In 2017, the equivalent of the arrival of an alien spaceship happened. A fund of a size none thought possible appeared from the edge of the world and descended on Silicon Valley. At the helm of the ship stood Masayoshi Son. An eccentric business daredevil with a risk appetite that would have made Genghis Khan wet his pants. The ship was loaded with 100 billion USD ready to be deployed through cash canons of doomsday-sized calibers. Once Son gave the command to fire, the cash cannons colored the skies green for the following years. When the cash rain ceased in 2019, the Soft Bank Vision Fund had deployed close to 100M USD per day, every day, since its arrival.
The enormity of the Vision Fund can best be illustrated by comparing it to the most legendary VC of all time. Sequoia Capital was founded in 1974 and has delivered above-market returns ever since. Consequently, investors from around the globe vie for receiving an allocation. Naturally, such pressure makes their funds grow. Still, their 2017 fund Sequoia Capital Global Growth Fund II, their biggest to date, was “just” 2 billion USD.
Despite Sequoia being dwarfed by the Vision Fund, Sequoia perhaps best depicts the development in VC fund sizes. The first Sequoia Capital fund I from 1974 was a mere 3 million USD. The second fund grew to 20M USD. The third amassed 44M USD. In 2011 and 12 funds in, Sequoia Capital crossed the 1 billion USD mark for the first time.
When VC funds grow, so does the number of people needed to manage them. The first Sequoia fund had one partner. Don Valentine. Later, more partners joined. Later still, the partners started employing investment professionals. Like Sequoia, most VCs start out as a group of partners investing together. These partners share the workload, and only have a couple of people employed. Perhaps a CFO and a secretary. But as VC funds grow, they employ more people. These investment professionals differ from the partners in one important aspect. They do not have their own money in the fund. Consequently, these people tend to regard the firm as an employer, and themselves as employees. To many, this fact may seem trivial. But in the world of investing, this is anything but. As we shall see.
The House Money Effect
When VCs assess deals, they must weigh risks and opportunities. But risk and opportunities are interpreted values. Interpreted by the people meeting the founders. Until a few years ago, startup founders would meet partners in the funds. And the partners would make the assessment of the risk and opportunities. But recently, founders mostly meet with investment professionals.
Because investment professionals are essentially employees, their frame of risk and opportunity is quite different from the partners. Partners can make or lose money. Investment professionals can be promoted or lose their job.
One might conclude, that losing money is worse than losing a job. And this should make Investment professionals more risk-tolerant. However, this conclusion would be mistaken because of something called the house-money effect.
The truth is that even though the partners risk losing their money. The money they invest typically stems from profits from previous investments. It is the equivalent of going to the slot machine, winning money, and only playing with the money you have just won while keeping the original amount safe. Money recently won feels like “free” money. And the behavior that stems from someone gambling recently gained money, is called the house-money-effect. The effect gives one much more risk appetite than if one was risking money diligently collected. Did Masayoshi Son have house-money? Son made close to 100 billion USD when betting on a young Jack Ma, founder of Alibaba.
Arguably, the importance of the house-money effect in venture capital is under-appreciated. One definition of startups is that they are: a temporary organization designed to search for a repeatable and scalable business model.” (Steve Blank). The definition oozes risk and uncertainty. A temporary organization that is searching does not seem like a sound investment. And it isn’t. Thus, some version of the house-money effect must excerpt influence to make otherwise smart people engage in such risky bets.
In fact, one could argue that the house-money effect underpins venture capital. But then what happens when investment professionals take over the risk and opportunity assessment? Will venture capital change? It already has. And a large group of founders suffers.
The tale of two founders
Many investment professionals come from finance and consulting. That means investment banking, PE funds, hedge funds, pension funds, McKinsey, Bain, etc. These people are used to hard data. However, startup investing seems opaque because there is little hard data available. This conundrum has two consequences. First, investment professionals gravitate towards companies that can present hard data. In practice, SaaS companies with three years’ operating history and 100K MRR. Second, and perhaps even more consequential, they gravitate towards founders with scaleup resumes. That means Founders, executives, and VPs from Zendesk, Klarna, Bolt, etc. Why would they do this? Well, imagine that the investment decision proves bad, and the firm loses money. To an investment professional, it seems much easier to defend having invested in proven people with impressive resumes, than a team of nobodies. The latter requires some explaining to do.
Does this mean that only founders with scaleup resumes get funding? Not entirely, because there are not enough scaleup founders for investment professionals to solely bet on them. But it does produce a tale of two founders. Founders with scaleup resumes who can raise exorbitant sums of money at fantasy valuations. And everyone else who struggles to merely solicit a term sheet. Besides being a frustrating experience for the latter group (which is the vast majority), it might also prove the beginning of the end.
The only way to make money investing
Much research finds that first-time funds perform best. One example comes from another legendary VC. In 2019, we got a rare view into the returns of Andreessen Horowitz (A16Z) when internal data slipped into public hands. The first A16Z fund from 2009 returned 44% net IRR. The second A16Z fund from 2010 returned 16% net IRR. The third fund from 2012 returned 15% net IRR. Although the final outcome could differ from these figures, there is a trend. And the trend is declining performance. But wait, there is another trend! The first fund was 300M UDS. The second was 656M USD. The third is 997M USD. I suspect you know where I am going.
When fund sizes increase, the firms get “institutionalized”. The risk tolerant house-money-effect is diluted and replaced by hard data seeking I-cannot-be-fired-from-investing-in-a-Klarna-product-manager conviction making. But if the house-money-effect is underpinning venture capital, what happens to venture capital when it is “institutionalized”? The answer might be comforting, or the opposite, depending on who you are.
Investing is a self-correcting game where non-viable strategies will disappear over the long run. And paying exorbitant premiums for founders with scaleup resumes is not viable. Why would I think so? Because there is a law in investing that not even all the money in the world and legions of Bain consultants can buck. The law is this: One can only make money investing if one is both right and non-consensus. Essentially the law says: if everyone agrees that something is a good investment, that something will become so expensive that no money can be made. When scaleup-resume founders obtain stratospheric valuations, it can only have one reason: Everyone agrees that it is a good investment. Consequently, the law ensures the firms engaging in this strategy will suffer in the long run.
However, time is relative and venture capital has painfully slow feedback loops. The self-correcting nature can take years, and perhaps even decades to exert itself. Until then, startup founders without scaleup resumes will suffer. And guess who are among these: yes, most women and minorities! But more importantly, a lot of entrepreneurs with the ideas and talent to create all the house-money needed to keep fueling the wonderful world of startups.
At Accelerace we insist on being indifferent to the resumes of founders. We do not care who you are. We care only about what you do. If you are a founder and our views resonate, then visit our website here.
It has been the year my prediction from 2017 came true. Four years ago, I described how crypto would enable what I called ‘unique digital assets’. Today, they are known as ‘non-fungible tokens’ or NFTs.
Many people consider NFTs to be gimmicks. They are mistaken.
Humanity is engaged in a collective effort to create a digital version of reality. Why? Well, we have always tried to create alternate realities. And before the latest digital tooling became available to us, we relied on hallucinogens, theme parks, and roleplaying.
But since the birth of the internet, our brightest minds have focused their efforts on digital realities. Chatrooms, online games, and social media are all efforts in this direction.
With the latest tooling available, such as VR headsets, powerful graphics engines, streaming, machine learning etc. our collective project is accelerating. And with each new app, we are advancing towards a more digital reality.
Many people hope that the coming digital reality will be more equitable. I share this hope. However, some people want digital realities with no scarcities. The logic is simple. When code can be replicated endlessly, we can all have things in abundance. A sort of paradise, they surmise.
However, this thinking is flawed. A world without scarcity is not a paradise. It is something closer to hell.
Scarcity is important because scarcity makes us value things. If something is abundant, we assign zero value to it. And a world we assign zero value to sounds far from paradise. Instead, it sounds like an action game with all the cheats turned on. After 5 minutes of rampage, this ceases to be fun.
Even today, some of our most beloved apps have introduced artificial scarcity for the joy and benefits of their users. Pictures that disappear, a limited number of attendees for streams, time-limited access.
However, the current ways of imposing scarcity are crude because they are essentially just ways of “crippling” the apps. They are not true scarcities. In contrast, NFTs enable true scarcity. As true as digital scarcity gets anyway.
NFTs could turn hell into paradise. A digital version of reality. One that feels truly valuable. NFTs enable us to create, trade and collect. Actions that define us as a species and give us immense joy.
We are just at the beginning of NFTs. So early that we call them by name. Soon, we will no longer call them NFTs. They will just be things. Because we will take scarcity for granted. Just like we used to call things “online”. Today, we just assume things are online.
Startups have amble opportunities to speed up this development. All digital assets will be put on blockchains. Just like we have put everything digital on servers.
Many startups helped us get online. Just like many startups will help us get “on-chain”. In the coming year, I hope to bet on more startups doing this.
Folklore /ˈfəʊklɔː/: the traditional beliefs, customs, and stories of a community, passed through the generations by word of mouth.
Each competitive realm has folklores. Stories of fame, success, and paths to notoriety. In golf, we know the story of a young Tiger Woods demonstrating his putting skills on national television at the age of 3.
In acting, we tell stories of the crazy dedication by Matthew McConaughey that willingly embodies his characters to an extent that they fuse.
In science, we tell stories of the lifelong obsession of Jane Goodall, who lived in the jungle studying chimpanzees.
In the modern world, folklore is more influential than ever. Because when we have access to infinite information, stories echoed by communities stand out as authentic and real.
Folklore shapes our beliefs about the realm that it depicts. The story of Tiger Woods primes us to believe that becoming a professional golfer is hard. Unless one has demonstrated remarkable talent from an early age, becoming the next Tiger is impossible, we believe. Consequently, most parents would not support the idea of their kids dropping out of university to start a potential career in golf. Nor would the trainers, or even their friends.
The story of Matthew McConaughey means few people suffer from the delusion that becoming a movie star is easy. And few career advisors would recommend trying.
The story of Jane Goodall tells us that becoming a renowned scientist requires lifelong immersion. And the few who embark on this quest, understand the sacrifices.
Golf, Hollywood, and Science share the characteristic that making a living, let alone becoming a top performer, is hard. We understand the odds, the sacrifices, and the obsession. And most stay away.
Startups share the same characteristic of being hard. Making a living, let alone making it onto the unicorn list, is as difficult as becoming a Jane Goodall. In 2020, 120 startups became unicorns. It is estimated that about half a million startups are founded per year. That is a chance of 0.024%.
Even when we decrease the ambition from unicorn to just raising a series-A, the numbers illuminate the hardship. In Denmark in 2020 (where I live), we had about 12 series-A investments in Danish startups. It is estimated that 500-something startups are founded each year in Denmark. That is a chance of raising a series-A of about 2%
However, the facts do not shape the perception of the realm of startups. Startup folklore does. And unlike Golf, Hollywood, and Science; teachers, parents, peers, and career advisors seemingly support everyone to pursue a startup. For a long time, this puzzled me. But I have come to understand the phenomenon to be the power of folklore.
Startup folklore is heavy on stories of people materializing billion-dollar companies by conceiving of a good idea. These stories make us believe that the idea is what matters. Equal to talent in golf. Dedication in acting. Or obsession in science. If you have it, you can make it.
The forgiving thing about this belief is that everyone has ideas. Not everyone has talent, dedication, or obsession. But everyone has ideas. Thus, startups can be done by everyone, the logic goes.
Unfortunately, the facts tell a different story. But more importantly, those of us who have spent a lifetime working with startups know that ideas have very little to do with success. Instead, the foundation for success is ‘original insight’. And not everyone has it.
The misconception has the effect that many people are attempting startups without having the foundation to succeed. But that is not the problem. Because, through this experience, many people obtain the lessons for later success.
The real problem is that because everyone thinks they have a chance of startups, equally many people think they can mentor and advise startups.
Few people think they can mentor and advise golfers, actors, or scientists. We understand it requires intimate understanding, expertise, and experience.
Ultimately, the victims are startups. Because when true startup expertise is neglected, many programs and organizations created to help startups are useless.
In these places, startups meet mentors who are interested in startups. And sometimes passionately so. But interest does not equal expertise. Founders do not need cheering, idea jamming, and being retold the content of books they could otherwise buy. Well, sometimes founders need those things, but it won’t be enough.
Founders need insight into the unique challenges of their business model, their stage, and their team composition. They need experience from analogous startups and sparring from people with battle scars and costly paid learnings from years of doing what the founders are about to attempt.
Startups are one of the hardest realms of human activity. To truly help startups, we must see past the folklore, and organize real help to startups. And only by recognizing that startup is an area of expertise, it can be done.
And if you are a startup founder: Evaluate the help being offered. See past the self-proclaimed titles of accelerator, incubator, advisor, mentor, business angel. They mean nothing! Find out who is behind them and evaluate them as if your life depended on it. Because it does.
There is a fear that has no name. But most startup founders experience it.
Perhaps, it is the fear that kills most startups. And no, it is not the fear of failure. It is a fear much more visceral. I call it Beachhead Phobia.
In our acceleration program, we teach all founders the concept of the Beachhead. It is the most important tool for finding product-market fit.
We teach our startups to focus all their resources on a single homogeneous segment that has a desperate need for their product. The desperation usually arises from the fact the segment is new and fast-growing. Consequently, the Beachhead has not yet found a solution that adequately solves their problem. This makes the Beachhead willing to test an early product from an unknown startup.
The beachhead is borrowed from military strategy. Here, invading forces must focus all their resources on a single spot on the beach to conquer enemy territory.
All successful startups find a Beachhead. But before they do, startups typically begin with a very broad customer definition. Then they learn that customers are different and want different things. This eventually leads startups to focus on a Beachhead. Once, startups dominate the Beachhead, they slowly broaden their focus again.
The puzzling thing is that even though all successful startups go through this process, all founders fight it. And after having accelerated startups for a decade, I see what is going on.
The fog of startup
When launching a startup, founders feel the intoxicating promise of infinite opportunity. The sense arises from the “fog-of-startup”. We want to be the next big startup success. But we are not completely sure how to get there. The space between the current situation and the future aspiration is the fog-of-startup.
In the fog-of-startup, we expect advantageous things will happen. Perhaps, a famous VC will flood us with cash. Or a big company will start distributing our product. Or a celebrity will endorse us. But our biggest hope is that we will immediately get flooded by customers from around the globe.
To keep this dream alive, we communicate in the biggest and broadest terms possible. We call our product the one-stop shop. Or the platform. Or the go-to software. We claim to be born global and be blitz scaling.
Accordingly, we launch and prepare champagne bottles. But instead of servers crashing due to insane customer demand. Things get murky. Some people sign up. But not nearly the numbers we hoped. The “fog of startup” has been lifted and it hid no miracles.
At this point, many founders make a fatal mistake. We surmise that we did not communicate to enough people. Not enough people understood the brilliance of our product. So, we respond by painting an even broader picture. We might state that our product is relevant for all industries or all consumers. Surely, this will make us seem bigger and relevant to more people.
But it does not have the intended effect. The response turns even murkier.
At this point, we get worried. Maybe we did something wrong. So, we seek advice (and funding). At some point, we encounter people who know about startups. That could be investors, other founders, and advisors. These people will tell us to “focus”. But at first, this advice seems strange.
Because we already focus all of our time on our startup. So, the advice seems patronizing and unnecessary. Sometimes, those providing the advice manage to convey that the focus is related to customers. But since launch, we have done little else than answering requests for features and bug reports from customers.
At some point, lucky founders encounter the concept of the Beachhead. The logic is clear. We must focus on a single homogenous segment to whom we can offer a perfect product. Once, we have conquered this Beachhead, we can focus on the next adjacent segment.
In other words, we must abandon the one-stop shop for all companies. Instead, we must offer a unique product for a specific person, in a specific type of company, with a specific problem, to be used in a specific use case.
We get it. But then we feel it. The fear that has no name. So, I dubbed it Beachhead Phobia .
Successful founders realize they must focus on a Beachhead. Still, most founders hesitate. The reason is the unpleasant sensation when contemplating the change. That sensation is Beachhead Phobia.
The sensation stems from the fact that the advice seemingly conflicts with several common beliefs.
The first belief is that VCs only invest in billion-dollar markets. Consequently, many founders articulate their market in the widest possible terms. Unfortunately, these founders confuse different time perspectives. When VCs talk about billion-dollar markets, they mean markets 10 years from now. But when we advise founders to focus on a Beachhead, we mean for the next six months.
The second belief is that “thinking small” means lowering our ambition and impact. Many founders are avid readers of books with titles like: The magic of thinking big. In addition, our personalities compel us to make a “dent in the universe”.
Going from declaring that you serve all companies everywhere! to serving a small group of specific people in specific companies, simply feels unambitious. But again, we confuse time perspectives. Anyone who succeeds in anything big, first succeeds in something small. The Beachhead is just the first step.
The third belief is not a belief. It is a feeling. And for this reason, it is the strongest cause for Beachhead Phobia. It is the psychological truth that it feels much worse to be rejected by someone specific than to be ignored by a crowd.
During our program, we ask founders to name and list the Beachhead. If a startup claims their Beachhead is HR managers in SMEs. Then we ask the founders to make a list with names of the exact HR managers they plan to sell to. And then create a “perfect” value proposition for these people.
Creating a specific value proposition to a specific person infinitely increases the chance of a positive response. Any woman using dating apps can attest to this. And so can you (even if you are not a women using dating apps).
The problem is that contacting a specific person with a tailored message feels wildly uncomfortable. Why? Because suddenly our actions are measurable, and rejection becomes impossible to ignore.
In a nightclub, it feels much worse to approach a specific person and be rejected, than to be ignored on the dancefloor.
On the dancefloor, we can convince ourselves that someone attractive will soon appear. But approaching a specific person with a personalized compliment and be rejected, ruins the night.
But the best founders overcome Beachhead Phobia. They target the Beachhead, get rejected, learn from it, adjust their value proposition, and do it again. They feel visceral pain with every invalidation of their assumptions, but they never succumb to the fear. And neither will you.
This is not a blog entry. Instead, it is a white paper I have produced in my line of work as General Partner at Accelerace Invest. But I post it here to log advances in my thinking.
Startups are defined by growth.
Growth is critical because startups are founded, build, and invested in on the assumption of rapid growth. Few founders, founding employees, or investors would bet on a startup with poor prospects for growth. Nor would the same people bet on a startup with prospects for slow growth.
To pre-seed investors, the potential for rapid growth is challenging to assess. Later stage investors enjoy the benefit of historical performance on actual growth. If a startup has grown rapidly over the past three years, it is reasonable to assume that the startup will continue its rapid growth.
But if the startup is less than 12 months old, meaningful historical data is nonexistent. Growth has not yet set in. What can pre-seed investors do?
Despite the lack of historical data, a startup should still be growing. However, instead of looking at the historical growth, pre-seed investors must look at the Momentum. Instead of asking: how fast has the startup grown?Pre-seed investors must ask: how fast is the startup growing?Or phrased differently: how strong is the Momentum of the startup?
The answer would allow pre-seed investors to use Momentum as an indicator of future growth. Just like later-stage investor use past performance.
But to answer the question: how strong is the Momentum of the startup? we must first define Momentum.
To pre-seed investors, Momentum is complex because in most cases financial metrics such as MRR, GMV, sales are absent. Instead, pre-seed investors must evaluate the accumulation of the resources that are foundational to financial growth. To use a race car analogy. Pre-seed investors must evaluate the making of the race car. Later stage investors can evaluate the lap times of the finished race car.
The pre-seed investors must look at the bits and pieces of the car and evaluate their combined quality to assess the prospects of the car becoming a great race car. The better the different pieces, the better the faster the race car.
Steve Blank argues that a startup is a temporary organization searching for a scalable business model. The search process is focused on obtaining insights and attract resources. Insights and resources are the bits and tools of the race car.
It can be assumed that startups with great insight and strong resources have a higher likelihood of success in the future. Again, the better the bits and pieces, the better the car will perform.
Or put simply, startups that have accumulated the most insight and resources are in a better position to generate growth in the future. Consequently, the accumulation of resources could be a good indicator of future performance.
But what are the resources that define a pre-seed startup?
A startup accumulates resources on four key dimensions. Those are Team, Technology, Customer insight, and Customer commitments. We will do brief reasoning to these four dimensions below:
The team is the driving force behind the startup. Naturally, high quality teams outperform low-quality teams. Consequently, a key dimension of Momentum is improvements to the team. The critical part of the team consists of founders and founding employees. Founders participated in the founding of the startup, while founding employees joined later. Both are critical to the startup and own shares in the entity. Often founding employees are more senior than the founders and are defined by “paying” big opportunity costs when joining the startup. (Danish examples are Jesper Lindhardt in Trustpilot, Mette Lykke in Toogoodtogo, and Thor Angelo in Mymonii). Because of the critical nature of these founders and founding employees, the evaluation of Momentum should concentrate on the expansion of this group. Consequently, a startup that manages to attract the best people should increase the chance of success.
TheTechnology is the basis of the value proposition. Most startups build their product on technology, and any advancement in the technology should improve the value proposition. Consequently, a key dimension of Momentum is technology. A startup that rapidly advances its technology should increase the chance of success.
The Customer insight is another basis of the value proposition. Customer insight is the information founders use to turn their technology into a product. Obtaining customer insight is a key activity for startups, and deeper understanding improves the value proposition. Consequently, a key dimension of Momentum is customer insight. A startup that deepens their level of insight should increase the chance of success.
The Customer commitments are de-risking the venture. If customers commit to pilot projects, payments, and contracts, the startup obtains proof of business points that can be leveraged when raising funding and attracting team members. Consequently, a key dimension of Momentum is customer commitments. A startup that amasses customer commitments should increase the chance of success.
Now that we understand what defines Momentum for pre-seed startups, we can almost answer the question: how strong is the Momentum of the startup?
However, we still need to define strong.Strength describes the efficiency of the progress. A startup might accumulate resources on the Team, Technology, Customer insight, and Customer commitmentsdimensions, but the price of this accumulation matters. The price is the constraint and consists of time and money.
Momentum only makessenseif it is related to the time and money that has been available to the startup.
If a startup has spent three years and 5 million to develop an app that has 10 pilot customers, one would evaluate the startup negatively, because the Momentum is unsatisfactory in relation to the time and money spent.
Contrast the above scenarios to a startup that has developed the same app, but only have 2 pilot customers. If this has been achieved in two weeks and 10K, the Momentum would be relatively stronger.
The examples above illustrate the power of evaluating progress relative to the time and money. Only by relating the progress to the constraints, we get a picture of the Momentum.
To stay in our race car analogy, Momentum in relation to the constraint gives us a performance indicator equivalent to km/h1 for cars. Km/h enables us to compare the efficiency of various cars.
Progress per Time or Progress per Money are the two most important Momentum metrics and they enable us to compare the efficiency of various startups. A metric that could be highly indicative of future growth.
Standardizing progress to understand Momentum
To measure Momentum, we must standardize the progress a startup has made. To this end, we propose to use standardized levels for each of the dimensions of progress(Team, Technology, Customer insight, and Customer commitment).
The proposed levels can be seen below:
The team can be classified depending on the completeness and experience of the team and its team members. We propose the following six levels:
Single, first-time founder, no industry insight.
The startup is the typical “Startup Weekend” project. One person who has recently conceived a vague business idea in an industry the person does not know from the inside.
Incomplete, first-time team, no industry insight.
The startup has a team. Often the lead founder has convinced a friend to join the project, but they lack real startup experience, and many critical skills are not possessed within the founder team. Also, they do not know the industry from the inside.
Complete, first-time team, no industry insight.
The startup has a complete team meaning that all critical skills are held in the founder team, but they lack real startup experience and industry insight.
Complete founder team, one person with some startup experience, and related industry insight.
The startup has a complete team meaning that all critical skills are held in the founder team. One of the persons has founded or been a founding employee in a startup before. Also, one of the persons has worked in a related but not the same industry.
Complete founder team, one person with some startup experience, and same industry insight.
The startup has a complete team meaning that all critical skills are held in the founder team. One of the persons has founded or been a founding employee in a startup before. Also, one of the persons has worked in the same industry.
Complete founder team, all persons with significant startup experience, and same industry insight.
The startup has a complete team meaning that all critical skills are held in the founder team. All team members have been founders or founding employees in successful startups before. Also, one of the persons has worked in the same industry.
The team will advance as the startup develops. Often a single founder will bring in co-founders. Also, founding employees with significant startup experience tends to join in the early stages. Any advancement from one stage to another is progress on this dimension. Efficient startups will advance through the stages using less time and money than non-efficient startups.
Thetechnology can be classified according to commonly understood industry taxonomy. We propose the following six defined levels of technology.
The technology is articulated in writing and verbally. Perhaps the founders have made a slide or document describing the idea. The idea is still rather general and lacks details and specifics.
The technology has been sketched out and it can be described in specifics. There are drawings, models, and roadmaps that detail the idea. Typically, the founders have a full slide deck at this point. Often, they have a video using animations and renderings. It is also the stage that is typical for crowdfunding campaigns.
The technology has been created to a level where it can be tested for proof of technology. The key components of the product exist and can be interacted with. This is often the stage for crowdfunding campaigns. Apps are often in TestFlight mode.
The technology has been packaged into a minimal product that can be used by users. It includes the key feature(s) and is complete enough for the beachhead to start gaining value. This is often the stage that select pilot users and pilot customers are testing the product.
Level 4 technology
The technology has been shipped as the first full-fledged product that the startup expects the customers to pay full price for. It is complete enough for the beachhead to put into production and use daily.
The technology has had its first major upgrade. The technology has stood the test of time and use, and the second generation of the product rebuilt to meet the requests of the customers of the first version and to add new features to start venturing outside the beachhead.
The technologywill advance as the startup develops. The startup overcomes technical hurdles and weeds out bugs. In the process, the technology matures and becomes a full product. Any advancement from one stage to another is progress on this dimension. Efficient startups will advance through the stages using less time and money than non-efficient startups.
The Customer insight can be classified using the proprietary Original Insight tool developed by Accelerace2. It is a self-assessment tool provided to founders to help them clarify how well they understand their customers. The tool quantifies the level of customer insight. We propose the following six defined levels of customer insight.
10 – 30 points.
The founders have no insight and only a vague and over-simplistic idea about their customers.
30 – 50 points.
The founders have little insight and only a vague and over-simplistic idea about their customers.
50 – 70 points.
The founders have some insight, and but still only general ideas about their customers.
70 – 90 points.
The founders some insight and can describe their customers in detail.
90 – 110 points.
The founders have the same level of insight as their customers. Perhaps the founders use to hold that job position themselves.
110 – 130 points.
The founders have deep insight and know the customers better than they know themselves. The founders can be considered expert to a level that a scientist would be an expert in their respective field.
The level of insight will advance as the startup develops. Typically, pre-seed startups are operating in the range between level 1 to level 3, to begin with. As the startup performs more customer interviews and get feedback from pilots, they advance their level of customer insight. Any advancement from one stage to another is progress on this dimension. Efficient startups will advance through the stages using less time and money than non-efficient startups.
TheCustomer commitments can be classified according to commonly understood industry taxonomy. We propose the following six defined levels of commitment levels.
The startup has talked to customers and can anecdotally talk about customers who have expressed interest.
The startup has a signed letter of intent from a relevant customer. For consumer startups, people have signed up on a waitlist.
The startup has a signed agreement of doing a proof of concept with customers. For consumer startups, people have signed up on a waitlist.
The startup has a signed agreement of doing a pilot to prove an articulated business outcome for the customer. For consumer startups, people are using the beta version.
The startup has paying customer that is using the product in “production”.
The startup has several customers that have renewed or in other ways shown that they are planning to remain customers for a significant time.
The level of customer commitments will advance as the startup develops. As the startup begins to prove the value of their product, the commitments increase. Any advancement from one stage to another is progress on this dimension. Efficient startups will advance through the stages using less time and money than non-efficient startups.
Now that we have defined standardized progress, we can measure progress along these four dimensions. In other words, turning progress into two Momentum metrics. Once progress has been converted to a number, we can divide this number with the constraints. Either time or money. This gives us the ultimate metrics for pre-seed investors: Progress per Time and Progress per Money.
Calculating Progress per Time (PpT)
How much progress does a startup produce per unit of time?
Below we will lay out the mathematical model for calculating PpT.
Conceptual equation detail level 1
Conceptual equation detail level 2
The PpT model in use
Example: Imagine a startup that during a period of 10 months has progressed one level on the team dimension. This gives the startup 1 point in our equation. On the technology dimension they have progressed three levels giving them 3 points. On the customer insight dimension, they have progressed two levels giving them 2 points. Finally, they have progressed customer commitments with four levels giving them 4 points. Mathematically the equation will be populated as follows:
Example level 1
Example level 2
Example level 3
Example level 4
Calculating Progress per Money (PpM)
How much progress does a startup produce per unit of money?
Below we will lay out the mathematical model for calculating PpM.
Conceptual equation detail level 1
Conceptual equation detail level 2
Conceptual equation detail level 3
The PpM model in use
Example: Imagine a startup that has spent 1 million DKK and progressed one level on the team dimension. This gives the startup 1 point in our equation. On the technology dimension, they have progressed three levels giving them 3 points. On the customer insight dimension, they have progressed two levels giving them 2 points. Finally, they have progressed customercommitments with four levels giving them 4 points. Mathematically the equation will be populated as follows:
Example level 1
Example level 2
Example level 3
Example level 4
Limitations of the model
Naturally, there are limitations to the PpT and PpM model. The most important are:
Team progress does not take the quality of the individuals into account beyond requiring the team expansion to be of “critical” people. This means that two startups can score equally many points even though one startup has attracted a Nobel prize laureate and the other a merely skilled industry professional.
The technology dimension does not take the difficulty of the science into account. This means that two startups can score equally many points even though one startup has made a scientific breakthrough and the other had mere launched their app.
The customer commitments do not take the difficulty of customers into account. This means that two startups can score equally many points even though one startup sold to SMBs and one has sold multi-year recurring enterprise contracts.
Some of the limitations can be dealt with by comparing startups within the same category. Thus comparing, enterprise software startups to other enterprise software startups. And consumer apps to other consumer apps. Few investors have big enough portfolios to enable a sub-segmentation. But if possible, it would be advisable.
On a more generalized notion, the model does not account for all the factors that affect the likelihood of success. From experience, we know that team dynamics, the growth of the market, timing, competition, and other factors play a significant role in the life of a startup. The model only quantifies Momentum. To most, Momentum is just one of many elements investors assess when making investment decisions.
First, Momentum allows us to compare companies that have had different amounts of time and money available to them. In other words, the efficiency of which they create progress. This matters greatly because as pre-seed investors we are investing small tickets and the efficiency of the companies is critical. Also, in the absence of historical financial metrics, Momentum is perhaps the most objective metric for progress at the pre-seed stage and can arguably be a reliable indicator for the future. Having Momentum available, a pre-seed investor can use these metrics to aid them in the decision making when evaluating various investment opportunities.
Second, the model provides input to the classic problem of making follow on investment decisions. Investors are often victims of the sunk cost fallacy. Often, the urge to support portfolio companies that are in urgent need of money to survive is strong. While this can be the right decision, often it is not. Momentum will provide data about how efficiently the portfolio company is spending the money and time provided with the investment. Startups with high Momentum scores suggest that the money are well spent, and that further investments are advisable.
About the authors
Peter Torstensen and David Ventzel are partners at Accelerace. Accelerace is a startup accelerator and pre-seed investor placed in Copenhagen Denmark. Accelerace was founded in 2009 and have accelerated more than 700 startups to date.
The authors have been aided by their colleagues Claus Kristensen and Mads Løntoft in the conceptual development of the framework.
If you are interested in the model and collaborating further development of the framework, then contact the authors on David Ventzel: email@example.com or Peter Torstensen: firstname.lastname@example.org
On January 4, 2005, the BBC aired a strange program that would impact the dreams and aspirations of our generation.
The opening scene features four men and a woman sitting in an empty warehouse. They wear suits and serious looks. They are meant to intimidate. Not like gangsters. But like ruthless titans of industry ready to place judgment upon the business ideas of lesser men and women.
Dragons Den aired during the startup depression following the dot-com crash. But the timing proofed impeccably. Just six months earlier a little-known social network called Facebook had launched. Just two months later Y-combinator ran their first batch. The next year Spotify and Twitter were founded.
The second wave of internet startups did what dot-com could not. But more importantly, they created a new ideal. That of the tech-savvy startup founder.
The pervasive idealization of the startup founder has created a startup tsunami of un-imaginary proportions. As a startup accelerator, we are frontline to feel the effects.
We see more startups than ever. But do we also see more startup founders than ever?
In the early days of Accelerace, many of the founders that came to us needed help in describing what they did. They had gotten an idea and had started executing it. But they lacked the vocabulary and structure to communicate their business to other people. Namely investors. One such person was Peter Holten Mühlmann from Trustpilot. He had built a website where people wrote reviews of webshops. But he needed help to formulate the logic of his (what seemed to many at the time) questionable business.
Back then, industry terminology such as customer discovery, hypothesis testing, conversion rates, CAC to LTV ratio, virality, monetization, etc. was still in the making. Accelerators played a role in disseminating the latest theories and vocabulary to these people with activities they were unable to describe.
But something else was at play. Before the startup founder was idealized, the people who did startups were the people who could not help it. They had conceived of an idea that hunted them to the extent they absolutely had to pursue it. Regardless of warnings from friends and family.
So, they did. And at some point, they needed investors. But the investors asked them questions they struggled to answer. These were the people who came to Accelerace.
These people still come to us. But slowly, another type of people started showing up. And in increasing numbers. These people are the opposite. They have near perfect descriptions of what they want to do. But they are short in activities. And they come to us to get help realizing their plans.
The problem is that startup accelerators are not good at helping such people. Placing such a team in an accelerator is frustrating because these founders enjoy talking about their plans. And because the mentors are good at exactly that, the entire program is spent on enthusiastically making more plans, while nothing real happens.
I have come to the opinion that true startup founders can be spotted by having more activities than plans. And if you are one, you would benefit tremendously from being in a quality acceleration program.
In 2007, a young student from Aarhus Denmark embarked on a doomed mission. But a couple of years later, fate would change the odds against him. Today, he is among the most celebrated Danish founders of our generation.
Peter Holten Mühlmann had noticed a problem. The internet lowered the barrier for commerce. New webshops were constantly popping up. But fraud and bad service followed.
Peter envisioned a software that could help shoppers navigate the mushrooming e-commerce landscape. Like an antivirus program warning you against shops that could not be trusted. He called it Trustpilot.
However, the software needed data. And the most reliable data would be experiences from shoppers. In other words, reviews.
To collect data about webshops, Peter set up a website where people could report bad shopping experiences. Surprisingly, people did. The site found a beachhead among market mavens. The sort of people who find meaning in passing warnings and endorsements to other people.
Peter started realizing that the reviews might be the product. Consequently, he abandoned the “antivirus” approach and turned Trustpilot into a destination for consumer reviews.
However, a problem arose. How would he make money on this website? Advertising seemed the logical approach, but Trustpilot was not a destination people hung out. Advertising would not be a good way to capitalize, he surmised.
And then it dawned on him. The businesses being reviewed were the customers. Good reviews were gold, and bad reviews were poison. Using good reviews in marketing was worth money. So was the ability to respond to bad reviews.
Trustpilot became a tool to manage reviews. However, this created a new problem for Peter. One that seemingly doomed his startup.
Peter had no experience in selling software to small businesses. Nor did his CTO. The task was daunting, and thousands of startups had shipwrecked on this challenge.
At the time, software was seldomly sold to small businesses. Only enterprises could afford the high prices needed to cover expensive salespeople in suits doing presentations.
The pivot meant that the founder team was utterly unqualified to execute the business model. In truth, this is quite common. Founders rarely limit their ideas to their current abilities.
Nonetheless, competence matters. Investors call it founder-market-fit. Investors evaluate how well the founder teams’ current competencies fit the challenges dictated by the market the startup is going after. Founder-market-fit defines whether the founders master the critical disciplines required to win.
Critical Disciplines. How to win Tour de France
Cycling is a sport. And cyclists are athletes. Consequently, one would imagine that the best athlete would win the most prestigious races. Intriguingly, things are not that simple.
The world championships in cycling is held every year. And the rainbow-striped winner jersey is a childhood dream for all cyclists. Still, the title of world champion is rivaled by another triumph. Winning Tour De France.
One would think that the same athlete would be a likely winner of both Tour de France and the World Championship. But as many know, that is seldom the case. In fact, this has not happened in more than 30 years.
The thing is that cycling includes different types of races. The World Championship is a one-day event. Tour de France lasts 23 days. Also, the route of the World Championship avoids the highest mountains. Tour de France includes snow-filled alpine peaks. Furthermore, Tour de France has a time trial.
The differences between the two races require riders to master different disciplines. In other words, the critical disciplines of winning the World Championships and Tour de France are different.
Throughout the history of Tour de France, the winners have been marked by mastering both time trials and mountain climbing. In contrast, world champions have been marked by break-away and sprinting abilities.
The point is that cycling is a sport, but the different races require different critical disciplines for winning them. And trying to win Tour de France without mastering time trials and mountain climbing is a doomed mission. Just like trying to win the market for review management software without mastering small business sales.
The importance of the Founding Employee
When Peter Holten Mühlmann pivoted to selling to small businesses, he needed someone with a rare competence. Then fate intervened. In 2010, Peter was introduced to someone who could give Trustpilot a winning chance.
Jesper Lindhardt was talented and successful. He had risen through the ranks of Navision, Realtime, SAP, Omniture, and Adobe. Most importantly, his focus was on small business sales. In other words, Jesper had spent 15 years honing the exact critical discipline needed by Trustpilot.
At this point, fate had played its part. Instead, true founder skill took center stage. Somehow, Peter convinced Jesper to abandon his meteoric career, leave Adobe, and join a completely unknown startup to become a founding employee.
Founding employees are probably the most underrated ingredient for startup success. A look at the most successful Danish startups founded by inexperienced founder teams illuminates the importance of this rare breed.
The founders of Coinify, OrderYoYo, Templafy, TooGoodtoGo, and Planday all attracted one or more founding employees who brought their experience and competence to the startup during infancy. These people mastered the critical disciplines of the business model and gave the startup a winning chance.
After having spent almost ten years as a startup investor, I am continuously puzzled by startup teams that do not master the critical disciplines of their business model. Luckily, certain doom can be avoided. Because true founder skill is the ability to attract resources. And no resource is more important than the founding employee. If you are lucky to meet Peter Holten Mühlmann, he tells you the same.
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.
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:
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.
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 example. Amazon 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.