Why all startup founders should understand ICOs

Most people have heard about cryptocurrencies. Some have heard about ICOs. Few actually understand them. This post will tell you why ICOs are important news for startup founders. It will tell you how it all began and why the crowd is the best investor. In the process, you will learn about a prodigy of our time and see what communist regimes did wrong. In the end, founders have gotten a new tool for fund raising. Use it.

In 1997, a new era began.

For the first time ever, a rock band asked their fans to fund their upcoming tour. The fans went online and pledged $60,000. The press called it crowdfunding.

A decade later, crowdfunding would fund everything from paintings to high tech gadgets. In 2012, a dock for iPhones became the first project to raise more than $1 million on Kickstarter. Still, the biggest breakthrough was yet to come.

Crowdfunding mainly benefitted physical products. This makes sense because physical products have tangible value. In comparison, software hadn’t benefitted much. It was simply too hard to define what backers were pre-paying for. But that was about to change.

In 2013, a Russian prodigy named Vitalik Buterin made history. He designed a completely new Blockchain named Ethereum. It would prove to become a breakthrough in crowdfunding. Vitalik was 19 years old.

Ethereum made it easy for developers to create new cryptocoins. And that is immensely important because cryptocoins solves the biggest problem about crowdfunding software.

Cryptocoins allows software projects to provide a tangible asset to backers. The projects can mint digital coins that represent a specific value. A simple example would be a coin that can buy a song in a music app. Anyone wanting a song could buy the coin. If enough people buy the coins, the founders have enough money to build the app. That’s called crowdfunding.

But that’s not all. If the backer no longer wants the coin, he can sell the coin someone else with a click of a button.

Already ICOs have outpaced VC funding. And it is just getting started. I am about to tell you why.

The key to successful investing

Investing is fundamentally about information. The information investors need is this: How big will the demand be?

If you can assess how many people will use a new product, you also know how much to invest in the project.

How accurate you can assess the demand depends on how close the investor is to the demand. In other words, to the users.

The communist experiments of the 1950s show the consequence of making investment decisions too far from the demand. At the time, Moscow and Beijing decided how much food farmers should grow. But the communist elite had little feel for the true need. Economists call it: misallocation of resources. The consequences were catastrophic.

VCs exist because they have better feel for the demand for tech products than the big pension funds. In theory, VCs have superior information and can make better investment decisions.

However, there is a group with an even better feel for the demand. And that’s the users. They are the ultimate source of information because they are the demand side.

Why ICOs are great news for founders

Crowdfunding allows users to vote for products they want with their money. In aggregate, users are the ultimate investor and allocator of resources. If 100 backers need a product, the project receives exactly the right amount of funding to fulfill the demand.

For many software startups, the invention of cryptocoins is heaven sent. Most founders spent an enormous amount of time and effort to convince VCs that they have a market. Sometimes they succeed, but the investor takes a risk premium. The risk premium is unfair terms. Like milestones, liquidity preferences and downside protection.

But thanks to a young Russian prodigy, software startups can do what artists and gadget-makers have been doing for the past five years. To raise funding directly from users. And because users don’t have to guess the demand, they also don’t require risk premiums. The money comes without a nasty set of legal documents and a rigid due diligence.

Luckily, many have already taken advantage. As of this writing, software projects have raised more than $1 billion through ICOs. And many more will follow.

Many critics will point to fraudulent and overhyped projects. All of that is true. But that always happens in the early days of great innovations.

In time, ICOs will mature and software founders will finally have an alternative to the exhausting VC pitches.

At Accelerace, we will do our best to help founders take advantage.

Check out Accelerace. We invest in tech startups.

Why the best founders feel unsuccessful

Many startups look successful, but this post will tell you how most founder really feel. It will tell you how humans are different from other animals, and why this difference distinguishes the best founders from normal people. Most importantly, it will explain what good crazy is. Good crazy is power. Cherish it.

One day in 1982, a group of researchers at Georgia State University experienced something unexpected. A two-year-old chimpanzee by the name Kanzi suddenly started talking.

Kanzi wasn’t being studied. Instead, the researchers had been trying to teach another chimpanzee to communicate via a pad. But they had failed. The chimpanzee had nothing to say.

The experiment was suggesting that apes don’t think. That conclusion would have ended the long-standing dispute: Do animals possess human-like thinking?

When Kanzi accidently picked up the pad and started communicating, we got an answer to the question. But the answer was not: yes or no. It was both.

The difference between humans and animals

The interesting part wasn’t the fact that Kanzi communicated. It was what Kanzi said.

It turned out that Kanzi mostly expressed fundamental needs. Like, give me food.

Kanzi was clearly thinking. However, Kanzi never expressed ideas. And that fact is immensely important for understanding humans.

Human cognition is unique because we are the only animal who have ideas. Only humans imagine things that don’t exists in the physical world. Like God or Harry Potter.

We can describe these ideas and infect other people. When many people have the same idea, it becomes a shared idea.

Shared ideas might be the most powerful phenomenon in the world. Shared ideas power Christianity, capitalism, and the $700 billion market cap of Apple.

A shared idea is immensely powerful because of its intersubjective nature. It exists among people and not just within people. This means that even though you abandon the idea, it still exists and governs everyone else infected by that idea.

Shared ideas create communities of people. Like the urban consumers, Harry Potter fans and the Apple evangelists.

Members of communities want success in their community. Urban consumers want to own and experience more things. Harry Potter fans want more people to read their fan fiction. Apple evangelists want to be first to get the latest upgrades.

Success in communities is defined by ideals. All communities have an ideal that shapes the hierarchy within the community. Ideals describe what a perfect manifestation of the idea would look like.

The perfect consumer eats sushi, owns designer furniture and weekend travel. The perfect christian is virtuous, attends church and lives in a nuclear family. The perfect Harry Potter fan writes fan fiction, plays quidditch and can dress up like a Gryffindor.

The closer you fit the ideal, the more successful other people in your community perceive you to be. The community upgrade your position in the hierarchy. Ascension feels good.

For this reason, most people spend their entire life attempting to fit the ideal of their community. But as you will learn, startup founders are different.

The difference between startup founders and normal people

For most people in developed countries, the biggest community is the idea of the urban consumer. And this fact can course great misery for startup founders.

The problem is that startups require founders to do things that break with the ideal of urban consumer.

Most founders in our portfolio are in their 30s. And for urban consumer, these are the years when the adult hierarchy sets in. The ideal is to buy the first house or apartment in a respectable neighborhood. Fill it with designer furniture. Drive an Audi and go skiing in winter. Kids in designer clothes, cooking gourmet food and keeping a dog give further plusses.

But for founders who choose the path of startups, life is very different. Most startups fail and all startups struggle. Founders usually scramble for two years before raising their first round of institutional capital. Even after raising funding, they still get very little salary.

The financial reality of most founders means that they actually descend on the hierarchy of urban consumers. They live on half the space, drive an embarrassing car and rarely fine dine.

Most founders occasionally feel the sting of inferiority and doubt. It happens when they meet old classmates, park their decade old Hyundai or check their Facebook feed.

To most people, this scenario is so scary that they give up their startup dream. They think it’s too risky. The risk is descending the social hierarchy. It doesn’t mean dying.

But this is where founders are different. They feel the sting, but they don’t succumb to the pressure of the ideal. Instead, the best founders we see have overwritten the ideal by the force of their startup vision.

To reject a pervasive intersubjective ideal is incredibly hard to do. And those who do are often regarded crazy. But at Accelerace, we call it being good crazy.

Conclusions made:

  • Only humans share ideas.
  • Shared ideas create communities.
  • Communities have hierarchy defined by an ideal.
  • In the developed countries, one of the biggest ideas is the urban consumer.
  • Startup founders often descend on the hierarchy of urban consumer communities.
  • Startup founders are special because they don’t succumb to the pressure of the ideal.
  • At Accelerace, we call it being good crazy.

Also visit Accelerace. We invest in startups.

The insane arrogance of startup investors

Most startup investors feel special. This post will tell you they are not. It will tell you that most investors evaluate startups using simple arrogance. In the process you will meet two groups of super humans, learn about one of the longest wars in history and get inside NASA. In the end startups will understand investors better. Hopefully investors will get inspiration on how to refine their selection. Improving is everything. Do it.

The world was at a war. And the president of the free world was losing it. But he was working on a secret project that would turn the tide. He called it Project Mercury.

He asked the military to find seven super humans. They should spearhead a new battle front. The elite group was found and became known as: The Original Seven.

The year was 1959, the president was Dwight D. Eisenhower and the new battle front was space. The Original Seven was the first team of NASA astronauts.

Since the Original Seven, NASA has graduated a total of 338 astronauts. However, this is a tiny amount compared to the large number of applicants. For 2017, NASA has received 18,300 candidate applications.

The thing is that only few people make world class astronauts. But you are about to learn something else. Even fewer people make world class startup founders.

The hunt for super human entrepreneurs

About the same time as Eisenhower was fighting the cold war in space. A man named Arthur Rock was fighting an equally important battle.

His battle field was Silicon Valley. The fight was over one of the most important inventions in history. The transistor.

Arthur Rock was gathering his own team of super humans. They became known as The Traitorous Eight.

The Traitorous Eight became the founding team at one of the most influential companies ever built. Fairchild Semiconductor. Together, they ignited the modern technology age and helped make Silicon Valley the world’s superpower of innovation hubs.

Like NASA, Arthur Rock continued to find more amazing people. When he did, he would fund their businesses. In the process he invented what we today know as venture capital.

Today venture capital is a global industry. There are thousands firms. Lately, accelerators and angels have joined the party. And they are all looking for the same rare teams of super humans.

But they are a rare breed indeed. It’s estimated that 150 million startups are attempted every year by 300 million people. The number of startups that gets venture funding is limited to couple of thousands. And out of those, only a fraction actually succeeds. Suddenly, becoming an astronaut looks easy peasy.

Overserving and understanding what to look for

Going with the numbers, identifying the outliars among startup teams is much harder than identifying the outliars among astronaut candidates. But that’s not reflected in the selection process.

NASA spends two years in rigorous and intense interaction with candidates before selecting who to send into space.

Comparably, many startup investors just spend a few hours in meetings with the startups before throwing a term sheet. The following due diligence process is mostly legal work. To outsiders this seems insane. And it is.

The problem is that investors are incredibly arrogant. Most of us believe we have developed a special gift. That our unique backgrounds enable us to spot winners on eye sight. Like Mike Markkula meeting Jobs and Wozniak in a garage and just knowing they will become a huge success. Obviously, it’s a delusion.

This delusion fools investors into believing that we just need a pitch. Then our gut will accurately predict the fate of the startup. But the facts disagree.

95% of all venture returns comes from only 20% of the firms. Most investors cannot pick the winners. Of course not. No space agency would ever pick astronauts from pitches and coffee meetings. Sure, they would develop a gut feel about the candidate, but they wouldn’t be arrogant enough to actually follow their intuition.

Instead, space agencies acknowledge that some of the skills and traits that make up excellent astronauts cannot be accurately evaluated in applications and during interviews. Only observing candidates under certain conditions will provide an accurate assessment.

Could the same be true for startups. That you actually need to observe the founder team in action to actually assess their chance of success? I suspect so.

In my work with startups I participate in team meetings, participate in customer meetings and listen in on investor pitches. I see how they make decisions, how they solve problems and how they interact. It’s like NASA observing astronaut candidates operate tools in a vacuum tube or docking in a simulator.

This gives me insights that I couldn’t have gotten otherwise. Insights so important that I often find myself correcting my initial gut feel about the startup.

Startups are built in real life. During prioritization meetings, customer meetings, cold calls and strategic pivots. Participating in real work with the founders provide a true picture of the startup.

At Accelerace we have institutionalized this in our selection and acceleration process. Our application form is minimal. We engage instead. We take in a bigger batch than we graduate. We work closely with the founder team. We reasses and challenge our inituition..

We know what we are looking for and we assign scores. It might not be the right parameters, but we are on our way of proving them. Most importantly, it reminds us to leave (most) arrogance behind.

(The scoreboard used under observation is developed together with my great colleagues at Accelerace. If you think you can help us refine it or make use of it, contact us)

Conclusions made:

  • World class startup founders are rarer than astronauts
  • Most startup investors believe they have a special gift because of their unique background
  • The delusion of a special gift makes investors do extremely shallow assessments of startups
  • Investor can learn from NASA and do more real life observation
  • Accelerace have institutionalized observation and have developed a specific scoreboard

 

Why feasts are essential to startup success

Management literature is filled with long books about company culture. This post will tell you that winning culture is actually really simple. It will give founders an easy way to 10X the performance of their team. Simplicity is power. Use it.

A group of men armed with spears had cornered their prey. They felt excitement and relief. Soon they would return victorious to wild cheers from the tribe. The women had prepared for a feast. Tonight they would be eating, dancing and singing. It was the greatest part of being alive.

For more than 20,000 years, humans were hunters living in tribes. Life was harsh and brutal. Among the few pleasures was the feast. To get a feast required collaboration of the whole tribe. The adult men hunted. The boys assisted. The women prepared fire, fruits and water. Everyone contributed to their common goal. The feast.

Today our lives have changed. But our brains haven’t. Humans still get immense pleasure from collaborating to reach a successful outcome and then celebrate the victory together. When athletes win Olympic medals even the assistants and masseuses go bananas. And this fact is of great importance to startup founders.

The really simple way to build a winning culture

I coach startups on many different things. One of them is how to build a winning startup culture. And that is actually quite simple.

Founders must leverage the hunting tribe mentality. They must break down their journey into small milestones and turn these milestones into hunts. They must assign every team member a role in the hunt and provide a feast when it ends in success.

In practice it means this:

  • Have team meetings Monday morning.
  • Set one overall goal for the entire team to reach by Friday. Hang it on the wall.
  • Place desirable rewards on a table. Like champagne, dinner reservations or concert tickets.
  • When you reach the goal, celebrate hard and congratulate every single member of the team. Even the interns and advisors.

You now have a team that pulls in one direction. Now everyone knows their priorities. Now everyone is motivated and feels important and appreciated. And because of human history, you will develop a true winning culture in the process.

 

The essential questions founders should ask investors

Most founders do investor meetings like a job interview. They look their best and hope to be picked. Most founders know it’s a mistake but don’t know what else to do. This post will teach you to turn the table and interview the investor. It will provide you with a set of essential questions to ask. The answers are more important than you can imagine. Use them.  

I made a huge mistake. And I want you to learn from it.

When I was a founder, I thought VC money was the same.

Because of this delusion, I didn’t care who the investor was. So I approached all investors in the same way.

I showed off and hoped the VC would throw a term sheet. It was a show on my part. I thought I did good. I was mistaken.

In fact, I did terrible. My pitch was good. But I forgot the most important part of the meeting. To learn who I was talking to.

Why does it matter? Because the VC demands your time and attention. And that’s your most valuable asset.

You want the time and attention he demands to be beneficial for you. And that’s a function of three things:

1) The experience of the firm 2) his personal experience 3) his view of your startup.

I didn’t know. So I didn’t ask. You shouldn’t make the same mistake. So here is a list of questions I wish someone had given me:

Essential questions about his firm

  • How many funds have you managed?
    • Because experience is important. First funds tend to give bad returns.
  • Who are the Limited Partners of the fund?
    • Because in the end, the investor serves the interests of the Limited Partners.
  • How big is the fund?
    • Because fund size determines how little and how much they can invest. And how much follow-up funding they can provide in the future.
  • When did the active investment period start and when does it end?
    • Because the lifespan of the fund determines the urgency to invest and to exit again.
  • How is the management of the fund structured and how do you make decisions
    • Because it matters greatly how decisions are being made and who have decision power.
  • What is your investment thesis?
    • Because a clear thesis is an indicator of professional intellect. In other words, they know what they are doing.
  • What are the limitations of your investments?
    • Because it’s nice to know if the investment can be turned down because of technicalities.
  • Which companies in the portfolio have given you learnings and expertise to help us?
    • Because expertise matters. And real expertise comes from experience.
  • How do you do due diligence?
    • Because due diligence can be very long and costly. And you will pay.

 

Essential questions about the investment manager (the one to join your board)

  • What is your thesis about startup success?
    • Because a clear thesis is an indicator of professional intellect.
  • Which other companies in the portfolio are you managing?
    • Because he gets most of his learning and network through his own portfolio.
  • How do you approach the role of being board member?
    • Because you want to know if his style is compatible.
  • How can you add value to our company?
    • Because the answer reveals if he fundamentally sees himself as a controlling mechanism or someone who is there to help build the business.
  • How are you incentivized?
    • Because he will focus on what makes him rich.

 

Essential questions about his/their view of your startup

  • What do you think are main opportunities of the business?
    • Because the answer reveals if he has valid growth thesis.
  • What do you see as the main risks of the business and how would you mitigate those risks?
    • Because the answer reveal if he has experience with your type of business model.
  • What do you see as the main priorities the next 6 months?
    • Because the answer reveal if he is aligned on the short-term strategy.
  • How do you see the exit path of the company?
    • Because VCs are driven by exits and you want to know if they are aligned on the long-term strategy.

If you ask these question, you will get a conversation instead of an interview. It will be a conversation with between parties evaluating each other. And most investors will respect you for this.

Good luck in your next meeting.

 

Why all founders should know their scale down rate

Most founders think they know their metrics. This post will tell you they don’t. It will reveal the most overlooked metric among startups. A metric so important that many startups fail because they don’t track it. This post will help you not make that mistake. Use it.

One of the biggest disasters in human history was unfolding. Panic spread like wild-fire as people realized they were doomed. When it ended, more than 1500 people had suffered a gruesome death.

Two hours and forty minutes earlier, First Officer William Murdoch had taken over command. He couldn’t believe how lucky he was. He was steering the largest and most prestigious ship in human history. The RMS Titanic.

The water was calm as glass. The air was so clear that the lookouts didn’t even need binoculars. In such conditions threats could be spotted on eye sight. And the crew would have plenty of time to steer around any problem ahead. During the next 30 seconds, First Officer William Murdoch would learn he was mistaken.

At 23:39, the lookouts spotted the iceberg. William Murdoch didn’t panic. He knew exactly what to do. He ordered the engines reversed. It would reduce the speed enough to steer the ship around the iceberg. He knew because he had been sailing for 12 years.

But William Murdoch was about to learn a new lesson. The RMS Titanic was different. And he didn’t have enough time. Half a minute later the iceberg ripped the ship open and unleashed a true Armageddon.

The lesson: Knowing the stopping distance of your ship is rather important.

Startups sail in dangerous waters

Early startups differ from established companies. And the difference can conveniently be illustrated using ships as the analogy.

A company is like a cargo ship carrying goods from one port to another. It sails a fixed route in a well-known environment. It’s low risk and the reward is predictable.

But a startup is like a treasure ship in unknown water. It often changes direction and must avoid all the icebergs floating around. It’s extremely risky but the reward can be massive.

In the world of startups, the most common iceberg is this: Premature scaling.

Premature scaling is so common that is basically synonymous with failure. Premature scaling happens when the founders decide to employ more people and increase marketing spend too early. Too early is before they have found product-market fit.

The result of premature scale is this: Cost increases more than revenue. The bank account sinks until there is nothing left. The empty bank account is the iceberg. And the engines must be reverse early enough to change course. First Officer William Murdoch of the RMS Titanic would agree.

The importance of the scale down rate

All startups meet icebergs. Like an online game called Glitch. The team raised angel funding. Then series A. Then series B. For every round they hired more people. The costs exploded. The revenue didn’t. The iceberg was approaching rapidly.

The team decided to reverse the engines and change direction. They survived, succeeded and eventually found gold. Today we know them as Slack.

But the story of Slack isn’t unique. In fact, most startups experience the following in some form: The founders have a vision. Investors fund them. Founders take salary. Costs increases. Revenue is lacking. Founders raise more money. The team grows. Costs increases even more. But the revenue is not picking up.

The founders try to raise more money, but investors are becomingly increasingly unwilling to fund them. The iceberg is approaching. And at this point, founders need to know their most important metric. The scale down rate.

A good scale down rate

All founders should track their scale down rate. It must give an updated and accurate measure of the stopping distance. How fast can you eliminate costs to a sustainable level? Most founders don’t know.

The scale down rate is a function of the structure of your agreements and liabilities. Such as, employment terms, loan terms, payment terms to suppliers, access to credit lines, etc. Ideally founders must seek to structure these agreements with respect to their stopping distance. The stopping distance is how long it takes to eliminate costs to operating breakeven levels.

Founders must optimize for flexibility in all agreements. Have the option to delay payment against penalty. Hire people on flexible terms. Decrease monthly salary and replace with end of the year bonuses. Avoid lengthy office rentals. Get a credit line. Keep savings so you can defer salary for a period of time.

What is a good scale down rate? It depends on the icebergs in your water. Delayed funding rounds are relatively predictable. But founder breakups, Google ranking penalties and bankrupting key customers can come sudden. Assess your unique environment.

A rule of thumb would be 1% per day. If you can slash 50% of your costs in 50 days, that should give you enough time avoid most icebergs. And every time you do, you get another chance of finding gold.

Conclusions made:

  • Most founders don’t track their scale down rate.
  • Most startups will experience the need for rapid scale down.
  • Most successful startups have succeeding scaling down and pivoting to something else.
  • If startups don’t know their scale down rate, the risk of losing everything when critical problems arise is very big.
  • A good scale down rate is different for each startups.
  • A rule of thumb is 50% of the costs in 50 days (1% per day).

Check out Accelerace. We invest in tech startups.

Why central banks hate startups

This is a useless blog post. It won’t help you succeed with a startup. Neither will it help you invest in startups. Instead it will make a connection most people haven’t seen. It will expose who really rules the world and how startups are changing everything we know about economics. In the end, you might see the world differently.

Nine years ago the world changed. We got a new ruler.

Regime changes happen when existing power structures break down. Like the French revolution and Arab Spring.

In 2008, the financial sector broke down. In the chaos following, the new ruler came to power. The central banks. And their leaders became household names. Today, most people know of Janet Yellen and Mario Draghi.

Like any new regime, the new rulers portrait themselves as saviors. And they were.

The world was headed for a 1930s like depression. Banks would freeze our accounts. Pensions would evaporate. Governments would have broken down.

Central banks emerged from obscurity. They stepped onto the world stage to shield us from chaos and anarchy. To restore order and confidence.

People embraced the new ruler. In return, central banks quickly and decisively saved banks, companies and governments. They did so by printing money at an unprecedented scale.

So far the ECB and the FED has printed more than $4 trillion in new money. Yes, that’s a lot.

Money printing is not bad in itself. It did save us. The problem is knowing when to stop. And if history has taught us anything, it’s that regimes never step back down. Central banks are no different.

The power of central banks

Central banks have stayed in power since 2008. They have declared state of emergency and taken control of our economy. The free market has been suspended. Prices of stocks and bonds are now under central bank control.

The price of stocks and houses are at historic highs. Not because the economy is better than ever. But because Janet Yellen and Mario Draghi keep printing money.

The reason why they keep printing so much money is because their instrument tells them so.

The instrument is a thermometer. It sits in every central bank. And it measures the temperature of the economy. Or so it’s believed.

The thermometer looks like this: high inflation – moderate inflation – deflation. High inflation is bad. Moderate inflation is good. Deflation is the really bad.

The thermometer tells central banks to aim for moderate inflation (around 2%). If the thermometer falls below their target, they print money.

And money printing always works. Except for the past eight years, it hasn’t.

Instead of inflation, we see clear signs of deflation. And Mario Draghi and Janet Yellen don’t know why. So they keep printing even more money. Sadly, it’s a futile act.

But to understand why, I will take you back in time to see when the misconception started.

Classic entrepreneurs made new products

In the late 1890s, there was a farmer named Henry. The thing about Henry was that he hated farm work. So he started dreaming about building a machine that could do his job.

Henry started to materialize his dream. After a long day of farm work, he would go to his small shed to work on his machine.

Then one day it was ready. He turned it on, and it worked. Henry had built a vehicle running on a gasoline engine. It marked the beginning of his later company. The Ford Motor Company.

But Henry Ford was just one of many entrepreneurs inventing new consumer products. In fact, the following decades would see a flood of new products. Like sewing machines, washing machines, personal computers and smartphones.

The new products provided vastly better solutions to our problems than the existing products did. Cars outperformed horses. Sewing machines outperformed handheld needle and thread. And the personal computer outperformed typewriters and calculators. The inventions created entirely new product categories that consumers were willing to pay premium prices for.

A car was more expensive than a horse. A sewing machine more expensive than needle and threat. And a personal computer was more expensive than a typewriter and calculator combined. But that didn’t matter, because new categories have no existing price anchors. The inventor is free to set a high price.

In the age of product innovation, rising prices became synonymous with economic health. A healthy economic environment had rising prices. In large part due to the many new and better products being introduced on the market. In other words, the age of product innovation was a world of inflation.

New entrepreneurs disrupt industries

The evolution of entrepreneurship can roughly be summed up like this: The first generation of entrepreneurs created new products. The second generation created digital tools. But the third and current generation does something no generation of entrepreneurs have attempted before. They redefine established industries. And the change of focus matters greatly.

The highest valuated startups are currently Uber (2009) and Airbnb (2008). Both were founded in the aftermath of the great recession. And they have inspired and defined the new age of entrepreneurship.

These startups showed aspiring founders that startups can do more than just make tools. They can disrupt and redefine the very pillars of our society. Such as: transportation, housing, banking, legal processing, energy and even space exploration. These industries are so important that their institutions have (almost) become political establishments. Disrupting them is the most daunting task ever taking on by startup founders. And it’s also the most important.

But disrupting industries has a very different economic impact than creating new product categories and creating digital tools. New categories are inflationary. Digital tools increase productivity. But redefining existing industries have a very different effect. One that Janet Yellen and Mario Draghi fear the most. Deflation.

The age of deflation

When startups disrupt and redefine existing industries they are not inventing new product categories. They are reinventing the way existing product and services are being produced.

Uber fundamentally delivers the same service as taxi companies. But they have redefined the underlying infrastructure behind the service. They have applied technology and utilized excess car capacity. The result is transportation that costs half of a taxi.

Airbnb fundamentally delivers the same service as hotels. But they have also applied technology and utilized excess capacity. The result is overnight stays that costs half of hotels.

But these companies are merely the front runners of a seismic wave of startups attacking the very pillars of our economy. Startups like Impossible Foods is redefining the way we produce meat. The result will be high quality meat at a fraction of the current price. Robinhood is attacking the financial service industry and eliminating fees for trading stocks. All of these startups have one thing in common. They lower the price on things we already spend money on. And that has a name. It’s called deflation.

It’s the thing central banks fear the most. And they will fight it with everything they got. But what they fail to understand is that not all deflation is created equal.

Why deflation from disruption is different

Economic theory stipulates that deflation leads to deferred spending. If apples are cheaper tomorrow, we will wait buying them. That’s obviously bad for economic activity. But this theory builds on a critical assumption. The assumption is this: we can anticipate the price decline.

If we know that apples will be cheaper tomorrow, we will surely wait buying them. But deflation from disruption is fundamentally unpredictable.

No one saw Uber or Airbnb coming before they were actually here. No consumer thought: I will wait booking my vacation until some startup emerges that will utilize spare bedrooms to offer cheap stays.

This means that deflation from innovation won’t lead to deferred spending. And this also means that Janet Yellen and Mario Draghi are looking at an obsolete thermometer. In other words, they are dead wrong.

Disruptive startups will define our future

Central banks have pledged to keep printing money till they reach their inflation targets. But they are fighting the force of human innovation. A force consisting of entrepreneurs from across the globe hell-bent on disrupting the establishment. Janet Yellen and Mario Draghi have brought a knife to a gun fight. And they will lose.

What central banks will get instead is something worse than deflation. They will get bubbles. All the money flows into stocks and cheap housing loans. Prices on stocks and houses will detach from the true state of the economy. They will bubble up to levels so high, that central banks will have no choice but to keep them high.

Janet Yellen and Mario Draghi will find themselves in situation they cannot get out of. All of it because they don’t understand that the world has changed. That they actually aren’t in control. But that disruptive startups will define the future economy. And it will be deflationary.

Conclusion made:

  • Central banks rule the current economy by intervening with printed money
  • Central banks want inflation because inflation used to show economic health
  • The new generation of startups creates deflation
  • Deflation created by disrupting startups doesn’t lead to deferred spending
  • Money printing will only lead to bubbles
  • Startups will succeed disrupting industries and thus create deflation

 

Check out Accelerace. We invest in tech startups.

 

How founders know when to give up and when to persist

Legends will teach you success is a matter of persistence. This post will tell you it’s not that simple. It will tell you that adversity isn’t created equal. It will teach you the different kinds of adversity and how to react to them. In the process you will witness the rise of a war lord and learn how Steve Jobs made predictions. In end, you will know when to give up and when to persist. Knowing is power. Use it.

It was a landscape of rocks, wind and dust. In the middle of this harsh environment, a young woman gave birth to a boy. She named him Temüjin. And he would change the course of mankind.

Temüjin grew up in adversity. His father was killed. The tribe abandoned his mother and the boy to die. Temüjin was captured by an enemy tribe and imprisoned. He was starved and tortured. All of it before he reached the age of 15.

But Temüjin refused to die. He persisted because he had a dream. He wanted to rule the world.

When Temüjin turned 25, he gathered an army to consolidate the tribes. He attacked his enemy. Arrows flew and swords were swung. The battle was brutal.

But Temüjin had survived an unthinkable childhood to come this far. His resolve was immense. But in the midst of the battle, he did something puzzling.

Temüjin stopped fighting. He ordered retreat, and fled.

The hardest decision for entrepreneurs

Today, we know how the story of Temüjin ends. His dream came true. He ruled the world by the name of Genghis Kahn.

We also know that his retreat was a smart move. He was losing the battle and wanted to maintain strength to fight again. It was a necessary “pivot”.

But how do entrepreneurs know when to pivot and when to persist? It’s one of the most important questions that exist.

When to pivot and when to persist

Most stories about success revolve around the theme of persistence. The stories go something like this: Some entrepreneur has a contrarian idea. Everybody tell him it’s crazy and cannot be done. But he persists. In the end, he succeeds.

The moral is this: don’t let anyone tell you that you are wrong. That only those who persist will succeed. The storyline is good entertainment. But it can terrible advice for dealing with reality. If Temüjin had persisted, he would have failed.

In the past years, the Lean Startup movement has enjoyed popularity. The methodology is all about testing and pivoting. To immediately change direction if something doesn’t work. That’s the opposite of persistence. And it confuses most people.

The confusing part is this: If I don’t get immediate success, should I give up and pivot? Or should I keep pushing and persist?

The answer is knowledge. The problem is belief.

What to do, depends on this: whether you KNOW you are right OR whether you BELIEVE you are right.

If you KNOW you are right, you should persist. If you BELIEVE you are right, you should be ready to pivot. Unfortunately, knowing and believing feels exactly the same. Then, how can you tell the difference?

The difference between knowing and believing

To KNOW you are right requires a model. To BELIEVE only requires hope and wishful thinking.

Steve Jobs insisted on a graphical user interface for the Mac because he had a model. The model was familiarity. He knew it’s intuitive for people to deal with familiar things. Typing commands into a black screen was alien. But to move a piece of paper into a folder felt familiar.

A valid model is a proven theory that allows you to make accurate assumptions. Hope and wishful thinking is what illusions are made of. Like Santa Claus.

If entrepreneurs have valid models, they must stay the course and persist. Even when people tell them they are crazy.

If the entrepreneur doesn’t have a valid model, entrepreneurs must be very attentive to push back. They must be ready to pivot.

How to demonstrate you know the difference

If you want to raise funding, you need to convince investors. During these conversations the investor will challenge your assumptions. And there are two ways to respond. One way is disastrous. The other way will create trust.

Entrepreneurs who respond with strong beliefs tends to come off as delusionary. No investors like delusionary founders.

Entrepreneurs who respond with a valid model tends to come off as intelligent. And in most cases the entrepreneur will have a superior model, because he has thought about longer than the investor. And good investors love to be proved wrong by intelligent founders.

Conclusions made:

  • Many entrepreneurs don’t know when to give up or when to persist.
  • If the assumptions are based on beliefs, the entrepreneurs must be ready to pivot.
  • If the assumptions are based on valid models, the entrepreneurs must persist.
  • When talking to investor, demonstrate you understand the above.

Check out Accelerace. We invest in tech startups.

The anatomy of the perfect entrepreneur

Most people think the world of startups is high tech. This post will tell you it’s primitive. It will tell you startups is where sports were a hundred years ago. It will tell you how founders and investors can improve performance. In the process you will meet a perfect athlete, meet pre-modern entrepreneurs and learn when the word startup was born. In the end, you will be better at startups. Knowledge is power. Use it.  

It was the biggest event on the planet. And all eyes were fixed one person. Elmer Niklander from Finland.

Niklander was the Vitruvian Man. His body was 185 cm tall and weighing 79 kilos. It was elegant and perfectly balanced. Like a renaissance sculpture. Every coach had told him he would become a superstar. And now he was.

He bent down and grabbed the 7.260 kilograms. He took a last deep breath. Then he exploded and hurled the ball 14.15 meters. The year was 1920. And the place was the Olympic shot put final in Antwerp.

70 years later, Randy Barnes from USA throws the same ball 23.12 meters. A devastating advance of more than 60%.

The false idea of the universal athlete

Elmer Niklander grew up in the early days of competitive sport. When he was 6 years old, the first modern Olympics took place in Athens. And If you had been at the opening ceremony, you would have witnessed something strange.

You would have seen 2,626 athletes from 29 countries come marching in. The strange part: Everyone almost looked the same.

But back then it wasn’t strange. Because until recently, it was believed that sport was a thing. That being good at sport was a function of universal physical coordination. And that coordination was best achieved by a harmonious body with perfect measurements relative to each part. Like the Vitruvian Man. Today we can appreciate the logic. Obviously, it was mistaken.

The recognition of specialized athletes

At some point it was realized that sport wasn’t a thing. We learned that sport was in fact many different things. The world of sports has specific disciplines. Each discipline has distinct problems.

Shot put impose the biomechanical problem of hurling a dense ball as far as possible. Swimming imposes an entirely different problem. To propel the body though water using minimum energy.

Once the distinct problems of each discipline were understood, the idea of the perfect athletic body faded.

Shot put requires a short explosive motion. That means that the muscle to fat ratio is irrelevant. Fat is mainly a problem for endurance. Good shot putters don’t need a six pack.

Swimming techniques mainly use upper body movements. That means the legs don’t matter much. Big feat and long arms do. Michelangelo would never have sculptured Michael Phelps.

When we finally realized that sports were many different things, something counter intuitive happened. Athletes started to look less perfect. Actually a lot less. But, their performance soared!

If you had met Randy Barnes, you would never had guessed he was an athlete. Much less, that he was an Olympic gold medalist.

Instead, Randy looks like a bouncer. Partly because of his monstrous frame of 132 kilos. Partly because of what appears to be a beer gut.

But, if Randy Barnes had participated in the 1920 Olympics, Elmer Niklander wouldn’t have stood a chance.

The false idea of the universal entrepreneur

The modern tech startup was invented in Silicon Valley in the late 1950’s. However, people didn’t call them startups. That didn’t happen before 1976 when Forbes Magazine first coined the term.

The founders of the modern startup adopted a name for themselves. Or someone gave it to them. A much older term. Entrepreneurs.

Before the modern tech startup, entrepreneurs were not the people we would think of today. Entrepreneurs were businessmen. And back then, most business was trade. Buying and selling goods with a profit. It required an appetite for risk, and skills in negotiation and salesmanship. People who excelled in those things were sometimes referred to as “born entrepreneurs”. It was an ideal. The business version of the Vitruvian Man.

But when the label “entrepreneur” was given to founders of startups, something changed. What changed was the nature of the underlying business. See, startups aren’t trading companies. Trading is a business model. Startups are not. It’s not even a thing. Its many different things. Does it ring a bell? Now you know where I am going.

The problem with the universal entrepreneur

The term “startup” carries no information about what it does. Nor what its business model is. A startup can do anything from deep science, to organizing sharing of goods, to inventing a new currency. It can sell to government, business and consumers. Its products can be software, hardware or living tissue. There are basically no limits. They are all called startups. And everyone starting them are all called entrepreneurs. And herein lies the problem.

The problem is the multitude of business models. Because each business model has specific problems. Getting consumers to buy virtual goods in games is a vastly different problem than navigating corporations to sell enterprise software to executives. Or getting retailers to provide optimal shelf space is a very different from getting an army of telemarketers to perform.

When modern shot putters are so much better than Elmer Niklander, it is because the specific problem of shot put has been understood. The talent scouts know what to look for. The coaches and athletes know what to train.

Our understanding of startups is where sport was in the 1920s. We know that there are disciplines, but we don’t distinguish the specific problems of each discipline well enough. We still believe in the Vitruvian Man.

That means investors favor universal characters. Like Jack Dorsey. A man who can run both Twitter and Square. And anything else he puts his mind to. But wait, that’s what people thought of Elmer Niklander. Including Niklander himself. So he also competed in discus, hammer and javelin.

The recognition of specialized entrepreneurs

Startup fail rates are horrendous. Some people think it’s supposed to be. But it doesn’t.

Most startups don’t compete with each other. It’s not a zero sum game. In fact, most startups could become successful without it being a mathematical problem. The only ones suffering would be the incumbents.

For this reason, increasing the success rate of entrepreneurs is fairly simple. It’s mainly a function of making the entrepreneurs better. How? Well, we know this by now, don’t we?

We must shed the idea of the universal entrepreneur. We must understand the different disciplines within startups. We must understand the specific problems each type of startup face. We must know what to look for and what to train. Mark Andreesen calls it: Strength over of lack of weakness. But the key question is what strength?

If I knew, the secret to unlocking a massive improvement in success among startups would be within my power. I don’t. But I have a thesis. The thesis is there are at least 144 different sets of startup disciplines.

I am analyzing each type of startups and the specific set of critical skills needed by the founders. If founders possess those skills and train them, they become Randy Barnes. If you want to follow this work, keep an eye on my blog.

Conclusion made:

  • The idea of the universal athlete dominated early days of competitive sports
  • The idea of the universal entrepreneur still dominates the world of startups
  • When sports were broken into disciplines and athletes specialized, performance soared
  • When startups will be broken into disciplines and entrepreneurs specialize, performance will also soar

 

Why startup founders feel lonely but aren’t alone

What I am about to tell you is a true story.

I got fired. It was the strangest thing. The company was my own.

One hour earlier I had put on my headset. Connected to the wifi in my hotel room. I had a board meeting. I reported from my business trip. I had met with a big potential client. He had even invited me to his home for dinner. I would go after the board meeting. It was a good sign. I was proud and excited. Then it happened. At the end of the agenda. Under Other.

Our chairman said: You are fired.  Budgets weren’t met. Again. He explained there would be a staff meeting later. The team would be informed. A new CEO had been found. He was there. He said Hello on the call.

The beginning of a long and lonely journey

Some years earlier I had co-founded my startup with two friends. We talked about everything.

Then one of them got another opportunity. He didn’t talk about it. He knew we wouldn’t like it. So he kept it to himself. One day I found out. I forced him to leave. We stopped talking.

But I still had my other friend. We got funding. Then roles. Then performance salary. We stopped talking about the salary part. Then about other things too. It felt awkward.

I hired people I liked. One of them was a really great guy. He could be my friend. But I was his boss. He threw parties with the other employees. I learned when they shared pictures and laughed at the office. I told them to laugh in their spare time.

My parents often called. They preferred I took a normal job. I never complained. I didn’t want them to worry. So I showed them our offices. I made sure everyone was there. Even interns. They felt better. It seemed like a real company. They stopped worrying.

I attended startup events. I met a lot of founders. We shared information. But everyone was doing great. Most conversations stopped there. I never met a founder who didn’t do great. Maybe only we struggled.

The journey ended. Alone.

One day I went on a business trip overseas. I was meeting the customer of a lifetime. The CEO of a big company. The meeting went perfect. He showed pictures of his family. He invited me to his house the same night for dinner. I accepted, knowing that I would have time for the board meeting in the meantime. I had great news.

I don’t remember the last part of the call. But I remember when Skype closed down. The hotel room was dead silent. I was desperate to talk to someone. I grabbed my phone. I stared at the screen. I had no idea who to call. Everyone seemed like the last person I wanted to tell. Then I couldn’t breathe.

My phone vibrated. It reminded me about the dinner invitation. It was in thirty minutes. I decided to go and tell the CEO.

He opened the door with a smile. His kids and wife came to greet me too. They served dinner. Since the board meeting my stomach felt like it had twisted inside. I couldn’t eat. The CEO told me that they had big plans with our software. He said he trusted in me. He toasted to a long and fruitful partnership. His wife toasted too. She said it was an honor to have me as guest. I left without telling the truth. There was no good time between the toasts.

The poker faces of founders

After becoming a mentor and investor in startups, I sometimes get phone calls late at night. When the founder has no one else to talk to. But it’s just tip of the iceberg.

The real problem is this: Startups are partly “a fake it till you make it” game. And founders play this game against everyone else.

When founders tell their family, they calm them with good news. Mothers prefer safety.

When founders hire employees they paint a glamorous picture. They can’t compete on salary.

When founders pitch investors they downplay the risks. They know investors hate risks.

When co-founders talk to each other they position for power. They know the media will only choose one darling.

The faking means that founders deal with difficulties and worries themselves. Successful bluffing requires not letting anyone know. Any poker player knows this.

But behind the “things are great”, most founders have tried this: Not knowing if they can make payroll next month. Been turned down by every investor in their area. Being so far of a milestone they have no idea how to reach it. Having taken devastating critique by investors in a board meeting. Had key clients churning. Having lost important team members to competitors. Having the product break down and not being able to identify the problem while support tickets are flying in. Expanded to new countries and not making a single sale two months in. Hired friends that don’t perform. Having been betrayed by a co-founder. Declined class reunions because there is nothing to show for yet. Lost romantic partners because they always came second.

If you are a founder, know that you are not alone. Everyone experiences this. Even those who are really successful. I hope that we can learn to be more honest about the hard things.

I will end with an old proverb. It says: If you want to go fast, go alone. If you want to go far, go together.

Conclusion made:

  • Entrepreneurship is partly “a fake it till you make it” game
  • Founders even fake it among each other
  • Founders face things they don’t share with anyone
  • Everyone would benefit if we could be more honest about the hard things

Check out Accelerace. We invest in tech startups.