Why luck matters for startups and how to be lucky

High performers will tell you luck is irrelevant. This post will do the opposite. It will tell you luck is important. It will explain how luck affects startups. It will guide you to be lucky. In the process you will experience the extinction of the dinosaurs, meet a different Netflix and learn about Swans. Luck is power. Use it.

A famous technologist and investor stepped on stage. He reflected and told stories from a long life in Silicon Valley. After spellbinding two hours, he concluded on everything he had learned. He spoke a single elegant sentence.

But what he said, left everyone in disbelief. Confusion spread. Was that it? Had they misunderstood? I couldn’t be.

The Narrative Fallacy

Imagine this famous experiment. A room with one million people. Everyone pairs up to play the game of heads and tails. Coins are flipped. Losers leave. Winners stay. Now half the people are left. New pairs are formed. And so it continues. In the end, one person is left. The winner. He has been right unbelievable 19 times in a row.

Let’s imagine we celebrate him. We give him awards. We label him genius. We study his technique. His fingers are rather long. We study his childhood. He used to play heads and tails with his brother to decide TV channels.

Let’s imagine we interview him. We ask him what makes him successful. What would he say? I suspect he would pause and think. And then he would do what most people do. He would fall victim to the Narrative Fallacy.

Good storytellers got many children

In pre-modern times survival wasn’t given. So humans strived for safety. Being safe was a matter of control. Control is understanding connections between Cause and Effect.

Humans achieved understanding of Cause and Effect through experience. Those who had eaten many berries knew which types caused stomach ache. Experienced people had high social status. They provided safety. The group made them Elders, Chiefs and Priests.

The experienced people were asked for advice. On all matters. Sometimes on things they didn’t really know. But they liked the role. It had benefits. Food and wives. The products of high social status.

So they started giving advice on everything. They made up Cause and Effect explanations. Like: Thunder is created by a hammer swinging angry god. Sickness is caused by evil deeds. Mermaids make sailors disappear.

The best storytellers had the most children. And so it happened. The ability to make up explanations spread. Today, it’s in all of us. The Narrative Fallacy.

Luck is real. Also for startups

Back to our winner of the coin toss contest. He gives the reporter what she wants. What everyone wants. The explanation for his outstanding performance. The Causes that lead to the Effect. The things he did to win. And people like the answer. It provides a recipe. We understand what caused his success. The story is created.

No need to explain the ridiculous nature of the heads and tails example. We understand that in a such experiment, someone will eventually win. We also understand that the winner was just lucky. But in the game of startups we do the same. We celebrate successful founders. We interview them. We study them. We make up stories about them. We identify Cause and Effect. But we rarely talk about luck. Its role is not well understood. In fact, it’s taboo.

The problem is this. We are afraid of luck. Afraid that attributing luck will harm us. Successful founders wouldn’t harvest social status. Authors wouldn’t sell books. Venture capitalists couldn’t raise funds. Accelerators and advisors couldn’t justify value. Like our heads and tails winner. We would never celebrate him in real life. Luck is not welcomed. But luck is undeniable real.

Every week someone wins the Lottery. Every day a child is adopted and gets a chance of a happy childhood. Most scientists believe that life and the birth of the universe are results of extraordinary coincidence. In other words: luck.

But if luck is (also) true for startups. How should we approach it?

Birds of serendipity

There is a phenomenon called a Black Swan. It’s an event that has no predecessor. It catches everyone off guard. It’s random.

Black Swans define our existence. The extinction of the dinosaurs. Birth of Jesus. The First World War. The iPhone. A Black Swan can happen today. Or tomorrow. Or next year. We don’t know. But we know it will define our future. And it will impact your startup. And your life.

The Black Swan has a cousin. The Grey Swan. It’s more frequent. But It will still surprise and impact you. Like Hip Hop, Snapchat and CrossFit. Together, these Swans are catalysts for change. And the change can be either: Good or Bad.

When Apple sent a Black Swan flying in 2007, it was bad news for many people. Namely for everyone that made Java apps. Not to mention Nokia managers.

But the iPhone was good news to others. Like a tiny startup called Unity. They had made it easy to build games for Apple devices. Two years after their founding, Apple revealed the iPhone. Then the App store. The iPhone became the world’s biggest gaming device. Unity benefitted. Today, it’s a unicorn.

How to be lucky

Luck is when a good Swan appears. But they hit randomly. And they are blind. They don’t know who they benefit. And they don’t care. Both good and bad Swans are random.

Because Swans appear randomly, the chance of getting hit is a function of time. That’s true for any random game. The more you play, the bigger the chance of winning. Our coin toss winner had to show up. Imagine Unity had folded before the launch of the iPhone. To be lucky is a matter how long you play the game.

But the risk of being unlucky is also a function of time. The longer you play, the bigger the risk of unlucky events. But there is a trick. The key to luck. And it’s simple, but hard. The hard part is the reason why we should acknowledge luck. Why it shouldn’t be taboo.

The trick is this: Don’t let the bad Swans kill you.

Not everything died in the mass extinction of the dinosaurs. Some animals and plants survived. Those that were versatile and scrappy. Like Amazon during the dot-com crash. Or Netflix ten years ago. They sent DVDs back and forth in envelopes. Internet enabled streaming was a really bad Swan. But they adapted.

If you can outlive a bad Swan you stay in the game. Richard Branson calls it protecting the downside. Fund managers call it hedging. Your mother calls it not putting all the eggs in one basket. They all understand that losing everything means game over. Your chances to be lucky goes to zero. But if you survive. Your chance of luck returns to random. You can be lucky.

The ultimate guide to luck

Here it comes. The ultimate guide to luck:

Guide for startups: Expose yourself to luck by staying on the market for as long as possible. Keep lean and protect your runway. Pivot if unlucky events occur.

Guide for people: Expose yourself to luck by staying alive as long as possible. Go out every day and interact with the world. Get up every time you fall.

Tomorrow a good Swan may come

Conclusion made:

  • Humans hate coincidence because it introduces uncertainty
  • Humans make up stories to downplay coincidence
  • Luck is taboo in entrepreneurship, but it’s very real
  • Luck comes as good Swans
  • The key to luck is to stay in the game and get up when you fall
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Why crazy founders succeed and clever people don’t

Human resource professionals prefer clever people. This post will tell you why it’s paramount for founders to be crazy. It will take you back thousands of years. I will explain why Borat is funny. Most importantly, it will explain what kind of crazy is good for startups. Good crazy is power. Use it.

A young boy was crying. He felt a burning sensation on his chin. He had felt it many times before. The hand that hit him was accompanied with shouting. This time it came from one of his dad’s hunting partners. But the boy was learning. The shouting didn’t happen so often anymore. The year was 12.000 BC.

For most of human existence we lived in tight knit communities. We had to. Life was too brutal to survive alone. Surviving was succeeding.

They key to success was to stay part of the community. To fit in. To conform. Conformity is about behaving according to expectations.

Expectations about behavior are formed by norms. Norms are created by communities. And communities are organized around economic activities. In pre-modern times economic activities consisted of hunting, fishing and pillaging. Today economic activity is made up by companies.

Society prepares us for working in companies. We are taught conformity by parents, teachers and television. And so it happens. Most people conform. We even laugh at people who don’t. They appear funny. Like Sacha Baron Cohen’s characters: Borat, Ali G, the Dictator etc.

Do you know why these characters are funny? It’s because they are non-threatening. We know that they are too non-conformist to ever succeed in the real world. They couldn’t seduce your wife or steal your position in the hunting party.

But recently something incredible happened. A change so fundamental it has left the human mind disrupted.

Conformity has become obsolete

Evolution formed humans to ensure survival through conformity. Those days are over.

Today survival no longer depends on being part of a community.  We don’t starve or get killed by lions. Conformity is not necessary for survival. We don’t have to work in a company. We can leave the community. Founders leave to create startups.

Startups are not companies. Startups are dreams. Founders must materialize their dream. The way founders materialize the dream is by attracting resources.

All the resources startups need are held by other people. Such as: cash held by investors, cash held by customers, time and attention of advisors, time and energy of talented employees. All of these are controlled by other people.

Norms dictate how we interact with other people. Consequently, norms influence how we get access to resources. Norms limit options for obtaining resources.

Now imagine this: You want a cup of coffee from Starbucks. You have limited money. Most people would wait for a discount. They only got a single way to get what they want.

But, instead of waiting for a discount. Would you do the following?

Walk into Starbucks, wait in line. When it becomes your turn, you pull out your own cup and ask them to fill it and give you 50% off. Say that the discount is because you brought your own cup. The people behind you laugh and roll your eyes. But you maintain that you should get 50%. You say you won’t leave until you get what you want.

Most people won’t. Why? Because it would break norms. It’s crazy. But that’s exactly the kind of crazy successful founders are made of. Let me tell you why.

Crazy founders make good bets

Founders who don’t feel the necessity to be conform have unlimited possibilities for obtaining the resources they need. Creativity is their only limitation. People who are conform would wait for Starbucks to hand out vouchers. But that’s not the only advantage of crazy.

Crazy people make great bets. A good bet is one where you can win more than you can lose. Financial engineers would call it asymmetric risk reward profile. In the case of Starbucks, the reward is 50% discount. That’s hard cash. The downside is a No. People laughing and rolling their eyes. That’s pride. Startup success is defined by cash rather than by pride.

The real problem is this. Conformity is actually rational. It’s clever. A normal mind tells you that the downside is bigger than the upside. The upside is saving money, but the downside is being excluded from the community, and die. Except that today none dies. But evolution couldn’t keep up.

The right kind of Crazy

Good crazy is a special bug in the mental software. It’s when risk reward calculations don’t account for conformity.

Like when a young Steve Jobs looked up the biggest mogul in the computer industry in the phone book. He called Bill Hewlett and asked Bill to send him spare parts. For free!

Or when Henry Ford didn’t care about the power of the automobile industry. Henry Ford broke their patents and challenged the biggest name in the industry to race him.

Or when Ingvar Kamprad refused to deal with Swedish suppliers. Instead he went to Poland and came in bad standing with the entire Swedish industry. He didn’t care. His startup was Ikea.

Or the many founders in our portfolio companies at Accelerace  who do these things on a small scale all the time.

In most cases, the upside is obtaining something important. The downside is being shunned by the “community”. To crazy people that’s a good bet. And they take it.

What founders must do

If you are a founder, I suspect you are a little crazy. You have to be.

If you are crazy and sometimes feel bad. Don’t. Actually, you should cherish and nurture it. You played a trick on evolution. Mother nature is not easily fooled. Know that you have a mind perfectly suited for startups. You might lack friends who get you. I know. It can hurt.

If you are an aspiring founder and wonder if you are crazy enough, test it. Practice crazy. Order chocolate milk to sushi. Ask strangers for kisses. Buy expensive things with coins. Remember. In the little strange world of startups, crazy is good.

Conclusion made:

  • Humans were designed to be conform
  • Crazy people are not conforming
  • No conformity means endless possibilities to get what you want
  • Crazy founders make good bets
  • Crazy founders should feel good about being crazy

Why venture capital don’t invest small amounts and startups think they do

(David Ventzel is Investment Manager at Accelerace. Accelerace is not a venture capital firm. Accelerace is an accelerator and seed investor. The insight provided in the article doesn’t reflect how Accelerace operates)

Conventional wisdom will tell you it’s easier to raise a little money than a lot of money. This post explains why it isn’t so. It will explain why VCs don’t invest small amounts. In the process you will meet my mother. You will see how VCs actually make money. You will learn what only few people know. Knowledge is power. Use it.

The elevator rushed towards the 5th floor. Seconds ago me and my co-founder had been buzzed in. Adrenaline rushed through my body. You can do this! you can do this, I said to myself. Ding! The doors opened. Two investment managers greeted us. We smiled. Made firm handshakes. The show began.

Earlier that day me and co-founder had prepared for the VC pitch. We would focus on our unique product. Then finish with a modest ask. Just €300K. The firm managed €1 billion. Surely our modest ask would be no problem for these guys.

Against all expectations the VC turned us down. Or rather they said: you are interesting and we would like to follow your progress. That’s VC language for No.

I didn’t know it then. It would take another 10 years before I knew. But we had made a fundamental mistake. A mistake that many startups make. We asked for a modest investment. I know what you are thinking. How can that be a mistake?

It seems strange indeed. You will learn why it’s not. But first, I will take you further back in time. To a summer when I learned something important.

Lesson one. Small asks are easy.

I was 10 years old. Me and my friend wanted ice creams. Big ones. But we didn’t have money. So we did what children always do. Asked for money. But this time we made a cleaver plan.

My mother was our biggest concern. Sugar was her enemy. She baked chocolate cake without sugar. It just tasted like regular bread.

We started with my mom. “Mom can we have a little money for ice creams? We just want the small round soda ones” The small round ice cream was the cheapest and smallest available. She gave in and handed us the coins.

Then we went to my friend’s mom. We asked for the same and got the money. Then our neighbor. They didn’t have kids and liked us. They gave us money too. We collected enough money to buy ice creams called Magnum. When my mom learned, she was furious. I was too high on sugar to care.

That day I learned an important lesson. Something I suspect most people have learned. It’s easier to ask for a little than a lot. Why? Because the less you ask for, the less the giver sacrifices. We all know this. Later I would learn a new lesson. A peculiar one.

I would learn that the complete opposite is true for VC investments. It’s easier to ask for a lot than a little. Why? Because the more you ask for, the less the giver sacrifices. Few know this. You are about to become one of them.

Lesson two. Small asks can be hard.

See, the thing is this:

My mom could take money out of her wallet. VCs don’t have a wallet.

My mom didn’t have a lot of questions for me. She trusted me. VCs do have lots of questions. They don’t trust you.

Once my mom gave us the money, she had no responsibilities. Once the VC invest, they will have lots of responsibilities.

And those differences have names. VCs call them:

  1. Capital calls
  2. Due Diligence
  3. Portfolio management

Let’s find out how they actually work:

Capital Calls (asking dad for money)

My mom just took money out her wallet. It was easy for her to hand us money. VCs don’t have a wallet. In fact, they don’t any cash. That’s right. So how do they invest?

VCs got investors too. They are called LPs (Limited Partners). The LPs don’t like the idea of the VC swimming around in cash like Uncle Scrooge. So LPs keep the money until the VCs need them. When the VCs need cash, they make a Capital Call. They ask for money. No one likes asking for money. It’s unpleasant work.

But there is one thing about capital calls VCs do like. Management fees! Every time VCs invest, they get 2-3% of the amount in annual fees. And that pays for the nice office. It also means they get more money if they make big investments. Bingo. That’s’ the first reason why VCs don’t invest small amounts.

But there are even bigger and more important differences.

Due Diligence (checking the merchandise)

My mom trusted us. So she just handed us the money. It took 2 minutes. Obviously, VCs can’t do the same. They spend 3-6 months seizing the startup. It’s called Due Diligence. You knew that already. But did you also know how much it costs?

Due Diligence isn’t just a long process. It’s also expensive. It often costs + €100K. Lawyers, consultants and accountants send big bills. The cost for Due Diligence is taken from the invested amount.  But Due Diligence is not proportional to the size of investment. It’s about the same for €10 million as for €1 million.

To spend €100K to do a small investment makes no sense. Even at €1 million the costs would be 10%. Bingo. That’s the second reason why VCs don’t invest small amounts.

Portfolio management (traveling to board meetings)

My mom never expected to see her money again. It was a gift. VC investments are not. A VC firm is a business. It has revenue and cost. The main revenue comes from fees. The main cost is time.

Most of the time is spent on board of director work. VCs prepare for meetings. They often travel far to attend them. Individual investment managers can sit on more than 10 boards. I have a friend who cried when he reached 12.

The problem is this. With each investment they get a new board seat. Board seats are time. Time is cost. A business wants to reduce costs. So the VC wants to reduce board seats. How? By making fewer, but bigger investments. And Bingo. That’s the third and final reason why VCs don’t invest small amounts.

What founders must do

Founders can do two things. Stop approaching VCs. Or get a valuation that justifies a big enough investment. I suspect you want the latter. How? Well, that’s a different topic. I plan to write about it. But I suggest you start with my earlier post on valuation.

That’s it. It took me 10 years to learn. Many up and down elevators. Including 3 years as an investment manager at Accelerace Invest. Now you know too. It took you 10 minutes.

Conclusion made:

  • VCs don’t have cash. They ask LPs for money and take a fee
  • VCs do due diligence and it’s really expensive. Only big investments can pay for the costs
  • VCs’ main cost is time spent on boards. The fewer investments, the fewer costs
  • Founders must either stop approaching VCs or get a valuation that justifies a big investment. Or turn to another type of investment vehicle.

 

How to build a Mastermind for your startup

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

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

The purpose of the Mastermind

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

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

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

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

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

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

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

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

Construction of the Mastermind

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

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

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

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

Step 2. Establish the Mastermind on a clear philosophy

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

Step 3. Execute meetings often and structured

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

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

Step 4. Appreciate your Mastermind

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

Step 5. End the Mastermind

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

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

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

Conclusion made:

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