seeing the person next to you catch something on their first attempt. And get up the next day to do a thousand throws with unchanged enthusiasm.

The world of startups is that place. I know because I was floating in the middle of it.

The unfairness and uncertainty of the wickedness depleted the self-confidence I once had. And I found myself naked in the darkness of the sea screaming for meaning. But my cry went unheard, and the pain of inexplicable abandonment consumed me.

At that moment, I resurrected. I realized that my suffering stemmed from desperately holding on to the kindness of the garden. I had to embrace the wickedness. To make it my world and rebuild myself as a master of its seas.

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.