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

 

Advertisements

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.