by Pete Flint (@PeteFlint). Pete is a Managing Partner at NFX, a seed-stage venture firm based in San Francisco.
In the face of a global pandemic and a financial meltdown, Founders are confronted with a new reality. The world has rapidly shifted under all our feet. Seemingly overnight, the economic dialogue has changed from measured confidence to murky chaos. If you are running a startup today, this will likely be one of the most challenging climates you’ll ever face.
I have been there — twice — and have a sense for what Founders are feeling right now. At lastminute.com, a European online travel site, we were in the eye of the storm during the September 11th crisis. And at Trulia in 2008, we faced not only a recession but a catastrophic meltdown in our core market, residential real estate.
In most ways, crises are horrible. But know this — crises always end. They are a cyclical part of our market economy and there are black swans that inevitably occur. The only way to build an iconic company is to do things differently. And in a crisis, survival requires being and thinking differently.
I’ve found there are three distinct but equally critical elements of how you manage a crisis:
1. The first is managing losses. This will be the most difficult and painful thing you do as a CEO because it involves people, but it’s often not so much about the what as it is the how. Your empathy and speed are key here.
2. The second is gaining ground. These are the ways you will reorient your focus, your tactics, and your team so you come out ahead after a crisis.
3. The third is managing psychology. It is crucial you keep yourself, your team, and those around you healthy, sane and productive.
Both lastminute.com & Trulia emerged stronger post-crisis because of the swift actions we took in these 3 areas. I’ve been advising my portfolio companies on the tactics we used to navigate through those very tough days, weeks, and months — and I felt it would be beneficial for the entire Founder community to make these publicly available.
We will continuously update this list with additional suggestions and resources.
This is by far the hardest and least fun part of being a CEO or on a founding team. Above all, remember that there is a human being behind every decision you make to cut, outsource, repurpose or restructure.
1. Accept the new reality and (likely) change plan to prioritize cash.
Assume things are going to be worse than you think. The market has dramatically shifted. Your previous financial plan is likely irrelevant. So it’s necessary to change your plan to reflect the new reality. For some companies, your product-market fit just evaporated. Prepare and plan for a worst-case scenario and be delighted when you exceed it. Above all, your primary objective is to not run out of cash. There are two ways to do that. Either you can become profitable or you can survive long enough and grow efficiently enough to be able to raise a new round of financing. We have seen many times that the leaders in markets are often just the ones that were the last company standing coming out of a recession when everyone else threw in the towel or went bankrupt as they were unable to raise additional capital. They had the grit and resilience to battle through and build an enduring company. This was my experience at lastminute.com, where the very fact that we survived and were the last European online travel agency standing at the end of a crisis gave us tremendous market power during the recovery.
2. If you have to make layoffs, make them deep and early.
The best way to do layoffs is in one deep cut early in the crisis. Nothing is more demoralizing than multiple rounds of layoffs and retaining cash is key to prolonging survival. Always remember that a layoff upends someone’s life at the worst possible time. Be as human, kind, and generous as possible. We did this at Trulia by organizing a job fair, renting out a conference room at a nearby hotel, and inviting every company we knew that was hiring to come. This is even more important as layoffs are now sadly likely to be done remotely. After the layoff, be sure to tell the remaining employees how painful it is to lay people off but that you believe this will be the only round of cuts — now the company is in a more stable and solid position to survive. The peace of mind you are giving them is crucial.
3. During layoffs, focus more on the “stay team”, but care deeply for the “leave team”.
At Trulia at one point, we needed to layoff one-third of the company. It was incredibly hard. I found that as a CEO, you are pulled to spend more time with those leaving. But remember — your most important job as the leader is to motivate and communicate with the stay team. They are depending on you for guidance and support. Helping them do their jobs really well is precisely what will save their jobs and the company.
4. Keep playing to win, not just to survive.
If you have been already running lean and have a strong cash balance, don’t make significant cuts. If you do have to make significant cuts, ensure the stay team is actually capable of turning things around. Generally, this means you should not decimate the product and engineering teams. Those teams have the most leverage to help you survive. Repurpose employees you don’t want to fire because chances are you will need them again soon. For example, if you have an A+ office manager but no longer have an office (or are working from home as we are in the current Coronavirus pandemic), have him or her move over into sales support or take over some operations tasks.
5. Implement a hiring freeze, but be ready to make opportunistic moves.
Sometimes getting tremendous talent can help you survive a downturn. In addition, great talent will be cheaper and more available in a downturn. Be fair in your hiring; ideally, offer to move their compensation higher when the downturn ends. Or offer them strong total compensation by increasing stock. But be ready to grab the best talent if you have the flexibility. It will put the company in a better position both during and after the downturn. Note — if you did layoffs, then hiring of any sort is not recommended for a while. It sends the wrong message to the team.
6. Assume you will not be able to raise money soon.
You are better off avoiding pitching VCs for the near term because you won’t get their attention. Most VCs I know are making much much fewer investments as they focus on their portfolio and wait for things to stabilize. That is why we continuously advise Founders to raise money when you can — once you’ve been through a downturn you realize more than ever the advantage capital offers in coming out stronger.
7. Reward outstanding performance with stock.
You still want to reward a few of your highest performers. Give them stock. Tell them you can’t pay them more due to the cash situation but you want them to understand how much you value what they are doing. Personally thank them for their commitment and contribution and make it clear that if they stay with you and the company, they will have a bright future. Even a small amount as a gesture at this time can go a long way to help reduce the feeling of loss.
8. Adjust compensation where possible to reduce cash burn and share risk.
Be creative in how you pay employees. For example, you can increase commissions as part of take-home compensation for sales teams. For marketing and engineering teams, you might be able to attach bonuses or pay to overall team goals with more upside if they hit stretch numbers. Be cognizant that this can introduce uncertainty into their lives and acknowledge this fact — that you see they are stepping up and sharing the risk. If all goes well, then everyone actually will do better and earn more money — and the company thrives.
9. Right-size and recast marketing plans.
This is traditionally one of the easiest places to trim back to retain cash. Longer-term projects and initiatives can be back-burnered. Reassess all your marketing channels and their cost-effectiveness — focus on channels that deliver rapid payback on spend and don’t assume that historical churn and spend rates will survive — dive deeply into the data and recast your strategy. It’s quite possible new opportunities have opened up as companies are more interested in incremental revenue. PR should be deprioritized unless it’s highly relevant to the market sentiment. During times of crisis, people don’t focus on business news as much. Large external agency contracts should be put on hold or severely reduced. This is not the time to revamp your website. For the agencies, this can hurt. Please try to give them as much notice as you can or be creative in your ongoing relationship.
10. Refocus marketing on the highest ROI activities.
Task your internal team with identifying the lowest-cost / highest-ROI marketing opportunities and scaling those to the max. Obviously, put events on hold. If you do have event budgets, this is one area where you can potentially fund new initiatives by redirecting it to other areas.
11. Renegotiate contracts and leases.
It never hurts to ask for reductions or better payment terms. Keep in mind, however, that these companies also have to stay alive. They are probably having to lay off employees as well. We’re all in this together. Be fair and compassionate, but there is no shame in asking.
12. Reorient channels and control your destiny.
Focus on channels you can control. If you are selling through third parties, you may no longer be able to count on them to keep selling your product. They most likely will be distracted by other things. This will make it even more important to manage what you can control. If successful, this has the additional benefit of driving higher margins and is a great forcing function to reorient sales channels and sales motion towards direct sales.
13. Incentivize faster payments from your customers.
Offer discounts on invoices to get cash in quickly. Cash in hand is worth taking a temporary hit to your gross margins. This is particularly true when cash is in short supply.
14. Assess all software and infrastructure costs.
Chances are, you have some things you can cut there. Extra spend on AWS? Stranded licenses for Salesforce? Contractors using Google accounts on the corporate domain? You can decide what’s really necessary and what’s a luxury. Now is the time to tighten your belt. Start by cutting things no one uses then move on to cuts that are “nice-to-haves” but not critical — like extra licenses of design software you may share with external designers or extra GitHub seats.
A downturn is the best time to position your company for growth. Your large competitors will likely be knocked sideways and unable to react. Many of your smaller competitors will be short on cash, hibernating and unable to match your moves. While you are managing losses, you must be simultaneously making moves to gain ground.
15. Identify massive supply/demand imbalances.
Downturns tend to generate big gaps between supply and demand. You need to either source new supply to meet the needs of the current demand or change your positioning so it’s attractive to where the new demand is (or find new kinds of demand).
Addressing supply-side imbalances: If you’re going to see significant reduction in volume in a market downturn, don’t try to push against the tide. It’s meaningless. Instead, go upstream to how you can lock in supply. Be a great partner to them and to be well-positioned when things recover. If you are providing a valuable service in a downturn, then when things recover you will be highly sought after.
At Trulia, we did this by getting integrations with brokers and technology partners so all the real estate listing inventory came onto Trulia at a time when these partners needed low-cost distribution the most. We also used this time to integrate our supply and partner ecosystem for the long haul. This is not just a business development conversation; you need to enlist your engineering team to do the plumbing on your side. Most likely, the counterparties will do the plumbing on their side to integrate their platform with your platform because they need the bump in usage and customers.
At lastminute.com, we used the downturn to secure more inventory at rock-bottom rates. We figured people would start traveling again in the not so distant future. We also secured inventory for entire Eurostar trains and sold tickets on them dirt cheap — matching the new demand. These stunts helped catalyse long-term supply and demand relationships that were important when the market recovered.
Addressing demand-side imbalances: How can you provide services to companies such that they can quickly reduce costs or increase revenue? Conversations that were historically challenging can become surprisingly easy if you’re able to directly impact the P&L. You can use these engagements to push through broader systemic changes to relationships and systems that might have been met with internal resistance previously. At Trulia, we negotiated deals with newspapers and other online portals to take over their real estate classified sections, add our branding and integrate with our system. As most companies in a downturn refocus on their core, how can you help them to turn cost centers into profit centers?
16. Follow the behavior changes as consumers/businesses become more cost-conscious.
Your customers’ behavior will change. Their thresholds for purchases will move. This often creates advantages if you follow them and pivot smartly. At Trulia, we integrated foreclosure listings into the core search experience during the housing downturn. It became a very popular product and was one of our biggest growth segments during the downturn. Watch closely for changes in customer behavior. Ask yourself and your team: ‘What can we create that will fulfill their current needs or address their anxieties?’
17. Speed is your asset. Move fast and try new things.
Anyone can be a chess grandmaster if they can move two times before their opponent moves. During a downturn, you have an opportunity to make three moves ahead of them. Incumbents will be doubly slow during a crisis. So lock in inventory, secure partnerships, and do other things that take incumbents much longer.
18. 10x your product.
Now is the time to make sure you are building a painkiller rather than a vitamin. The only way to break through in this new reality is to have a dramatically better product or service. Talk to all of your best customers. Dive deeply into the user analytics data. Find out how users are engaging with your product today — what features they love, where they seem to get stuck. Compare current user behaviors with previous ones. Identify new behaviors that you can better support and amplify to make their experience better. Be creative, ask how you can solve problems in novel ways. Asking these questions will not only improve your product; it may also save your company because you will see signs of trouble and identify reasons for them to leave. If you 10x your product during a crisis and get your users excited, imagine what will happen after the crisis abates?
19. Turn fixed costs into variable costs.
This can give you more flexibility as you grow. Maybe you had a content marketer that you had to lay off? Are there 3rd party services that can provide a similar level of service, but on a performance basis? You can dial that variable output up when you start growing again and even add more contractors or service providers. This may seem to contradict my advice to ditch agencies — but it actually doesn’t. Independent contractors are a bargain compared to most agencies — and can be a bargain compared to FTEs for some roles. Converting fixed to variable costs when the costs are people does create internal change management issues you should address; explain to your employees why you are making the shift and whether it is permanent.
20. Replace people-driven processes with technology wherever possible.
This is a good use of engineering time during a downturn that could yield big cost savings and improve efficiency. It’s also an essential muscle to grow. All great startups have done a masterful job of doing more with less. Are there opportunities to automate basic customer service responses, streamline sales functions, or reduce operational costs? The most obvious way to do this is by leveraging technology more effectively. Again, you should explain what’s going on to your team and why you are doing it. In most cases, top performers who are technology-disrupted can either shift to another role in your company or can be highly successful elsewhere with a company that still has more people-centric processes for their role in place.
21. Make your sales more efficient.
If you can figure out ways to increase the chance of any sales prospect turning into a customer, you are creating amazing future margin leverage even as you are reducing burn rate (you don’t need to acquire as many customers). At Trulia, with a small team, we were converting roughly 2% of real estate agents we contacted. We looked deep in the data and built out a great data science discipline to identify how to better prospect and identify potential customers. As a result, we increased conversions to 20% by the end of the recession. The math on that is astounding.
22. Be committed to building a high-performance culture.
In a downturn, everyone must perform. This becomes non-negotiable. Hitting 95% of your goal is missing your goal. If you don’t have a strong performance culture — clear, measurable targets for everyone — then create one.
1. Explain what you are doing and why you are doing it.
2. Give everyone clear numerical goals.
3. Be visible with metrics company-wide.
4. Be fair — reforecast and revise targets to be realistic.
Crises are psychologically taxing for everyone. Your team needs you to go above and beyond. You need to think about caring for their minds as much as anything else; clear minds will get you through this. Above all, be as humane and empathetic as possible.
23. (Completely) empathize with your employees.
People tend to adopt more of a “What will happen to me?” mindset in times of fear and uncertainty. Even if you are stressed about managing the entire company, acknowledging their concerns is critical in helping them be productive. Be as transparent as possible and explain in detail how the company will be able to get through this crisis and what can everyone do to contribute to the new plan.
24. Encourage company bonding.
Get to know each other even better. Have everyone share something about their day that made them happy or sad at team meetings. Be sure to call out birthdays, anniversaries, and highlight funny or touching shared memories. Instill a warm feeling as much as you can. While there are so many big things going on, it’s even more important to take time out to focus on the little things that make people people. Teams that are emotionally engaged are also higher performing. This type of connection makes work more meaningful — both during and after a crisis.
25. Practice spontaneous, random acts.
Call people. Sing a song for them. Send them a funny GIF. Send them a virtual cookie. Use your imagination in crazy ways. All of this shows you care about them. Keep it within bounds — no one wants to feel like they have to be on 24/7. But show your employees you care with your acts, not just your emails.
26. Quickly adapt your company culture to the current reality.
In the current environment, everyone is working from home. So move all team meetings online but also take extra steps like creating online office hours for executives or designated periods when everyone is on video together, just working and interacting. Team happy hours, or “Quarantinis” as we at NFX call them, bring lightness to heavy times. Everyone can give the company a virtual house tour to show where they live and what it’s like. The next crisis may be different and may require different cultural shifts but react quickly to help everyone stay engaged and feel safe. In general, many of these shifts may stick after the crisis, so make sure they are all practices you would adopt for the long-haul.
27. Focus. Have candid, honest conversations with yourself and your team.
Focusing in on vanity metrics, pet projects that should die, and other activities that might be left alone in a normal situation now exert critical drag you must avoid. Ask yourself the hard questions and ask your team members the same. Above all, this is a time of focus. This is really about managing psychology and helping people focus on what’s most important in a time when you have the least room for error.
28. Celebrate small victories.
With all the uncertainty and stress, take time out to celebrate the team’s small wins on a weekly basis. Build a long term vision, but focus on a near term plan and things you can achieve quickly. The compounding impact of many seemingly little wins can be astounding. Small wins have an outsized impact in tough times and give you a sense of progress and success when things around you are grim.
Mind Over Matter
Downturns are hard and negativity and fear will be everywhere. But having been through two cataclysmic market crashes where both companies emerged ahead of my competitors, I can promise you this is an exercise of mind over matter. Once you realize there is a binary choice at play — either the downturn will end or it will continue forever — then it’s easy to see through the fog of emotion.
Yes, this is a crisis. But it is also your opportunity to breakout, if you choose that mindset.
TaskRabbit invented the gig-economy in 2008 with a marketplace that matches freelance labor with local demand for everyday tasks. Stacy Brown-Philpot became CEO of TaskRabbit In 2016 and led the successful acquisition of TaskRabbit by the IKEA Group. During her tenure, TaskRabbit has expanded its presence into 45 markets across the United States, the United Kingdom and Canada with a plan to expand globally. In addition to shaping the future of work, TaskRabbit is now a core driver of the e-commerce and services strategy for the world’s largest furniture retailer with the mission of making everyday life easier for everyone.
In this episode, we discuss:
Growth vs. profitability
Pete Flint (00:32): So it’s a real pleasure today to have Stacy Brown-Philpot, the CEO of TaskRabbit who is also a dear old friend. So thank you for joining us today on the NFX Podcast.
Stacy Brown-Philpot (00:46): Thank you for having me, Pete. Nice to see you.
Pete Flint (00:48): I’d love to just kick off and if you think about in 2020, the technologies in the startup ecosystem, since this day it has exploded. I mean startups and seed funds, it’s like exploding, so it’s almost, on the one hand, is easier than ever to be a founder and start a company and the CEO, but at the same time, perhaps it’s harder than ever to be a great leader. Can you share a little bit about how you think about leadership and is there a crisis today in technology leadership and what can we do about it.
Stacy Brown-Philpot (01:20): What does it mean to be a leader in today’s times is a really hard question to answer because it’s evolving. I would say in the past, people would say if you become a CEO of a publicly traded company, then your number one priority is your shareholders. If you become a founder of a company and you get investors, then your priority is to deliver the value that you said the investors want. And if you create a business and people buy it, you get a return and that’s no longer the case anymore. The expectations, I wake up and I think about not just how much value we’re creating in terms of revenue and profitability, but also the team that we’re building. We have to not just have a mission, but live that mission every day. We have to focus on the culture, we have to talk about the culture, and then we have to look at the external environment and be able to respond to the culture.
Stacy Brown-Philpot (02:08): Outside of TaskRabbit, there’s a lot happening, a lot in terms of the treatment of women. As a woman who’s a founder, I have to come in and have a point of view and maybe not always have the right answer, but create an environment that’s inclusive and people can hear it. As the political environment changes, people are asking me, what should TaskRabbit respond to in these situations? And that never used to be part of the dialogue anymore. It was always very separate. And so I wouldn’t call it a crisis of leadership, I would just say that what’s expected of a leader today goes way beyond just profits and profitability and it extends into how you treat people, what kind of person you are and how you lead and not just what you do.
Pete Flint (02:54): For you as a leader, perhaps I’m curious, you’ve done a whole bunch of different things throughout your career. Was there a particular leadership challenge that was incredibly challenging and perhaps share what was that challenge and how did you get through that?
Stacy Brown-Philpot (03:11): We had a data breach two years ago and … it was almost two years ago at this point, and our site went down and we had to come together as a team to really figure out what we were going to do. And obviously a lot of the work was going into getting the site back up, figuring out what data, if any, was compromised. Making sure that the people who worked at the company employees were taken care of. And of course we were thinking about our Taskers, tasks had to be done. Clients were depending on TaskRabbit for somebody to show up and the app wasn’t up and it wasn’t running. And so we scrambled as an operations team to pull all these things together. We got the crisis response team to manage through it. And one of the things that we were debating was how do we handle it if a Tasker can’t show up for their job because they can’t find out where the client is that day? Do we compensate them for that day or do we not?
Stacy Brown-Philpot (04:17): And there was this moment where we were trying to do the analysis, but we couldn’t do the analysis in enough time that we had to do the press release. And I said, “Forget about the analysis. Let’s just pay everybody for the next two days.” Like if you were going to do a task, we’re going to figure out what you probably would have earned on that task and we’re just going to pay the Taskers because it’s the right thing to do. And so sometimes you just don’t have … you’re in a crisis and you just don’t know what the right thing to do is.
Stacy Brown-Philpot (04:45): And in this case, that was the right thing to do because then we told all our Taskers that was going to happen. You know what they started doing? They started going on Facebook to find their client. They started figuring out, well, did I have this person’s phone number, can I text them and see if I can still show up? And many of them went out of their way to get the tests done even though the site was down and we didn’t even see a dip at all in the growth of our revenues because of that outage.
Pete Flint (05:09): Can you walk us through the, how you figured out what the right thing to do is. Who do you rely on in times of crisis to help you navigate?
Stacy Brown-Philpot (05:16): We are a very tight team and so it was my core leadership team that came together and there was some decisions our general counsel could just make by herself. And there was some decisions that we all had to make as a team and this was one of them. So we had my VP of ops, we have my general counsel and we had the team there.
Stacy Brown-Philpot (05:34): The other thing that I did is we had advisors, we had some great advisors who do crisis management and then I contacted a couple of people who’d gone through this before. And so I have great people in my life who’ve seen many things that I have yet to see and I’m excited to learn what those things are. This is not one that I planned for, but when it happened, I had a couple of people who’d gone through it beforereach out to me, said, “Hey, if you ever need help around this, let me know.” And I remember texting one person and said, “Hey, we’re trying to decide where we’re going to do here.” He said, “Here’s how I would think about it.”
Stacy Brown-Philpot (06:08): And ultimately it came down to our values. Our number one value is caring deeply and that value was more important than anything else that we were dealing with at the moment and we cared deeply about our Taskers. So you said if that’s the value, fine, we just pay everybody.
Pete Flint (06:24): Out of that experience, was there anything that you changed fundamentally from the company or yourself or the things that you learned just going through that?
Stacy Brown-Philpot (06:32): I have two things. One of them is, one of my favorite quotes is by Dr. Martin Luther King, which is the ultimate measure of a man or a woman in today’s time is not how he stands in times of convenience, but how he stands in times of challenge and controversy. And we had yet to have something controversial happen, and this was it. And it really was a test of what kind of team have I built? Is this the kind of team that’s going to stand together? And we completely did. So it was a good learning about the importance of building a team of people who are going to be there with you and through that time of challenge and controversy.
Pete Flint (07:11): Yeah, that resonates with me in the time when I was running Trulia, 2008 during Lehman collapse, it was like … then you’re in the real estate, you’re in the online real estate company, that financial market collapses, real estate collapses. And we were about three years old then, but it was just a torturous time. You just, you do not know what to do. But having built a foundation of a strong culture and values, then people figure it out. Obviously they need clear leadership, but I think the culture is one of those things that certain company values are set. It’s one of those things that certain companies leave too late and they try to add it in when they need it and it’s-
Stacy Brown-Philpot (07:54): It’s too late then.
Pete Flint (07:54): … not authentic and is far too late. But if you’re able to infuse a really strong culture from the outset, then you have no idea what crisis, but there’s going to be a crisis and you’ll be thankful that the infrastructure is there and that culture that will able you to carry through that. Were there any experiences which you had to as a company just get through a certain kind of constraint or challenge? The kind of unlock some value as you think about scaling the business off, whether, I think Ben Horowitz calls it the struggle. In that early scaling period, were there any stories about, okay there was this kind of this hack or this idea or this insight which enabled the company to perhaps go where it is today.
Stacy Brown-Philpot (08:38): When I joined TaskRabbit we were known for, oh this is going to be the next eBay for services. There’s auction model, people bid, people ask and it matches and we were in nine cities and it was going fine. The problem we had is our fulfillment rate, which if you all are running marketplaces, you know exactly what I’m talking about, was like 50%. And so any investor would look at them and say, “I’m never going to put another dollar in because that’s just awful.” We just couldn’t figure out how to move that number. And the struggle as you mentioned was like, we tried everything. We were trying to convince people to set different prices. We were trying to convince clients to pick certain categories and you just couldn’t convince people.
Stacy Brown-Philpot (09:26): Ultimately, we had to change the product and when we changed the product to a direct-hire model where we listed all the Taskers who were available with their hourly rates and what their skills are and then you just go in and hire the person, it was like, fulfillment rate went up, skyrocketed, it was successful, but we had to go through that and tweak and iterate and really try really, really hard to figure out, this thing is not going to work. We actually have to tell people who’re available to do what and how much is going to cost. Otherwise, we’re never going to get our fulfillment where it needs to.
Pete Flint (10:01): So this is a demand-side pick-
Stacy Brown-Philpot (10:03): Correct.
Pete Flint (10:07): … just to say, and then before, what was it? It was opaque.
Stacy Brown-Philpot (10:09): It was, demand-side still picked but you just bid. I want to get my house cleaned. 25 people bid and you go back if you want to and pick, but they bid different prices. The problem with that, you pick somebody for $10 you’re unhappy. You pick somebody for $100 and they still don’t do a good job, you’re unhappy. You pick somebody for $50 you think is amazing, but then, “Oh, but you know what? I’m not available on a day that you want,” then you’re still unhappy. So you just couldn’t make people happy with an auction model.
Pete Flint (10:36): And that reduced that friction. So enabled the matching rate to go up. So it went from 50 to something-
Stacy Brown-Philpot (10:42): Like close to 90%.
Pete Flint (10:42): Oh wow. Okay.
Stacy Brown-Philpot (10:43): Yeah, way better.
Pete Flint (10:48): You have a business. So that was the core pricing change. And what was the reaction from the participants in the ecosystem? Obviously, on the demand side, I think they would probably be much happy, on the supply side similarly, it was like, okay, I get what the company is about. I can easily fulfill orders. That supply-side was elite as well?
Stacy Brown-Philpot (11:03): Yeah. We launched this as a test in London where no one knew anything about TaskRabbit. So when we launched it, super successful. Taskers knew how much they were going to make. People could hire, the person showed up, everybody was happy, and then we brought it back to the US and when we did that, everyone’s going to be equally as happy, right? Wrong. But what we have built was a community that had come accustomed to a certain way of working and behavior. And so our Taskers were worried that if I put myself out there and put my calendar, how do I know I’m going to get hired? I used to have so much more agency. I could bid and now I can’t bid, I’m just waiting for somebody to hire me. I don’t trust you. There was a trust issue. So they had to believe in us that the work was going to come.
Stacy Brown-Philpot (11:52): Likewise, clients like to pick from 25 people, who is TaskRabbit to decide who the best person is, how are we going to know? How do I trust you? So it really pushed us to create a higher level of trust. And initially, the trust was not there. So we had to rebuild that trust for sure.
Pete Flint (12:09): That took like three, six months to figure out that?
Stacy Brown-Philpot (12:12): Less than six months. And the reason why I said that answer so fast of how long that took is because we were watching what happened to our revenues over a six month period, and they needed to reach a certain level for us to know if that was the right decision or not. And we did.
Pete Flint (12:29): But one of the classic … I mean, if you see in the marketplace, businesses are incredibly dynamic. You’ve seen how an existing business model is incredibly hard to change. And one of the wonderful things about marketplaces, they’re incredibly sticky. But one of the challenges is the participants really hate change. So you see people like Craigslist, which just don’t change, but kind of do okay. Increasingly less okay, but they do okay, and then you see in other businesses which are constantly innovating, evolving, and Amazon has perhaps been pioneering its incremental changes over time. If you were to perhaps pioneering. It’s incremental changes over time. If you were to perhaps do that again, and change perhaps the pricing model or business model within a marketplace, what changes would you do? How would you do it differently, or alternative? What was the best thing you did with that change?
Stacy Brown-Philpot (13:17): There’s a lot that we would’ve done differently. We would have chosen that business model, but we probably would’ve done a lot more communication about what was about to happen. We thought we’d do this great press release, and tell everybody, and they were going to be happy. And the truth is, is we should have brought the community along. Because it’s such a sticky marketplace, people are so invested. We didn’t tell our taskers until the day before it was happening. We should have introduced the concept to them. We should have got them involved. We should have encouraged them to participate in the development process, and those are all things we could have done, even if we ended up with the same decision, on the same tight timeline, we would have brought people along. And that’s a unique thing about marketplaces that many other companies don’t have to worry about. But the importance of the community, and how you interact with them was a huge piece of what we would’ve done differently. For sure.
Pete Flint (14:12): As the marketplace ecosystem has evolved, there’s been this sort of tension between horizontal marketplaces, or increasingly verticalization. How do you think about this balance between horizontal versus vertical?
Stacy Brown-Philpot (14:27): That is a tough balance. When we started, we were everything. And so because we were everything, we were nothing to somebody and everything to everybody. Since then, we’ve actually focused, and become a lot more vertical, focusing specifically on home services. So a task management network that gives you trusted people to do things around your home. It’s a much easier message to communicate. And so while we haven’t specifically said only TV mounting, or only furniture assembly, even though we’re owned by IKEA, or only cleaning, we have put in some boundaries of what we will offer, and what we will do, and what we won’t. And the reason is adjacencies. I think it’s important to have some adjacencies in a marketplace, because a customer comes to you, you spend all that money, and all that time to build trust, and now, they want to come to you for something else. So you’ve got to look at what are the adjacencies. And so we built our marketplace around what adjacencies actually matter for our target customer. And it tends to be things around the home.
Pete Flint (15:33): And that adjacency is not only important, I guess to increase the revenue per customer, but also to increase the sort of repeat interactions. The more people use this as a kind of like the habit, this is my go-to, then that increases frequency, increases brand, increases retention.
Stacy Brown-Philpot (15:51): That’s right. It’s all about being this go-to team. And so you have to have enough frequency, and presence in their mind, and in their home, for that to really work.
Pete Flint (16:02): With Services Marketplace, one of the big changes have been disintermediation. How do you go kind of like off-platform with the sort of home care marketplaces, it’s been a real challenge. What do you do to overcome that challenge of transactions happening off-platform?
Stacy Brown-Philpot (16:16): Disintermediation is hard to manage. We spent a lot of time figuring out how to keep people on the platform, and sometimes to get somebody to come to you, you have to actually just let go. So if you said, “You know what we’re going to do? We’re going to build the best marketplace that we can, we’re going to attract amazing clients who have a lot of demand, and we’re going to give our taskers the best opportunities for work that they can find. They can set their own hourly rates, they can set their own schedule. And you know what? We’re going to back them up. Something goes wrong, we’re going to be there for them.” And that’s the kind of thing we want to build. And so we built that, and so we’ve been able to manage this intermediation because you now have a place that you can go where you now trust this platform to do things for you that you might not otherwise choose to do on your own, or to validate things and uncertainties that you might have about using the experience.
Stacy Brown-Philpot (17:07): And that’s how we’ve done it. I have yet to find another company that does anything that prevents anybody from just leaving the marketplace. And we do have success stories, and I like to call a lot of them success stories, where people will find a full-time job, because they went and did a task, they bartended somewhere, this startup was hiring, and they got a job. So doing engineering, or some other thing, that’s great. That’s exactly what this community is about. If we’re not growing the community that we’re a part of, we’re not doing something more than we thought we were here to do.
Pete Flint (17:41): I guess it’s also a function of the rake as well? What is the kind of pricing, if you try to sort of… if you tried to kind of charge too much, as a marketplace, and that creates problems. If you charge too little, then it’s hard to build a sustainable business, and attract supply and demand. Is that, if you think about that kind of, the evolution of that decision, has there been kind of any insights that you’ve learned over the evolution of TaskRabbit in terms of pricing? Other than just fixed price?
Stacy Brown-Philpot (18:12): Yeah, the take rate, or rake, or however you want to describe it is this weird thing, because you can do the bottoms up version, which is like, here’s our costs, here’s how much we need to cover the costs. This is what it needs to be. And then you can do the outside inversion, which is how much are people willing to pay for this service, and then how much can we make? We have really tried to focus on letting our taskers set their own hourly rates. And we don’t mess with that number at all. So if you want to charge $150 an hour, that’s your decision. And then we’ve looked at what does it take to build a great marketplace? How much do we need to charge? That prices some people out. And it does. But then we educate them on, well, if this is how much you want to make in a week, this is how many tasks you can do at a lower hourly rate, for example.
Stacy Brown-Philpot (19:03): So we try, we do a lot of education around the rate, but because we let them set their own hourly rates, that’s the best thing that we do, because we’re not taking money out of the tasker’s pocket. We may be charging more to the clients, but it equalizes to some degree, the experience on the marketplace, because the client still has a choice on who she wants to hire at a higher or a lower hourly rate.
Pete Flint (19:29): And just as you think about TaskRabbit specifically, demand versus supply constraint, how is that, and we’ll go into sort of geographic expansion, how do you think about, are you supply constrained, demand constrained, in general? And then how do you think about your geographic expansion? What are the kind of gating factors for you to go into different markets? Because it seems to me that many other competitors have just gone out of business, because they’ve either grown to fast in too many different markets, or they haven’t attracted enough demand, or the demand’s not sticky enough.
Stacy Brown-Philpot (20:05): So TaskRabbit now operating in six countries, and each country, including the US is very different. We’ve gone through the cycles of being demand constrained, and supply constrained, in almost all of them. We just launched Spain last month, so that one’s still very new. We have a lot of supply, because we always start with a lot of supply, and enough to meet what we think the demand is going to be, unless we’re way, way off. And by and large, investing in not just the quantity of supply, but the quality of supply has been the most important thing to balance the two-sided marketplace. So even when we get demand constrained, we’ve still got a great supply, and when we’re supply constrained, we can really work with that community and say, “Hey, things are happening. It’s the end of the month, it’s New York. People are moving, it’s the summer, and nobody wants to do it themselves. So, if you want to earn some extra money, this is the time to do it.” So we’ve got that relationship there to manage some of the spikes in demand while we build up the supply that we need over time.
Stacy Brown-Philpot (21:14): Every country is different. We went into Canada thinking this was going to be a slam dunk, and we turned out to be way more supply constrained than we thought. And part of that has been working with IKEA as a partner. So after the UK, we launched in Canada. That was the first country we launched with IKEA. And some of our criteria is how big is the market? What’s the potential? What does demand look like? Readiness for this kind of work, independent contractors. But it’s also where does IKEA operates? How can they really support our growth? And it turned out that the team in Canada really unlocked a lot of growth for us that we just did not anticipate. It was exciting because we can now go meet that challenge. But it created a new dynamic for us in how we scale in a new country, for sure.
Pete Flint (22:02): And is there any frameworks or as you think about geographic expansions, is there any both sequencing different regions as well as timing? Are we ready to expand into another market? As you speak to other marketplace founders and CEOs, are there any rules of thumb that you develop to help to understand this geographic expansion?
Stacy Brown-Philpot (22:20): So one rule of thumb is not to even think about it in regions. You’ve got to think about it not even at the country level, at the city level, make the city. Meaning people say make the market, make the market the city. Have enough demand in that city, where geographically speaking, the people who are doing the work for us are willing to drive as far as that city is big, to go and do the work. And so really focus on making the market, and making the city. We launched in London in one store for IKEA, in the Wembley store. And we didn’t go to the next store until we figured out that that store was a good store.
Pete Flint (23:04): So neighborhood, not even cities, just a neighborhood.
Stacy Brown-Philpot (23:04): Neighborhoods. It’s neighborhoods. And then we didn’t launch in more cities across the UK for a long time after we did London, because we were looking at the numbers, and the potential. We weren’t yet big enough to do enough brand marketing to cover the country. It was not going to pay off. And some of these smaller cities are so small, that you’re just not going to generate enough demand from those. And so the big cities really make the neighborhood, but for the smaller cities, make sure you have enough coverage to afford the marketing around them.
Pete Flint (23:38): So TaskRabbit is a division of IKEA now?
Stacy Brown-Philpot (23:41): Yes.
Pete Flint (23:44): How’d you get to know the IKEA folks? It’s an amazing kind of partnership. How did you get to know them?
Stacy Brown-Philpot (23:51): This is going to sound like one of those Silicon Valley stories, and maybe it is, but in December of 2015, the IKEA team came to visit Silicon Valley and met a bunch of companies, including TaskRabbit. There were like 10 people in the room, around a table, that was not an IKEA table, which they commented on the minute they walked in at our office. We now have IKEA tables, by the way. And we thought it was a great meeting, but one of the most important things we shared with them in that meeting was how many people pay somebody else to get their furniture assembled. And on average, how much they pay, which is often as much, or a little bit less than the cost of the item. And so with that information, and we didn’t even have a relationship with them, we were just like, “Just so you know, lots of people go to Emeryville store, and they then log into TaskRabbit and they hire somebody to come put it together.” So that became the conversation around the partnership.
Pete Flint (24:53): I’ve done that.
Stacy Brown-Philpot (24:53): You’ve done that?
Pete Flint (24:54): I’ve done that. Exactly. That was the first use case.
Stacy Brown-Philpot (24:56): Of course. Lots of people have. And that started the partnership. And from there, we really focused a lot on what value are we going to create? We obviously were creating value for customers who wouldn’t otherwise shop at IKEA. The only reason why they went is because they know somebody from TaskRabbit is going to put that thing together for them. But the company is very values-driven. And so to go from a partnership, to an acquisition was not just about how much money we were making for them, or for ourselves. It was also about what kind of value we were creating, and our own values as a company, and the alignment of those values. So a lot of the diligence was ours on values, and what matters, and what kind of company are we building, and why. And how can we really do that together.
Pete Flint (25:43): And just, how do you manage the culture? You’ve shared with me privately just the values, and it’s really impressive, and the organization, and it’s a remarkable company. How do you effectively navigate this sort of fast-moving, fast-charging, we’re a tech-driven company in Silicon Valley, we move a hundred miles an hour because that’s what’s required and that’s in our DNA, versus a European furniture maker. It’s like night and day.
Stacy Brown-Philpot (26:12): You make it seem so different, Pete. It is very different, but the missions are very similar. So our mission at TaskRabbit is to make everyday life easier for everyday people. Ikea is to create a better everyday life for the many people. Ours was written 11 years ago, theirs 76. So because that mission alignment was there, we could then there’s some forgiveness that happens on both side, which is like there’s this greater mission that we all sort of care about how we get there. We really have been left independent to do that. We’re technically a separate legal entity. We have a board that governs the company and they really didn’t want to, what they say, squash the butterfly and like, let’s just let this company run independently.
Stacy Brown-Philpot (26:54): So part of it is that decision as part of doing the deal. The second thing that we did was right after we announced the deal, we announced in October of 2017 and in January of 2018 we redid our values, and not that we didn’t have great values before but it was a moment and an opportunity for us to create new values if we wanted to, or reinforce the same values, but to establish that this is still going to be a separate entity. We’re still going to have our values, and these are the values are going to carry us through this next phase for this organization that’ll also be around in 75 years.
Pete Flint (27:32): And just can you, through that period, what’s been some of the growth in geographies or any metrics? Just like from the acquisition to where you are today.
Stacy Brown-Philpot (27:42): Yeah, we have seen so much growth. We went from two countries to six countries. Let’s see. When we first met with Ikea and started this partnership, our business was about 2% furniture assembly and now it’s 20% furniture assembly, so it’s grown.
Pete Flint (28:00): It’s still the vast minority.
Stacy Brown-Philpot (28:02): It’s a vast minority but and so it’s fueled a lot of our growth. The business is still growing, and at the same time the customer acquisition from Ikea is also growing and many of these customers are getting something assembled and then coming back and getting something mounted or some other service done, so that’s been impressive. Ikea is the world’s largest furniture retailer, and so imagine having that customer base to tap into. It’s the one thing we were hoping for and it’s really paid off.
Pete Flint (28:32): And if there was, you know, because it’s really unusual that this sort of big traditional company and this fast-moving tech company, it’s hard for them sometimes to work together in this environment. What would perhaps have been some of the biggest surprises of the experience, and then what advice would you give founders that are building high tech companies who are kind of building either partnerships or M and A with other perhaps more traditional companies?
Stacy Brown-Philpot (28:57): One of the biggest surprises is to be the world’s largest furniture retailer, you have to be a good business. The business has to be good and has to be well-run. Otherwise you’re out of business. But the process by which companies make decisions is often very different, and so we’ve got the DNA here of this is the pace. It’s really fast. Let’s just go, let’s go, let’s go. Let’s raise the next round of funding, and now we’re going to be successful. And they’re just very patient. They have like, 40 billion euros on the balance sheet. They can just wait, and they can test and they can iterate, and so their process of innovation, maybe it doesn’t happen as fast, but they have the capital to invest and they have the time to invest and so we had to both get comfortable with how the pace of decision making for sure.
Stacy Brown-Philpot (29:42): So if you’re at all considering a partnership or potential M and A with a more traditional company, number one, the pace is probably not going to be as fast as you want it to be. Number two, often those things align with the strategy of which you have very little influence over, meaning if that company has a strategy that fits with what you’re doing, then it’s going to be very easy for you to get that deal done. If you’re trying to sell in your strategy into a company that’s 20,000 people, that’s exhausting. And so think about where else you should be spending your time. If this is your number one bet, and for us Ikea was the company. You’re like, “If we could partner with anybody, we’d love to,” make sure you set aside some resources but not all the company resources to do it and to focus on it.
Pete Flint (30:33): So trying to create this sort of nimble team of Navy SEALs, kind of running a million miles an hour, but kind of working with the mothership but not necessarily letting them dictate the strategy. So it feels to me like TaskRabbit kind of invented this sort of word “gig economy,” and it’s remarkable. Like, it’s pioneer in the category way before Uber and Lyft I think in terms of the impact on their economy, but a huge amount has changed as that segment of the market has expanded. Tell me a little bit about what’s happening on regulation side and how TaskRabbit thinks about it. You’ve got AB 5 and various kind of measures in flux. What is the right thing for the industry to help all participants in the ecosystem as well as what do you think’s right for TaskRabbit?
Stacy Brown-Philpot (31:20): Leah deciding to start this company 11 years ago, I don’t think she went in thinking, “I’m going to create the gig economy or the sharing economy,” but she just wanted to have neighbors helping neighbors and it turned into a phenomenon that the world was actually ready for. It was 2008 and people were ready for something different. They needed a way to afford to live. Today people need a way to afford to live and more and more people need a way to afford to live, and so whatever regulation that has been passed or is currently in the process of being passed is really I believe in service of that, but the process is different than how many of the companies in our space are approaching it.
Stacy Brown-Philpot (32:04): So what matters for the industry and for the sharing economy or gig economy is that we create a way for people to afford to live. We are creating economic opportunities. We are filling the income gap. We are helping people pay major bills. We are doing a lot of the things that a lot of people say they want to do. It is actually happening because of the companies that we have and for TaskRabbit, we want nothing more than for that to continue. We want to continue to offer our taskers flexibility to set their own hourly rates. We want them to have the option to set their hours for when they want to work, but we also want them to have benefits. We are not against portable benefits. We want to create a structure where that is supported and available to them, and so those are the things that we’re advocating for as we navigate some of the regulatory environment.
Pete Flint (32:55): And is there a Holy Grail out there? What would be the, if you were writing these bills, what would you advocate for?
Stacy Brown-Philpot (33:04): I wish there were a Holy Grail. It is so complicated because when we have these conversations, everybody has something else in mind about what’s important for the group. When we talk to our taskers, they want to be able to save for retirement, like access to a 401(k). They obviously want great healthcare. Some of them want worker’s compensation, but most of them don’t because a lot of them are supplementing their income and they have a job already that provides that. So we would love to be able to offer some way to afford the things that they need when they need it. I don’t know what that looks like because we don’t have a structure today anywhere. W-2 does not allow for that structure. We don’t have a structure today anywhere that allows for that.
Pete Flint (33:48): And there’s no other international market which you’ve seen that kind of does a good job in navigating this? Some of these socialist European countries? No?
Stacy Brown-Philpot (33:57): Six countries and nothing. We found nothing. No. Every country has a point of view around independent contractors that some of them whom are different than in the US. Some of them are more accepting, some are more stringent, and so we’re having to deal with that as well.
Pete Flint (34:15): You know, here we are in the midst of the corona crisis. What do you think about that? I’m sure you’ve had conversations with your team. They’re sort of, on the one hand it’s clearly a travel industry. Is it going to be really challenged? On the other hand, there’s at least speculation that there’ll be certain industries as I saw this morning that Grubhub was upgraded as a stock because people were going to be like, you know, getting their DoorDash.
Stacy Brown-Philpot (34:38): Using delivery services.
Pete Flint (34:38): Using their delivery services. DoorDash, and maybe it’s too early to tell, but how do you think that might impact not only just TaskRabbit, but perhaps this broader ecosystem of the gig economy or shared economy?
Stacy Brown-Philpot (34:52): I think it’s a little bit too early to call any particular company. Obviously certain industries. Where do I think TaskRabbit fits in this? The most important thing that we care about is the safety of our employees and the community, our taskers and our clients, and so we’ve focused on what communications do we need to do to make sure that they are protected at this time? Many of them have to go to work, but we want them to be safe, so we’ve said things like if you have to cancel because you’re not feeling well, then we’ll waive the cancellation fee. Something like that. Something where they feel like they might be penalized for something but they won’t be.
Stacy Brown-Philpot (35:35): I think over time the dependency that we have on services is actually going to go up because now the things that we used to do ourselves, we’re going to start looking around and figuring out, who can do them for us? And that may create some value. It may create some, or it may be scary to people, but if it becomes more of a norm then I think for anybody who’s running a marketplace for any kind of service has an opportunity to demonstrate what kind of value you can create. So we’re just trying to be as safe as possible during this time so people can see that this is a valuable service, whether you’re in a crisis or not.
Pete Flint (36:11): But it seems that there would be some sort of lasting impact from this, and what we’ve seen in so many, when you have these economic shocks or shocks of any kind, then there’s a mismatch between supply and demand. And it’s the smart, nimble marketplaces that can identify these mismatches of supply and demand that can capture market share and then use that as a wedge to expand into other markets. So while I’m just hopeful it will pass pretty soon and we can move back on with what we’re doing before.
Stacy Brown-Philpot (36:38): Yeah, I hope so too.
Pete Flint (36:40): So, thanks again Stacy. This was amazing conversation, and such a wonderful story and such a wonderful leader, so thank you for joining us today.
Stacy Brown-Philpot (36:48): Thank you for having me!
In 2019, NFX company Incredible Health announced a $15 Million Series A led by our friend Jeff Jordan at Andreessen Horowitz. NFX participated in the round, along with Obvious Ventures and Precursor Ventures. Today, CEO & Co-Founder Iman Abuzeid breaks down the complicated (and often convoluted) process of fundraising and makes public her lessons for the Founder community on what it takes to raise venture capital from top-tier VCs. In September 2019, the company I co-founded, Incredible Health, announced a $15 million Series A round led by A16z. We’d first received seed funding from NFX, and we sought them out because of their expertise in marketplaces and network effects. James Currier introduced us to James Joaquin of Obvious Ventures who led our seed round, and when we were ready to raise our A, James introduced us to Jeff Jordan. We also received Series A term sheets from other top VCs in the world, but had to select only one due to each VC’s ownership requirements.
The biggest lesson Founders should realize is that traction alone is rarely sufficient to raise venture capital from VCs of that caliber. Consider that Incredible Health has a huge vision of a hiring marketplace for hospitals and nurses that solves the U.S. nursing shortage, and aims to be the category-defining, market-leading company in healthcare labor. The hiring gap for nurses is 3x larger than the engineering shortage and recruiting tools and processes have barely changed since the 1980s and 1990s. This has created a multi-billion dollar market opportunity. We also had an impressive roster of customers from brand-name hospitals like Cedars-Sinai Medical Center and Stanford Healthcare. And we had strong traction with these customers who were witnessing real results – cutting the average time to fill permanent nursing jobs from 90 days to 30 days.
But even with all this traction, I’m not sure our fundraise would have been successful without a strong process – something most Founders don’t realize or get access to. This essay lays out what I learned from fundraising and the process that emerged. My focus here is on raising for a Series A, because that’s my experience thus far, but many of the lessons learned likely translate into Series B and beyond.
Do you really want to raise venture capital?
Before you begin raising, consider and understand the pressures and expectations. If you raise money from venture funds, they will expect rapid growth and most likely will want to be heavily involved with the management of your company. Venture backers will also expect you to hire quickly and scale up fast in many or all aspects of your business. Is that what you and your co-founder(s) want? If not, you might want to look to raise another form of financing or simply use your revenue to fuel growth.
There is a wide spectrum of vehicles, from convertible notes, to venture debt, to standard revolving lines of credit, or use your revenue. Venture equity is the most expensive of the bunch, but venture firms increasingly provide their portfolio companies with lots of business help — in hiring, marketing and PR, strategy, and business development. The bank providing you a line of credit will not take those steps. Consider all of these questions before you definitively decide to raise money from venture capitalists.
Fundraising had many surprising learnings for us.
One of the biggest was that traction, even strong traction, is not enough to spur action. Instead, a huge vision and story, and FOMO (fear of missing out) are the strongest forces for accelerating your fundraising process. Once you incite FOMO, it is powerful and you should use it wisely and deliberately. More on that later in the post.
We had so much going for us — traction, product-market fit, a huge TAM. But without treating our raise as a rigorous process, I am not certain we would have achieved nearly as good an outcome – and we may not have been able to raise money at all. We got dozens of rejections, changed our deck dozens of times, and sifted through hundreds of pieces of advice.
Making sure you have the right rationale for fundraising
A16z’s Marc Andreessen listed two reasons to raise venture money: you either have a killer idea that is only partially validated and need capital to get to product-market fit, or you have product-market fit with real customers and real revenue and need capital to grow and expand.
Either is a good answer. If you are seeking product-market fit, you could frame your raise as a seed round. This sets expectations appropriately and allows you room to build your product and seek validation from the market. If you have product-market fit, then aim for a Series A.
However, the distinction between the two has gotten blurry. Companies can raise a “super seed” of $5-10 million, while Series A raises can be anywhere from $6 million to $50 million, depending on various factors. Whatever the case, make sure you understand which of the two rationales you occupy. And if you can’t clearly identify either — if you are post-seed but don’t have product-market fit, for example — then don’t raise.
The Two Components of a Strong Raise
We knew pretty early on we were going to raise. I am an entrepreneur at heart and I wanted to grow a business, fast. I had no interest in building a business that might be lucrative for me personally but did not have the scale to make a difference in the world. With that in mind, let’s separate the fundraising process into two parts: the process, and the pitch.
In my experience, the proper breakdown of effort and time spent is 30% process, 70% pitch.
Here’s why: If your pitch is not going to knock their socks off, if you cannot communicate a big vision, then even if you build out the smartest, most thoughtful process of chasing fundraising you will fail.
In reality, though, you have to be amazing at both. Failing to create a strong process limits the pool of potential investors who will hear about you and also reduces your chances of landing with a top-tier fund and a partner that you really want to work with.
The Fundraising Process
There were two key ingredients in our fundraising process: timing our raise, and identifying the right investors.
Timing your raise
When you decide that you want to raise, you should have a reality check to make sure that you are positioned to do so, or have strong reasons to want money.
Fundraising is too much of a time sink to pursue if your probability of successfully fundraising is low. Some key triggers that I thought about, and that CEO friends who have raised mentioned to me, as good indications that it’s time to raise include:
You want to expand nationally or internationally due to market demand and because your product is working and churn is low.
You want to expand your engineering team to accelerate product development, and to build features and integrations users are asking for.
You want to expand marketing efforts because you have a repeatable sales cycle and need more in the top of the funnel to fuel sales growth.
Your revenues are steadily rising month over month, or quarter over quarter.
Some indications that it might not be the right time to raise include:
You just missed two quarters of growth or sales numbers. This is a red flag to investors.
Your growth rate is flattening out.
Your space just cooled off. You know this because two competitors raised less than the market expected.
These are just a few of the triggers to look for. Above all, be very intentional about the timing of when you raise, because you want the fundraising to happen quickly and successfully. To do that, you need to have all the right ingredients in place, and strong momentum in your business. With so many startups fundraising at any one time, any question marks will slow down a fundraising process.
Identifying the right investors
Here is the process we followed for identifying investors. We built a spreadsheet for this, as you probably would want to do, with some simple data on how well they fit with our ideal VC funding candidate.
Step 1: Filter based on the criteria that matter to you
Just like a sales team identifying the right potential customers who fit the profile of your product, you want to identify the right potential investors. We considered a number of criteria as important in our screen including:
Location – we wanted investors in the Bay Area
Check size – we wanted to be able to raise a decent-sized series A to reduce the need for follow-on funding
Sector expertise – we wanted experts at building marketplaces so we could benefit from their experience, connections, and talent network
Fund size – we wanted a lead investor from a large fund so we could have confidence they would be able to easily write checks in follow-on rounds (equally important here is whether the fund is planning to raise another fund for not. You may want that additional fund for follow-on funding).
Track record – we wanted a lead investor with a solid track record because that signals it’s a good fund with good capabilities, which also would reflect well on Incredible Health.
You may decide other factors are important in your screen, like specific technical expertise (if you are an AI company or a data company, for example) or ability to help with business development (some funds have detailed ongoing programs to introduce their portfolio companies to prospective customers).
Or you may also want a fund that is well-known for being hands-off. Anything that you think is important should go into your screen. We went with the above criteria as our primary screens.
Step 2: Build your fund wish list with tech tools and human recommendations
Once we selected the criteria that were important for us, we used some tools to build our list.
Signal(built by NFX) is an investor database with lots of screens. It helped us narrow down our options very quickly.
Crunchbase has information on different funds and the deals they had invested in.
Pitchbook has the most detailed deal data and valuation info. Both deal data and valuation data were important for helping us screen investors, and later for building out models around how much we should try to raise and at what valuation.
While databases are nice, we also found that human filters gave us some of the best recommendations.
We asked all of our CEO friends and our early investors who they recommended we talk to about raising money. This can be powerful for a number of reasons. You may be connected with unexpected opportunities or learn about things that may not be in the databases yet (for example, if a prominent partner is about to break out and do their own fund).
These human filters can also help warn you off working with funds or VCs that may be difficult to deal with, or simply are unlikely to be a good fit for your needs. Your CEO friends often have a great handle on which VC fund, and which partner, might be the best match.
I’d recommend you build a list of 40 to 50 funds because you should expect a rejection rate well above 90%. Trust me. I’ve lived it.
Also, you will likely be working on getting an introduction into multiple funds at once so you want many irons in the fire. You are not in full control of timing in this step of the process so it’s best to cast a relatively wide net. However, after the introduction is made, you are back in control and can determine when you meet the investor, because they often connect you with their assistant.
Granted, if you have very strict criteria then you may want to narrow it down more. But that also carries the risk of not raising a round. We were fortunate enough to get both the fund we wanted and the valuation and round-size we sought. Not every founder will be so lucky and sometimes you may need to accept a less than perfect scenario.
Step 3: Identify the right partners at each fund
For each fund, you now need to identify who would be the best partner for your to seek an introduction.
This is super important. There are complicated and usually hidden power dynamics inside most funds. You can’t judge whether a partner is a good fit for you just from the website or even from news articles about them.
Some partners have more clout to push a deal through than others. Some partners may not be seeking more investments because they are at their deal quota and sit on more boards than they can handle. Some funds have specific ways of performing due diligence that more senior partners can influence but junior partners cannot. With all of this in mind, we considered all of the following angles:
Is this partner powerful enough to get our deal through the full partnership vote? Or is this a weaker partner?
Which of the partners adds the most value / adds real value? Which ones might actually be disruptive and demanding?
What is the communication style of the partner? Does it match ours?
Does the partner have strong or weak expertise in our business area?
Can the partner help us build a strong board of advisors?
Will the partner actually help you bring in customers or partners by tapping their Rolodex?
What is the particular expertise of the partner? Marketing? Operations? Engineering? What types of expertise map the best to your company’s needs?
Getting this type of intel about individual partners is time-consuming and challenging. But it is absolutely critical, because otherwise you will be walking into a fund blind, and potentially picking a partner that has a lower probability of getting you funded or making you successful down the road.
Another key part of this due diligence process is to start figuring out who can give you a meaningful warm intro to the partner. Venture capitalists are extremely busy. They are bombarded with requests for their time and meetings. Getting a warm intro from a strong connection is invaluable both for getting in the door and also for the halo effect it gives you walking into that first meeting.
Frankly, we didn’t even consider cold-contacting venture capitalists. Our friends and early-stage investors told us it was not a good use of our time.
That lays out the process we developed and ran during our raise. Now, on to the pitch.
The Fundraising Pitch
During the entire course of your raise, our pitch was a work in progress. We changed it dozens of times, which was healthy because we were responding to feedback and learning and iterating.
If you aren’t constantly tweaking your pitch, then you are probably not listening to feedback enough. During our rounds, we customized our pitch deck for each meeting, catering to what we thought would resonate the best with each set of potential investors.
There were core themes and slides that remained the same. But we believed that personalizing was crucial to showing we had taken the time to think about pitching to them as a person.
What to put in your pitch
The pitch model we followed (that worked) is straightforward:
Discuss the market
Demonstrate the size of the market
Cover what the problems are that customers are facing in the market
Introduce your product and how it solves those customer problems
Explain how you plan to bring your product to market and scale your company
Within this framework, here are some additional guidelines that we picked up in our journey.
Pitch Guideline 1: Highlight the differentiation of your product
Good UX or clever marketing is not sufficient. VCs are looking for technical or really measurable differentiation. Some examples along these lines might be:
Data network effects / data gravity
Superior or unique product capabilities that might take a while for competitors to replicate
Pitch Guideline 2: Use good metrics
Ideally, you will have specific metrics that show your traction and strength. The best metrics are:
Industry appropriate: You should assume that whomever you are pitching will know (or soon find out ) what the right metrics to look at are for your space and expect you to know them, too.
Demonstrating stickiness: DAU, MAU, time spent in-app, repeat customers, churn rate, NPS, and CSAT are just a few examples of this. Product stickiness and happy customers or users are the best indications you are doing something right.
The Importance of Go-To-Market And Winning Big
GTM is a major buzzword. We were asked about it often during our raise. You should expect this, as well. The more detailed you can be about your GTM, the better. A strong, detailed plan for GTM demonstrates you have thought about how to grow and that you really understand your space.
Now, about winning big. This is probably not news but it’s important to underscore because we got called on this in some of our meetings. A few VCs said we were too “capital efficient.” This means they didn’t see us as having a reason to spend their money or a clear path in our minds and in our presentation to rapid growth.
Never forget that VCs are looking for huge returns. If you can’t show them a path to a billion-dollar exit, they are not interested. For many VCs, they are looking at hundreds of opportunities per month. Few of them will ever get a billion-dollar exit. One billion-dollar exit can literally make their career. So you have to make sure they understand that you are trying to give them that billion-dollar exit.
How To Build Pitch Decks
We used decks as the key prop for our narrative, the visual support for our story. You can do it without them, but it’s hard if you want to tell a compelling story, backed by data and frameworks.
Putting something like “We are seeing strong demand for our product” on a slide was not good enough. Instead, we would say “We have seen a 50% MoM increase in inbound leads from hospitals.” Adding the number gives investors confidence that you have done your homework and demonstrates in a more tangible way the assertion you are making.
Step 2: Work hard on your talk track, too
You will convey a lot more information in what you say than what’s in the deck.
In particular, how you explain your product is crucial. I worked on that a ton and got a lot of feedback. I had to hone that ability extensively before we started to make real headway and get investor interest.
Step 3: Rehearse, Rehearse, Rehearse
Practice your pitch with your deck on friendlies. Do this many times.
CEO friends who had recently raised were the most valuable to me. Their advice was the most useful in upleveling our deck and we benefited from what they had learned along their journey. Existing investors are also excellent for practice pitches with a soft crowd.
Use spreadsheets to build a robust financial model
Our second pitch vehicle was our financial model – both P&L and balance sheet – in a spreadsheet. For any financial modeling, this is essential. If you try to do something different, investors will look at you funny.
If you are not good at financial modeling, have someone help you. Any MBA should have the ability to create a decent financial model in a spreadsheet. It shows you are serious about finance and the money side of things and understand the underlying assumptions that drive your business and growth.
You need to have a robust financial model with forecasts going at least three years out, and include your historical financials too. No one expects the forecasts will be accurate. But these forecasts demonstrate what you think the potential of your business is and they also demonstrate basic financial competence.
Be prepared to defend your forecast calculations; know them inside and out. Also, make sure all the accounting terms you use are correct, and that your model passes the sniff test with CFO-types. If you don’t have a CFO or someone that can build a solid financial model (and you aren’t an MBA), it’s worthwhile to hire someone to do this.
Assume you will need to adjust your model over time with feedback. As I mentioned earlier, in our first few pitch meetings, VCs told us we were too capital efficient. “What are you going to do with all the money we give you? Your model doesn’t show that,” they said.
We adjusted our model to demonstrate how we could effectively use all the money we were asking and to have a more ambitious growth-oriented plan. You also want to be very realistic in all your assumptions. Do not put down a $100k salary for an engineer in San Francisco, for example. Unrealistic assumptions will be challenged.
Getting ready to pitch
We had built out a list of VCs we wanted to meet and prioritized them on our criteria. We had worked hard to create a pitch and a deck that we thought would resonate. And we had a financial model. Now it was time to take some meetings. In this section, I’ll cover what we learned in the process of pitching and make some recommendations on the best approaches.
Part 1: The Warm-Up
We warmed up by pitching first to two or three investors that were very low on our priority list. I viewed this as almost like a dry run for job interviews starting with jobs you don’t really want that badly.
There is little risk to you in these pitches. It was helpful to get me in the right mental space for doing pitches. It also helped me hone both my pitch and other skills I learned for pitch meetings.
Part 2: Gathering Feedback
Each VC will have feedback. Some of it may be insanely useful. Other feedback, less so. Gather that feedback closely and use it to iterate and improve your deck and your pitch.
Incorporate language they use that you like. Absorb like a sponge. Sometimes we got feedback that was hard to interpret. In those cases, I talked about it with others on my team and with other CEOs to better understand what the VC wanted or was trying to communicate.
Feedback is not just verbal or via email. In meetings study everyone’s body language with laser focus. Keep track of which slide makes them sit up, when they smile, when their eyes go wide open. Also keep track of negative signals like slumping, looking down, or appearing bored.
Make sure you closely associate these signals with the part of your deck or pitch you were covering at that instant. We took careful notes on this after every meeting. It helped us identify what parts of our pitch and what slides were the most and least effective.
Part 3: Going beyond the KPIs
We had very solid traction, strong revenue growth, excellent customers and a product that both sides of our marketplace raved about.
Investors want a really big vision for the future, something they can bet on and something that shows you are trying to build something huge and amazing — a legendary company where the VC is part of that legacy. Traction is required but not sufficient, but having a big vision and a plan to get there is required.
When investors could not see that part of our story easily and clearly, they lost interest. So I can’t restate enough – telling a really big story and having a big vision is essential to raising a healthy round.
Part 4: Using FOMO to drive to the finish line
There were a couple of Tier-1 investors that think independently and made the decision to give us a term sheet independent of the rest of the market. We had heard about FOMO but didn’t understand its power until late in our fundraising process. In the blink of an eye, we saw a rapid increase in Incredible Health from Tier-1 funds. The reality is, we realized, that competition for good deals among Tier-1 funds is just as intense as the competition to raise capital.
Once you are marked as a highly promising startup and the holder of primo term sheets, then you will probably get interest from other VCs who are afraid of missing out on a deal that could make their fund a success.
Once you have it, you can use FOMO to drive a higher valuation, more capital, or lower dilution for your round. But be careful with FOMO.
Don’t fake FOMO. If you don’t have a term sheet from a top-tier VC, then don’t claim to. If you are called out, you are done.
Don’t tell investors which VCs have given you a term sheet. You want to keep them in the dark to prevent them from colluding (illegal but does happen)
Once you feel FOMO building, accelerate your process and use it to your advantage. Your goal should be to raise as quickly as possible once you feel FOMO. You can time-box your raise to drive faster decisions, for example. Investors will move quickly when they see something they want. Use the way people respond to FOMO as a filter, as well. You may elect to go with a smaller round and a lower valuation if the partner you want the most made an initial offer and then gets FOMO’d by other funds that you are less interested in for one reason or another.
Don’t Reinvent the Wheel. Enjoy the Ride
I laid out most of what I learned in my fundraising here, which I hope readers find useful.
My sincere wish is to help CEOs and founders save time and effort in building out their fundraising process, in part by leveraging what I learned. This is not rocket science and there is no need to reinvent the wheel.
While fundraising is grueling, it can also be exhilarating and rewarding. You are selling a story and a vision to some of the smartest people in the world. They will ask excellent questions and you will learn from them.
Your network will expand and your storytelling skills will improve. Fundraising is a growth opportunity in more than just one way. It is all part of the journey toward building something that changes the world.
Mammoth is now the bio-platform for next-generation CRISPR products across therapeutics and diagnostics.
NFX portfolio company Mammoth Biosciences today announced a $45M Series B, led by Decheng Capital, with participation from Alphabet’s Verily Life Sciences and Brook Byers of Kleiner Perkins, among others. Additionally, Mammoth Dr. Min Cui, Ph.D., of Decheng, Jeff Huber the founding CEO of GRAIL will be joining the board. Lloyd Minor, the dean of Stanford Medical School, will be joining the company’s advisory board.
In addition to raising a new round, Mammoth is also announcing a collaboration with UCSF to explore the feasibility of a rapid coronavirus diagnostic test through Charles Chu, who is a member of Mammoth’s scientific advisory board.
NFX led the pre-seed and seed rounds of Mammoth, and participated heavily in the Series A, and now the Series B.
Mammoth has recently signed a large deal with Horizon Discovery to collaborate on bringing select new Mammoth gene-editing product offerings to the bioproduction market.
This is significant because it highlights the bio-platform approach of Mammoth which builds network effects over time. Mammoth has created a platform across therapeutic and diagnostic applications and now allows partners, like Horizon, to plug in to develop new products and services that wouldn’t be possible without Mammoth.
Mammoth’s platform combines two forms of IP that make the business defensible: 1) “wet” IP of CRISPR Cas proteins, and 2) “dry” IP on the data and AI side. Mammoth is the #1 holder of CRISPR IP now. Over time, working deeply and closely with partners, Mammoth will build up a data set that will speed the development of new products in both gene-editing and diagnostics.
Mammoth’s aim is to change how biology is programmed over the next 30 years, playing a similar role to Microsoft over the last 40 years when they married an operating system to the microchip in 1976, creating a new 2-sided platform for personal computing.
It’s All About the People
The Founders and team of Mammoth are very unique and extraordinarily talented people, including Mammoth CEO Trevor Martin, Janice Chen, Lucas Harrington, and Jennifer Doudna. The company also recently announced that two other industry titans have joined the company. Peter Nell, the new Chief Business Officer in charge of therapeutics, from co-founding Casebia Therapeutics and many years at Bayer and Ted Tisch, the new COO, previously COO at Synthego and many years at Bio-Rad prior to that.
We’re all lucky to have such a talented team assembled.
by Pete Flint (@PeteFlint). Pete is a Managing Partner at NFX, a seed-stage venture firm based in San Francisco.
Behind every iconic company is a radical, risk-laden idea. But as the startup ecosystem has grown, we’ve seen a decreasing appetite for risk & an increased emphasis on predictability and familiarity. Yet if you carefully study the most successful technology companies of our time, you’ll find something curious – not only are they born from risk, but they’ve survived and thrived because they knew how to evaluate risk itself.
To build iconic companies, Founders must take more risks, not less. But they also need to understand how to classify and assess the types of risk they will encounter. Trulia would have never become one of the most prolific PropTech companies had I not quickly learned how to do this.
I fear the pendulum has swung too far in the wrong direction to produce the kind of companies that technology promises – the kind of companies Founders dream of building. So today, I am sharing a framework for all Founders to evaluate startup risk.
2 Types of (Necessary) Startup Risk
To take risks strategically we must first understand them. We have to be sure that the biggest risks we are taking are necessary, so we can have the conviction to take them. We also have to be able to identify and avoid unnecessary risks so that, if our companies fail, it won’t be because we took avoidable risks.
As we’ve written about recently, two types of risk Founders trade off between are market risk and execution risk. Market risk is the risk that people may not want what you’re building. Execution risk is the risk that you might not be able to execute your idea better than the competition. Or as one memorable aphorism puts it, “vision without execution is just hallucination”.
When we introduced this framework, we pointed out that startup ideas with higher market risk are usually the best option for first-time entrepreneurs looking to avoid incumbents and competitors. By contrast, experienced entrepreneurs will often choose to take on more execution risk because they have more confidence in their ability to execute.
But to help Founders truly calculate how they should assess the risks involved with their startups, let’s take a deeper dive into what these two types of risk mean and where they really come from.
Sources of Market Risk
Market risks are outside of your direct control as a startup. But if you understand the sources of market risk, you can make better decisions upfront as a Founder on whether to start a startup in a given market category.
1. Product Risk — Do people want your product?
Founders often decide to start companies with a founding insight. This is usually an observation or realization of a commonly experienced problem that has become solvable through technological innovation.
For example, when I founded Trulia, my founding insight was that home buyers looking to make the biggest financial transaction of their lives would increasingly want to start their search online — and that there didn’t yet exist a good online resource for this purpose.
Once you have a founding insight, you can iterate on a product until you get to product-market fit and deliver a solution on the founding insight.
Not achieving product-market fit is possibly the biggest risk of all for first-time Founders starting companies with high market risk. In other words, your product risk comes down to how certain you can be about the accuracy of your founding insight. To properly assess it, ask yourself what evidence you have even from an early stage:
Is your founding insight addressing a clear pain point?
How big of a problem are you solving?
Do you have evidence that people are willing to pay money for a solution?
The more data and information you have to corroborate that there’s a real need for your product — and that you will produce real value for your users — the lower this risk.
Early on as a Founder, it’s best to take whatever steps you can to minimize market risk before you start a company and raise capital. The longer it takes you to get to product-market fit, the harder everything else with your startup will become.
The best evidence of low market risk is obviously the existence of thriving businesses that already exist and provide a similar product. But, as we’ll discuss further below, the less market risk you can perceive because of the presence of competition, the more execution risk you tend to take on.
The best market-risk companies have strong evidence that there will be demand for their product and low to non-existent competition.
2. Scale Risk — Is there a big enough market?
The size of the market for your product is (mostly) outside of your control, but one of the biggest avoidable risks I see Founders take is starting companies where the potential market is too small for the economics of a venture-backed company.
There are many good, profitable businesses that can be built in smaller market categories, but these are not usually VC-backable. The real problem is that a small addressable market means that any company, no matter how well-run, cannot achieve the necessary scale to profitably build a breakthrough product with transformative impact and venture scale returns.
Startups that raise VC money must have the ability to (profitably) scale in order for them to be successful. It’s not always obvious what the size of the market for a product is or will be, but sometimes even a cursory glance at the market research will make it evident that the TAM is too small to ever support a potential billion-dollar company.
The exception to this is if you are building a new market like Lyft was doing in the early days. They essentially invented the ride-sharing market category, and so existing data around the size of the taxi industry was not a good indicator of market size. Lyft isn’t just going after the “taxi” problem. They are going after something much bigger — the problem of transportation.
While the size of a potential market for your startup isn’t identical to the size of the problem you’re tackling, there’s usually some correlation. If you’re looking to create a transformative company, it’s important to tackle a big problem.
Not all companies that end up having a huge market size know it at first. Companies like Slack and Instagram stumbled upon huge markets after seeing early traction with a particular feature of their products and looking to rapidly scale in that direction. The strategy is to double down on a market and scale up your ambition once you see early evidence of traction, and this can be one smart way to attenuate market risk.
3. Competitive Risk — What is the competitive landscape?
Another market-related risk to consider is the risk of competition. Big ideas with high market risk usually have limited direct competition, but sizable indirect competition from adjacent market categories.
As we’ve written about in the past, defensibility is the biggest factor in how valuable a company eventually becomes, and network effects are the best form of defensibility. 70% of the market capitalization in tech over the last 20+ years comes from companies with strong enough network effects to heavily mitigate competitive risk.
So as a Founder, it’s important to ask what the competitive landscape looks like. Are there already entrenched incumbents with strong defensibility within or adjacent to your market category? Are there a lot of other competing startups?
While it is possible to compete and win in hypercompetitive markets, as I’ve written about before, facing heavy competition creates significant risk.
Whether or not there’s already a lot of existing competition in any given market category, you can bet that eventually there will be. That’s why one of the most important risks to limit early on is the risk of later entrants eating into your market share by developing a sound defensibility strategy and ideally, building network effects into your product.
4. Timing Risk — Is this the right time?
The last significant risk outside of your direct control is timing.
In my essay, Why Startup Timing Is Everything, I break down the three preconditions that you should look for in a market to know if the timing is right to start a startup: economic impetus, enabling technologies, and cultural acceptance.
When a market reaches a critical mass of these three preconditions, there is an inflection point in the available market size so large that it can determine the success or failure of a given company.
Companies founded before this inflection point, despite having similar or identical products to later success companies in the same market, often fail for this reason alone (poor timing).
By contrast, companies that are too late to a market frequently find a lot of difficulty gaining traction because of entrenched competition. They often fail also.
Understand the current state of the market you’re getting into. The closer you can time your startup to the critical mass inflection point, the lower your risk.
5. Legal Risk — What is the regulatory environment?
Most iconic companies in tech end up having to navigate the obstacle of regulation. When they first got going, Uber had to deal with transport regulations, Airbnb had to deal with housing authority, and Youtube was dealing with copyright issues.
Usually, the regulatory environment surrounding an industry lags behind fast-moving technological innovation seen in startups. But it’s important to know that, just as with all the examples above, if you’re providing sufficient value to the key members of the ecosystem, you’re not breaking laws, and you are able to thoughtfully navigate the marketplace, then it is often a risk worth taking.
The fact that you might face regulatory hurdles doesn’t mean it’s a bad business. Fully self-driving cars are currently illegal, but most of the major transportation businesses in the world are developing autonomous vehicles.
If you face regulatory risk, you just need to be thoughtful about how you approach it. YouTube, for example, abided by takedown notices to protect copyright early on, but they continued to offer their core service which provided a lot of value to both content producers and consumers, and ultimately led to a $1.6 B acquisition by Google.
The continued presence of unauthorized material on YouTube after the Google acquisition led to a number of lawsuits that Google was able to bankroll, which brings up another point. If you’re operating in an environment of high regulatory uncertainty, you need to have the patience and the bankroll to sustain heightened legal and regulatory costs.
The lessons is that if your business is providing value and the legal environment was designed for an outdated technological era, there’s sometimes a path to building a meaningful business, and you shouldn’t be intimidated by regulatory uncertainty.
However, this varies on a case-by-case basis and it’s really a question of magnitude, and you should certainly be careful about overreaching or breaking any laws. It’s also important to be cognizant of societal impact. Ultimately, a lot of the decision around regulatory risk is around the downstream implications of pushing the envelope — a failed medical diagnosis or an erroneous self-driving car is a lot more damaging than disrupting legacy media platforms with online comedy videos.
Sources of Execution Risk
Execution risks are more in your direct control than market risks, so taking on execution risk is betting on your own ability to execute in 3 basic areas: recruiting a world-class team, having the technical capacity to build the product itself, and fundraising aptitude.
1. Team Risk — Can you recruit world-class talent?
As a Founder, you’re likely to have a lot of confidence in the quality and abilities of your own founding team, but early hires can be just as important for startups.
To assess team risk, take a look at your existing professional network and those of your co-Founders. Do you have access to networks in centers of excellence, like a top-performing company or university? Are you geographically located in an ecosystem with an abundance of available talent? As you scale, will you be able to attract top candidates for your VP of Sales or Finance?
One of the big reasons why second-time Founders choose to adopt execution risk is because they can limit that risk with well-developed professional networks which give them more confidence that they can recruit the top people to help them make their vision a reality in the face of technical or competitive obstacles.
Assess which professional network clusters you have access to for early hires before you start a startup, and, if necessary, do the work of developing ties with potential future sources of talent.
In building a strong team, it’s also important to realize that having just raw talent won’t be enough. Equally crucial is the need to have the right mix of complementary team DNA so that the team is able to work together in an ambiguous, pressure-filled startup environment and build a great culture and organization.
2. Product Execution Risk — Can you build it?
Can you actually build the product you want to build?
One of the reasons early-stage investors often look for technical co-Founders is to mitigate this risk.
The more control you as a Founder have over your ability to execute on the product, the less your execution risk. Relying on early hires to build out your concept carries costs with it, because no matter what, you will probably always be the most motivated person at the company to make the business work.
The more you or your co-Founder can guide and influence the execution of the product itself, the lower your product risk.
3. Fundraising Risk — Can you fundraise?
Fundraising is a completely different skillset from leading an organization, technical execution, and business strategy. But for a venture-backed startup, it is equally crucial in the success of your company.
In addition to being able to calculate and manage risk as a Founder, you should also understand how investors see risk so that you can be more successful in your fundraising process.
From an investor’s perspective, not all risks are created equal. Investors tend to be biased toward companies with high market risk, but low execution risk.
Why? Because the early-stage VC model is built on high variance investments. Most Funds are made by taking big risks for the chance of getting a huge outcome.
The math looks something like this: if I invest in a market risk company, it might have a 10% chance of having a huge $1B+ outcome, vs. investing in an execution risk company with a 30% chance of a 200M outcome.
Companies with massive defensibilities, i.e. network effects, have the most potential to become huge, iconic companies. But these companies usually have a lot of market risk and are doing something non-obvious that no one else is doing.
Most companies with low market risk are in industries that are very competitive. A lot of people go after it because it’s somewhat obvious. For that reason, it’s tougher to create breakthrough companies with large market share and high defensibility (and therefore high margins).
VCs, however, will sometimes invest in startups going into proven markets with lots of competition if the execution risk is relatively low — either if the startup has an exceptional team or product and strong Founder-Market Fit, or if there is an opportunity for meaningful technology-driven disruption in the market, e.g. a platform shift.
Another thing to be aware of is that investors are also less prone to taking team risk, but more prone to taking technical risk. If you have an amazing team but it’s unclear whether what you’re proposing can actually be done, investors might still back you, as we see with companies like Magic Leap.
This is because investors see team risk as binary — either it’s a high-quality team with the capacity to attract other top performers from centers of excellence or its not. Technical risk is not seen the same way, as in tech there’s a strong belief that given enough time and money you will always figure out a technical solution.
As a result, I encourage Founders to think big and take more technical risk. Investors tend to believe that everything is possible given enough time, money, and the right people. You should have the same outlook. Personally, as a VC, I would love to see more companies taking big, bold technical risks.
Living in the future
One method to come up with a big, bold, radical idea is to implant yourself in the future and think about how people’s lives and needs might be different. Anticipating the needs of tomorrow is one of the best ways to come up with startup ideas today.
One underrated way to do this is by turning to science fiction. Many of our iconic technologies today were predicted or portrayed by imaginative science fiction of previous generations. Think of the self-driving cars in Isaac Azimov’s “I, Robot”, or voice-activated computers depicted in Star Trek long before they had become a household commodity with Alexa.
Another way to do it is by extrapolating big trends in underlying economics (such as changes in costs of computation, storage, genomic sequencing, photovoltaic cells, etc.), penetration of enabling technologies (like increasing smartphone adoption, enterprise cloud computing), or cultural change to anticipate new sources of demand or new enabling technologies.
In addition, given that many of the most interesting trends are compounding or exponential in nature, you can see orders of magnitude difference in just a few years. We tend to think intuitively in a linear fashion, so superlinear trends can catch us by surprise and can rapidly create new market opportunities.
The Varian Rule can also be used to extrapolate future trends in consumer business. Named for Google’s chief economist Hal Varian, this rule holds that “a simple way to forecast the future is to look at what rich people have today; middle-income people will have something equivalent in 10 years, and poor people will have it in an additional decade”.
In other words, The luxury goods of today are often the necessities of tomorrow. Some examples of services which were, until recently, inaccessible to anyone except the very wealthy:
Personal shopping (Instacart)
Personal driver (Uber/Lyft)
Personal stylist (StitchFix).
Whatever method you use to come up with your founding insight, creating an iconic company comes down to tackling a big, important problem with a radical idea. Understand and be strategic about the risks you take on, but don’t shy away from taking them. Risk is, at the end of the day, innate to being an entrepreneur and the lifeblood of the startup ecosystem. Founders, investors, and everyone else in the ecosystem should recognize this and embrace risk-taking as part of our identity.
Why Risk Is Critical
One of the things that drew me to Silicon Valley over fifteen years ago from the UK was the spirit of innovation and risk-taking. It’s that same spirit that continues to draw innovators and technical talent to the startup ecosystem from all over the globe.
The tech and startup ecosystem has long represented an oasis from the drudgery of traditional industry. With its culture of bucking the norms, trying the unproven, and pursuing innovation for its own sake, it was a magnet for people with radical ideas who were crazy enough to pursue them.
Today, the costs of starting a startup are lower than ever, which is an amazing thing. But a growing backdrop of fear and caution means the startup system is more filled with unambitious and unexciting ideas. While there has been a (healthy) education about the importance of taking calculated risks with business models, too often this has been accompanied by an unwillingness to think big enough and to tackle truly important problems.
I believe the startup ecosystem has the continued potential to deliver on our highest aspirations for the future. But we can’t lose our willingness to take big risks. Today I want to look at how risk can be strategically managed by avoiding the unnecessary and embracing necessary risk. Hopefully, this will empower Founders to take more of it.
by James Currier (@JamesCurrier). James is a Managing Partner at NFX, a seed-stage venture firm headquartered in San Francisco.
What city you live in. Who you date or marry. Which job you choose. What clothes you wear.
We all think we make these choices ourselves. It certainly feels like we’re in full control. But it turns out that our choices — both in our startups and in our lives — are more constrained than we think.
The unseen hand in them all is the networks that surround us and the powerful math they exert on us.
Working with network effects in our 100+ companies makes it impossible not to notice how the same mechanisms and math that create near-destiny for companies also create near-destiny for us as individuals. It’s mind-blowing once you see it.
These constraints are highly determinative of how your life will turn out, guiding us inexorably down one path or another in ways that are both quite predictable. Yet these forces are typically unnoticed.
This article outlines how we see network effects impacting nearly every aspect of your life. With that lens, it lays out a perspective on how to make the 7 most important decisions of your life. It will hopefully help you make decisions that are more true to the kind of life you want to lead.
Network Force: The Unseen Hand
Adam Smith published The Wealth of Nations in 1776. In it, he envisioned markets with thousands of individuals pursuing their own independent self-interest as creating an “invisible hand” that unintentionally promoted the good of society. This “free-market model” allowed him to point out the math and mechanisms behind the emergence of large-scale social order.
Here we want to do the reverse — to use a “network model” to characterize the large scale human social orders and explain how they impact each of us with an often unseen hand.
In short, the networks of human connections in your life create a force that guides you down a path not always fully of your intention, through the mechanism of 100s of small interactions.
Further, this “network force” compounds over time. The longer your relationships, cliques, and communities persist, the more they shape your destiny.
Sociologists regard the evolution of our lives as resulting from a combination of our own choices and preference and the force of our surrounding social network structure.
Observing our own lives, and watching as 100s of founders move through their own journeys, we would go even further in the belief that it’s network forces that influence the majority of how our lives turn out. And 90% of those network forces are established in just 7 crossroads or pivotal life events.
Given the power of network forces on your life, they should be the primary consideration when making decisions at these crossroads. Although it may feel like a complex decision in the moment, they become simplified when seen primarily through the lens of joining and forming new networks and changing the network topology of your life.
The world seems chaotic. But it’s not. Underlying all this apparent complexity is some wonderfully simple math. Follow the math to your destination.
Understanding the primacy of networks will give you a superpower to see what others do not and navigate life’s big decisions more effectively.
Seeing the Math at Work in Your Life
Math underlies elements of the social sphere in ways we don’t always see. In spooky ways.
Here are a few examples of how math drives the large and small scale social orders we experience every day. After that, we’ll get to how the network force should guide your decision making in the 7 crossroads of your life.
Zipf’s Law and You
Did you know the frequency of the words you use are determined by an underlying mathematical pattern?
This mathematical pattern is a power law known as Zipf’s Law. It was first noticed as a principle of language. About 100 years ago, physicists and linguists discovered that the second most commonly used word in English is used one half as much as the most used word. The third most used word is used one third as much as the most used word, so forth down through all the words in a given language.
This law turns out to hold not just in languages, but in many other cases. The world looks complex or chaotic on the surface, particularly in social matters and perhaps your own life, but underlying what we see are simple rules of math.
The underlying mechanism for Zipf’s law is not yet agreed on but the main hypothesis is that it’s an outgrowth of the Principle of Least Effort. In short, systems that survive and operate at steady state optimize for efficiency. When they do, things tend to look like Zipf distributions.
Related to your life, an even stranger implication of Zipf’s Law is that unconscious network forces will act on anyone or any company that gets to be an outlier in one or more of these distributions. Bringing you back in line — or bringing another person or company back in line to make room for your new numbers — will happen without any conscious or intentional force at play.
This is a bit spooky. It means that the number of inhabitants of NYC constrains and influences the number of inhabitants of LA, Seattle, Chatanooga and all American cities in some unseen way because they are all part of the network of US cities. Even though we are each making what feel like independent decisions about where to live, it seems that we are part of this network unconsciously influencing people to keep American cities on the Zipf distribution line. I am one of those people being pushed around. And so are you.
That also implies that my income is somehow influenced by other incomes that surround me as my income fits into the Zipf Law curve. And my country’s GDP is influenced by other countries’ GDPs.
If math is underlying all this, what else in my life is being affected by the larger social order?
Your Body and Cities Have Predictable Mathematical Patterns
Systemic efficiency also drives other mathematical laws that govern how our lives look. Another example is the ¾ scaling law that shows up everywhere in the world as pointed out by Geoffrey West in his 2017 book Scale. The cells and energy systems of living things scale up in predictable patterns. A mammal that is 200% the size of another will only consume 150% of the energy. That’s because our cells and capillaries have evolved to be the most efficient fractal network transport system for conveying energy and nutrients to a 3D body. Those same underlying mechanisms drive the math of when you’ll die and why you stop growing taller.
This biological fractal network is very similar to the fractal network of a city that has evolved to provide energy and transportation to keep the city alive. The empirically measured numbers for cities are 17/20 scaling, still pretty remarkable energy gains for the city based on its network effect, and still consistent across nearly all cities.
It’s remarkable to think that city planners could actively try to violate the 17/20 scaling rule for cities, and the network would actively work against them in unseen ways to pull the city back to 17/20.
How do nodes on a human network work?
Nodes, which in this case are people, exchange a host of things. Sometimes consciously if I pay you from my bank account, sometimes unconsciously like when you overhear me at dinner telling someone about how I coach founders during walks and you decide to try it with your employees.
The things they exchange are… well… nearly everything. The most important ones for our discussions here are ideas, capital, connections, jobs, status, aspirations, language, requests, standards, expectations, affirmation, criticism, belonging, and physical space.
The nodes exchange more of these things when the friction is low due to physical proximity, interaction frequency, tribal trust, similarity, etc. The nodes also exchange more when the benefit is high due to resources gain, status gain, tribal trust gain, etc.
In Networks, The Rich Nodes Get Richer
Most things that happen in society are multi-turn and repetitive. These are called preferential attachment processes which happen when something (such as money, status, fame, punishment) is distributed based on how much is already possessed. Most social processes are preferential attachment. For example, if two Founders each tweet out the same great idea at the same time, the one with more status will be given credit for the idea.
What’s fascinating is that this is because of math. Nodes that are “ahead” get picked more often by the other nodes because they are ahead and thus offer the nodes choosing them less friction and more benefit. When this gets repeated many times, it systematically directs more resources to the nodes that already have relatively more.
This pattern has been so prevalent for so long, and has been so annoying to the majority of people, who, by definition are not in the lead, that it’s mentioned in one form or another at least five times in the Bible, most famously in Matthew: “For to everyone who has will more be given…” Now called Matthew Effect.
The math behind why dinner parties behave the way they do
If you want to have one conversation at a dinner table, 6 people is about the right number. Maybe 8, max. While that seems like a social decision you made yourself, the reasons behind it are mathematical. That number is similar for all of us because it’s based on how many possible two-way conversations (links) can exist between people (nodes) in a group. The formula (derived from Scale, pg. 317), it turns out, is:
N * (N-1) / 2
Where N is the number of people. If you have a group of six people, that’s 6 * 5 / 2 = 15 potential two-way conversations, which means that to focus on one conversation, you have to suppress 14 others. That’s possible without being too rude, but if you add just one more person to the group, the formula becomes 7 * 6 / 2 = 21. That’s an additional 6 conversations to suppress. That stretches our social skills to control.
The larger point here is that when groups get larger, it’s an exponential change, not a linear one, and that affects social experience you have, how you interact, and ultimately how you feel. Whether it’s a dinner party, the size of your extended family, school, college, workplace, or a city, with networks, the math behind them puts impactful forces on how we all behave.
How Networks Form
In theory, the people who inhabit each “layer” of your life’s network map could be anyone. All humanity is, after all, connected. As Stanley Milgram famously showed as far back as 1967, there are a maximum of 6 degrees of separation between you and any other person in the US. With the advent of the internet and global social networks like Facebook, that number may be even lower — as low as three and a half degrees according to a study conducted by Facebook in 2016.
But in practice, relationships don’t form at random. 5 conditions contribute to the depth and speed at which they form:
A context for frequent, repeated interaction with a new group of people (e.g. a new school, job, church, club, dorm, living situation, etc.).
A high degree of overlap between relationships in the new group.
A transition period where people are open to changing or evolving their identity.
A high density of people in geographic and network proximity.
Go through something hard and perhaps fear-inducing together.
So you can see why high school, college and your first job are such important life stages. All 5 of these conditions are present.
What Does Your Network Want from You?
You are not just the recipient of value from your network. The people and nodes in your network want and expect an exchange from you, too. They want you to validate them and support them. You are in a dialogue with the network force. As Obi-Wan says about The Force in the original Star Wars movie:
Kenobi: A Jedi can feel the Force flowing through him.
Luke Skywalker: You mean it controls your actions?
Kenobi: Partially, but it also obeys your commands.
The network force is similar. You don’t always see it, but it is exerting itself on you.
It wants something from you. Your network force proactively guides you down a path. So be careful which sub-networks and people you add into your network.
When you start to see that dialogue between you and your network, the push-pull, you see it everywhere. The chaos of the world diminishes a bit and becomes more understandable and predictable. And you understand more why things are the way they are and why they stay that way. Hopefully, it will also give you insights as to where you can push to change things that should be changed, not just about you, but about your company, your city, and your world.
Your Life’s Crossroads
Let’s look with new “network force” eyes at the crossroads each of us face. This list of crossroads is intuitive, but few of us explicitly understand the math that guides our choices and the gravitational force our networks exert on our lives.
And further, like asteroids colliding in space to form larger asteroids, at each crossroads we pick up greater “network mass”, increasing our network gravity and exponentially heightening the energy costs of changing course.
The conclusion is that the compounding, nonlinear math of networks means that they should be the primary consideration in our big life decisions.
The Network Topology of Your Life
There are three levels of networks you’re a part of.
Within the “People Network”, you are a member of many networks. Your family, your high school classmates, college alumni, company alumni, the people from an activity you do like a soccer team or volunteering, the people who work in your building, the people who live on your street, the people at the gym you go to.
The intensity of each of the links between you and the other nodes in your networks, it turns out, will follow Dunbar’s law, which appears to be based on the fundamental structure of your brain. We each tend to have 5 people who are like family, 15 intimates, 50 acquaintances, and 150 total familiars that we can interact with on a regular basis. Beyond these approximate limits, humans don’t do so well.
You are a node in each of the networks to which you belong. The other nodes – people – give you your ideas, your words and phrases, your assumptions, your desires, your fears and your beliefs. They give you your belonging, your affection, your shame, your fear, and your hopes.
To make an analogy, imagine that the things that these nodes all give you show up on your life dashboard as you navigate life. They appear with a lot of numbers. Probabilities, rewards, costs, frictions. You make your decisions reading this dashboard and what the network presents to you there. You have agency and free will in making your decisions. You look at the math of each decision and make the best decision you can at every point.
The mathematically obvious path will feel like “the right decision.” But note that what even shows up on your life dashboard is put there by your network. And the math associated with each option — the rewards and frictions and probabilities — are determined by your unique network. And your network is the result of the network decisions you made during the few crossroads moments in your life.
What that means is that the little decisions you make daily, the ones you fret over, are orders of magnitude less important than the crossroads decisions you make. This is true because those decisions have been placed in front of you by your network and are mostly a function of your network, and they don’t typically bridge you into whole new networks and new ideas and options.
Crossroad #1 – What Family You’re Born Into
You don’t get to choose this one. For better or worse, your family is the fundamental layer of your network topology. Seeing your family through the lens of the network forces model can reveal the hidden depth of that influence.
Network clusters influence us in proportion to how frequently we interact with them, how early we adopt them, how strong and reciprocal our ties are with the other members, how much they are reinforced by overlapping shared connections, and how long we expect them to last.
In all of these measures, few of our other networks in life can rival family:
Since you usually live in the same house with your family for a large part of your life, geographical proximity makes frequency of interaction extremely high and friction to interact low.
Your individual relationship with one family member — usually a strong tie — is reinforced by all the other family members you share in common.
We expect family relationships to persist throughout our entire lives, an expectation formalized in most human cultures as a deeply-embedded social norm. There’s a long “shadow of the future” with our family members. We know they’ll always be there, so we’re willing to invest and sacrifice for our family relationships more than for non-family.
Family ties have higher bandwidth than others because we see labels like “mother” or “son” as identity-defining. Family relationships straddle the line between who you know and who you are.
Future relationships outside the family network, e.g. friends, dates, etc., will be impacted and reinforced by your family. The closer you get to someone, the more they interact with your family, and the more likely it becomes that they develop their own ties with your family members.
All of the powerful factors above are superimposed by, and reinforced with, our biological drive to connect with others who share our genes.
Now that we can see how families are uniquely influential relative to other networks, it’s clearer why we so often adopt our cosmological, religious views, linguistic dialect, political leanings, dietary preferences, and worldviews from them — despite such things not being genetically heritable.
You go through life thinking such things are innately “you”. But you didn’t adopt your identity in a vacuum. Had you been raised by a different family, you would likely be a very different “you” — Your religion, linguistics, political orientation, favorite foods, worldview would probably be very different despite such things not being genetically heritable.
Our family network impacts what networks we are exposed to and which ones we are constrained from. Family nodes have preferences, and push links to other networks on us in the form of introductions to schools, places to live, jobs, and spouses. There are also prohibitions on fraternizing with the “wrong” nodes in certain networks.
Your family is a low-friction, high-impact network. Because of that underlying math, when making life decisions most people will choose the options that most align with their core family network.Be aware of this if you want to be more conscious in directing where your life path will lead.
Your family network is the one you don’t get to choose, and in that sense, it’s not fair. But it’s not destiny. Think of it as another network force — albeit a very powerful one — that puts data on your dashboard.
Crossroad #2 – High School Network
High school networks are especially important because they are influential when we are forming our identities and worldviews as young adults. High school networks are also correlated with academic achievement, work habits, and even college admission — defining access to future networks and building a vibrant life of your choosing.
Like family, where you go to high school isn’t usually a choice. But if you do have this option still ahead of you, or if you have children and can choose for them, don’t underestimate its importance.
High schools are typically the first peer networks we join that are large enough to have a diverse array of subgroups — better known as high school cliques. As such, they present us with our first significant network-based decision: who to associate with in high school.
The importance high-schoolers place on “popularity” — their status in the social hierarchy of their peers — shows that we intuitively understand the importance of networks even at an early age. In seeking status or popularity, we are, in part, looking to maximize our options in terms of which cliques we can elect to join or form. For most teenagers, that optionality matters deeply.
How does status work? Why does status give you options? Because status lights up the network. It’s a pure shot of preferential attachment we mentioned earlier. Sure, nodes on the network with money attract more money. Nodes with more access attract more access. Nodes with more attention attract more attention. But nodes with status attract all of the above. Nodes of all types want to associate with high-status nodes because it will improve their own status.
Winning status becomes the singular focus of life for many teens, and not a few adults persist in that goal. Adult parents of a high school teen may see it as melodramatic or irrational how much their kids care about their status, reputation, and friends at that stage in life — especially compared with more “important” things like academic accomplishment.
But from the vantage point of a teenager, social obsession is quite rational. Teens intuitively understand that their high school destiny depends on their network of friends. And though it’s easy to dismiss teenage behavior as irrational and hormonally driven, there are serious consequences to the networks we join early in life.
According to one 2011 Harvard study, all kinds of traits, from body weight to happiness, are heavily influenced by network clusters. Throughout your life, your “clique” helps define you. The same study also found that the presence of friends in class has a positive and significant effect on test scores.
Moreover, as your first peer-based network you form after you’ve come of age, your high school friends have a particular influence on your lifelong identity — from your tastes in music, to your work ethic, your fashion sense, and your life aspirations — which is only rivaled by family, and in some cases even surpasses it.
It’s not just during high school that high school networks matter. Those who go to college and build a career in the same cosmopolitan area as their high school are likely to retain some parts of their teenage cliques throughout their lifetime, usually forming a core part of their network.
All this network force taken into account, which high school you go to matters a lot. Imagine the impact of moving a kid from, for instance, Taiwan or Spain to the US, or vice versa, for high school. How much of a difference would that make to the trajectory of a person? The networks presented to them? The ideas, the sports, the foods, the language, the friends, etc. Imagine moving from Arkansas to, for instance, Phillips Exeter Academy in New Hampshire for high school. Intuitively, we know this will make a difference. But we see the mechanics of that difference more clearly when we see it through the lens of network forces.
When navigating the question of which high school to attend or — if you don’t have a choice — who to make friends with as a high school student (or which kinds of people to encourage your kids to befriend if you’re a parent, although good luck with getting them to listen), ask yourself the following questions:
How big is the high school? The bigger the high school, the bigger the alumni network, which may influence your ability to choose future networks like college, spouse, and jobs.
How diverse is the school so you can find nodes and sub-networks that fit you best? With more options, there is a higher probability you can find a high achieving sub-network in an area you can be ambitious and high achieving.
How strong is the affinity of school graduates? Higher affinity indicates stronger network links between nodes in the network, that the network is more valuable to the graduates. How much do they brag that they went to that high school? How often do they come back for reunions? How passionate are they about the brand of the school? Do they use it as a strong identity peg or are they indifferent? Those would indicate stronger network links between nodes in the network.
How important is academic success to high-status students in this high school? The more that popularity / status positively correlates with academic success, the more that short-term social incentives will be aligned with achievements that will serve you or your kids in the long term.
Parents and ambitious teens often mistake high school for a competition to get into a good college, either through academic achievement or sports. By focusing on the sound and fury of competing for grades and spots on the varsity team, they miss the higher importance of the network dynamics at stake. In high school, putting yourself in a position to form a large number of strong relationships with the right network nodes can make all the difference, not to “get ahead” but to create a vibrant, amazing life of your choosing.
Crossroad #3 – College Network
You should choose your college based on its network of students and the geographic network they inhabit more than course of study or sports teams. If you choose the right people to be around in college, they will open up ideas, relationships, jobs, aspirations, attitudes and resources that fit with you and a virtuous cycle will be set in motion. Your network will ask you to be your best self and live your best life, like a trainer at the gym. In this way, your college network will have an exponential impact on your life.
College networks have many characteristics that make them powerful
Geographic density creates frequent interactions between the nodes, giving network bonds a chance to form and strengthen.
There’s a long duration of network formation. 4 years is a long time. A lot happens in 4 years.
A closed, selective network. This is powerful for three reasons. A) Your reputation matters. People are more likely to have heard about you via a third party, and treat you differently according to your reputation. B) If you meet another student, the chances of them knowing someone you know is much higher than someone you meet outside of the closed network. There is a high degree of network overlap between you and other students, and as network theory predicts, shared connections between two people vastly heighten the chances of them forming a strong bond. C) The likelihood of repeat interaction between students is very high.
Like with family, these networks cross from who you know to who you are. Identity formation takes place at this age and are thus likely to last longer.
When you choose a college, you are also choosing a geography. People tend to end up working and living in the same geographical proximity as their college, keeping them close to their college friends.
People tend to end up working in the same industries as the people in their college network.
It’s considered a social norm that you should build and value your network in college, so others are more receptive to building new and strong bonds.
Given your biological age, it’s a good time to look for a partner. The network upshot of this is that many people will find their spouse at college, or at least find someone who they think likely to be their spouse in the future, which impacts big life decisions such as where to live after college. As we’ll see, this is actually a huge decision — and letting your dating life dictate where you live isn’t usually a wise choice.
College teaches you the idea that you will know these people the rest of your life, so like family, there is a powerful shadow of the future that makes the bonds stronger and more numerous.
All of the above elements reinforce each other.
To see what this means in practice, consider the following scenario:
As a freshman, you meet someone in class. Let’s call that person Sally. You and Sally have some things in common, and you get along fine. If you were asked to rate your affinity for Sally, it would be a 6 out of 10. Since you share a class together, you’ll see each other maybe twice a week for at least six months.
You’ll interact regularly and frequently — and even after this semester, there’s a high likelihood that you’ll see Sally around campus, share friends with her who might invite you both to the same parties or get-togethers, or participate in the same extracurricular activities. All of this is the result of you being members of the same closed network and sharing the same geographical and institutional circumstances.
Now suppose that, the same day when you first meet Sally, after class you go to a party off campus where you meet Bob. Bob doesn’t go to your school, doesn’t have any shared connections with you, and doesn’t live near you. But he does have a lot in common with you, and you spend all night at the party hanging out because you share so many interests and have so much chemistry. If you were asked to rate your affinity with Bob, it would be a 10 out of 10.
4 years later when you graduate, which friendship is most likely to have survived? How much does the math of network formation matter compared to your own preferences and agency?
Mutual affinity isn’t the only thing that matters in choosing friends. It’s not even the biggest factor. Network force swamps other factors. Taking it into account, the model for relationship development doesn’t just include mutual affinity. Instead, it looks more like this:
Likelihood of forming a relationship = Mutual affinity * frequency of interaction * duration of interaction * geographical proximity * network proximity * number of shared connections * etc…
Bob might be a 10 in that first factor of mutual affinity, but in all the others he’s a 1.
Sally, on the other hand, may be a 6/10 in terms of personal affinity, but she’s a 10/10 in all the other ways, each of which serves as a multiplier on the likelihood of you interacting and developing a lasting relationship with her.
Another way of looking at it is that the friction of hanging out with Sally is much lower than hanging out with Bob — it takes 10X less effort to hang out with Sally. So over time, the math of inhabiting a shared network — the network gravity — makes it hundreds of times more likely to become lasting friends with her than with Bob.
This is a rough illustration of the mathematical power of networks in shaping behavior. As we see, networks impose real constraints on how you make decisions, not only in who you are likely to end up befriending, but the career opportunities, dating choices, beliefs, and information that you’ll end up sticking with.
Network proximity makes some options more appealing than they would be in a vacuum, while network distance can impose a high friction on other options — like being friends with Bob, or choosing to adopt a belief system, a fashion sense, or industry job too different from those of the other people in your proximal network.
So if you are choosing between colleges, or know someone who is, consider the following questions:
Where do most of the alumni of this college end up living? When you choose a college you are also choosing a regional network. If you go to school in California, for example, your friends and job offers will end up being mostly in that region. I don’t recruit at my alma mater Princeton anymore because it’s so low probability to pull a Princeton grad out of the NYC-DC-Boston orbit. I tried for four years, and each of the people I was recruiting did the math on their own life dashboards, saw the numbers put there by their networks, felt the network gravity, and each made the rational decision to stay on the East Coast. One candidate stayed in NYC to move into an apartment with their college friends and work at Goldman Sachs who recruited heavily on campus, one hour from their office in Manhattan (low friction due to geographic network). Another moved back to Boston to be near to their girlfriend who was finishing up at Brown, and their parents in the suburbs. They each “really wanted” to join a startup, but network gravity and network math were too much.
Now think about how the math continues to cascade through the network. Princeton hopes that I continue to be an active recruiting node on the network, providing the students with great employment options. But my cost/reward math doesn’t work. The denominator is zero. So Princeton lost a recruiter node in their network for now. Further, now those student nodes back on campus don’t hear from me. I and people like me don’t add our numbers to their life dashboards saying “work for a startup in SF.” So the math for other ideas like Goldman Sachs and McKinsey gets stronger over the years. The strong get stronger. Again, preferential attachment in the network. Students look at the network math on their life dashboards and they choose the mathematically correct choice.
What kind of career or industry do alumni of this college typically work in? Here’s an example of how this works. My 23-year-old nephew went to Trinity College in Connecticut. Most of the students from that college end up working in finance in NYC or Boston. Guess what my nephew now does? He works in finance in Boston. He followed the least resistance path, leading him to the highest paying, highest status outcome similar to his network. Is his choice of job about his own unique abilities and interests? No. It’s the math of the networks. He made the correct choice based on the options presented on his life dashboard by his networks.
Do you relate to the other students naturally? Will they relate to you? Do the students represent the type of aspirations, lifestyle, and interests you want for yourself? There’s no point in joining a network where you won’t actually bond with the other nodes, no matter how prestigious that network is.
How big is the college? The bigger the college, the bigger the alumni network. The bigger the alumni network, the more weak ties you have, which are great for career, marriage, and a host of other life attributes. Harvard Business School has figured this out and has classes of 900 compared to Stanford and MIT Sloan of 400.
How strong is the affinity between graduates? Like with high school, how much do alumni brag they went to that college? How much do they come back for reunions? How passionate are they about the brand of the school? Do they use it as a strong identity marker or are they indifferent?
Is it clear what it says about the graduates that they went to that college? A clear, strong brand lights up other networks because external nodes know what to expect from you if you’re a member.
In addition to that, and I suspect this will be controversial, you should probably de-emphasize questions like:
Where does the college rank in US News & World Report college prestige list that dates back to 1981
Are the classes amazing?
Is there a sports team I’m keen to play on?
Is there a particular professor I want to work with or a particular major I want to pursue? Only 27% of college grads end up with a job closely related to their major.
College is possibly best seen as a place for network formation, and creating the network topology you want. The network you join will lead you to a geography, a type of work, certain ideas about life, and a group of dating/marriage options that will all have a big influence on your life. All that network force will be pushing on you to then take the mathematically obvious path from there, one which will feel like the “right decision”.
Crossroad #4 – First Job
The professional relationships you form during your first job are the seed of your professional network which influences the arc of your career — from how you think about work, to how you’re known, to the geography where you have advantaged job access for a long time.
In working life, you see your coworkers every day of the week for 8 or more hours per day. The frequency of interaction with coworkers, at this stage in life, may even be higher than what you have with your family.
Prevailing wisdom says you should pick your first job based on the highest income, or the one that you’re most passionate about, or the skills you’ll learn, or where the day to day will be the most energizing for you.
All of this is flat wrong. In your first job, go work with people whose career path you want to emulate. Optimize for network.
The early professional relationships you form will have a bigger influence on your skillset, your lifetime earning potential, and the mastery of your craft than the particulars of your job description, the income, the company perks, or the brand name on your resume.
In almost every field — from theoretical physics to growth marketing — top performers were mentored, influenced by, or otherwise connected to other top performers.
There are a couple of reasons for this. First, as we saw in the high school section, high achievement is communicable. Surround yourselves with high achievers, and probability is on your side, you will become like them.
Second, innovation is contagious. If your first job is at a place that’s a breeding ground of innovation, the chances are a lot higher that you’ll come across some really good ideas — especially if you want to start a company one day.
The PayPal Mafia was no coincidence. Network clusters are capable of producing multiple future billionaires. There is no upper price, in terms of effort, difference in income, or even cost of living, that can even close to compare to the upside of being part of a network of high achievers in your first or second or third job.
So, when making a decision about where you want to work, instead of asking:
Will this give me the work I want to do daily?
Is this the best offer I got in terms of income?
Does this company look good on my resume?
Does this company let me take as much vacation as I want, have free catered lunches, and a fancy office?
Do yourself a favor and ignore all of it. Focus on these questions instead:
Is this job in the right city? The city I want to live in long term?
Will I like and respect my co-workers? Will they like and respect me?
Do I want to be like my bosses someday?
Do my co-workers career aspirations match mine?
Am I going to be working with the best?
Is there a strong culture and camaraderie?
Will I have opportunities to prove myself to others at my company to build my network bonds?
Are employees proud of their company and their brand? Do they enthusiastically recruit? Do they seek each other out when outside of work? This indicates strong network bonds are forming.
Marriage, or choosing a life partner, is one of the most important decisions you make in life. It could be the source of your greatest joy and/or your greatest suffering at a very personal level. In terms of the network model, it’s powerful because you are choosing someone else’s full network to add to yours. This person will also share the very center of your network hierarchy with you.
In many cases, this person will produce your children with you. Not only will parenthood be a focus of a lot of your life’s energies, but in addition, your children’s full networks will be added to yours for the rest of your life.
Children are shaped by how you nurture them as parents, and as we’ve seen earlier in the discussion of family, they are shaped by the networks brought to them by their parents. Your children are brought into, and partially inherit, the networks of both parents.
For 60% of people, how you meet their significant other is determined mostly by who you know and who you get introduced to, although that’s changing with the “digital people network” layer beginning to break down geographic networks and other closed networks. In 2017, 39% of all US marriages originated by meeting online.
“It is one of the most profound changes in life in the US” and the best example of what we’ve been hoping the Internet might do for a long time — moving from unchosen network forces constraining options to a global, digital network empowering your own preferences and agency.
I ran the largest self-assessment testing and matchmaking company in the world. We had 150M users and 10s of personality tests written by my staff of 5 PhDs to help people connect better. We also ran a matchmaking site with 30 million users that took advantage of those tests to match people. What my team told me at the time was that the most successful marriages were ones where 1) the two people were the most similar, and 2) they had shared network connections.
What this means is that when you’re dating someone, you’re not just dating them. You’re dating their networks — their friends, family, and colleagues. And vice versa.
Compatibility between two people in terms of their individual characteristics is sometimes much less important than the compatibility between their networks. This is one possible reason why there is a surprisingly low divorce rate amongst arranged matches made solely on the basis of compatibility between kin networks.
Although online dating is gaining ground, meeting through friends is still the most common way to meet someone. Further, what the statistics don’t yet show is how many of the 39% who met online had strong affinity networks already in place before meeting online, but just needed to shortcut the longer, in person, process with the tech layer to find each other.
“The stronger the tie between [two individuals], the larger the proportion of individuals to whom they will both be tied.” – Mark Granovetter
Given this, everyone in your “inner circle” probably already knows each other. The closest friendships you have, because of the structure of social network clusters, will have close to a 100% degree of network overlap with you.
So what this means is that your closest friends are usually poor nodes in your network to pursue romantic interests. There are two possibilities if you go this route:
(More likely) Your closest friends won’t be able to introduce you to anyone new.
(More unlikely) Your close friends introduce you to a close friend of theirs that you didn’t previously know. You end up dating, and in the high percentage of cases where things don’t work out, the blowback from the ruined relationship wreaks havoc in your network cluster, forcing your friends to choose.
That’s not to say that it’s impossible for people to become friends and then later become romantically involved. But for the purposes of meeting someone new, friends of the inner circle of your network map are not the place to start.
This is where your acquaintances — the weak ties at the outer layer of your network map — become vital. As we know from the work of Duncan Watts and Steven Strogatz, acquaintances serve as vital “bridges” between tightly knit network clusters. For people looking to be exposed to new dating prospects, job leads, ideas, beliefs, or lifestyles that differ from what they’re used to, there’s no better way to do it than through an acquaintance.
Smart questions to ask yourself when you’re single and looking to meet someone:
Which acquaintance is most likely to know a lot of people that you’re compatible with? Not all people have equally large networks, and some people you know may be “hubs” that have a large number of connections. If you can find someone like this, they are usually quite helpful in meeting new people. “Hubs” frequently have weak ties to a lot of different cliques, groups, and sub-networks. They’re usually happy to make introductions.
Do you get along with their friends? Do your friends get along with them? If you’re serious about the relationship, consider whether you’d be willing to bring those people into your life. If so, it’s a lot more likely that your relationship will last in the long haul.
Do you get along with their family? The importance of in-laws isn’t to be underestimated. It’s easy to dismiss this in a culture that preaches that true love is all you need, but network theory tells us differently. Your in-laws are the core network of the person you’ll be closest with in life. What may seem like minor issues at first can grow into powerful problems over the long course of a lifetime.
Are you in the same geographic network? When a couple is geographically challenged, it puts a real strain on their relationship.
Could there be blowback if it doesn’t work out? Everyone knows why it’s a bad idea to date a coworker or someone else who you might see on a regular basis if you break up. Network forces are why. The same applies if you share a lot of mutual friends — especially if you ever get divorced. You put your friends in a position where they have to choose, and you risk losing some of the relationships you’ve built up over a lifetime. Don’t underestimate this risk.
Crossroad #6 – Where You Live
Where to live is powerfully impacts the relationships and direction of your life, in ways you may not even realize. When coming out of college, this is even more important to your life than your choice of job.
As mentioned previously, physical proximity is predictive of network formation. Cities, from a network perspective, are like scaled-up colleges. Network density, frequency, similarity, and status accumulation all drive urban network formation. Cities do a great job of helping us form our networks because they are networks themselves, both physical and social.
Where you live largely determines who you know. Who you know largely determines the richness of your life and your access to wealth and information. Your network is a form of wealth. It brings you friends, career opportunities, or a spouse.
Committing to a geography and developing a network increases your access to all the experiences and resources you might want.
As the great Saar Gur — Partner at CRV and investor in Doordash, Classpass, Patreon, Bird and many other well-known companies — said to me recently, “Staying in the SF Bay Area after business school was the most impactful decision I’ve ever made. Everything else was noise.”
It’s certainly the most common life advice I give to people. Pick your city first. Everything flows from that. Your job, spouse, friends, income, and other opportunities flow from that core choice. The reason is network forces.
It’s important to note that your “choice” of city may be greatly influenced by the network force from the earlier networks you’ve accumulated. Take note of that and steel yourself to have the courage to make what sociologists call a “major move” if you decide that move makes sense. (Hint: it most likely does).
Making a clean break to move to the place that would facilitate your best life is hard. Network forces keep you on your path. The network wants something from you. Your boyfriend, a parent, high school friends, college friends, your weekend sports team, your roommate, your comfortable job.
This is true for those of us lucky enough to have a lot of resources and equally true for those with far fewer resources. In this article in the New Yorker, Malcolm Gladwell reported on research done by sociologist Corina Graif on people at the lower end of the socioeconomic spectrum who were forced to undertake a “major move” out of New Orleans by hurricane Katrina to growing cities like Houston.
Interestingly, their standard of living ended up rising significantly just as a consequence of the move — even though they were forced to do it by disastrous circumstances. It turned out to be a positive move, but they would never have undertaken it if they hadn’t been forced to by a natural disaster. As Gladwell points out, it gave “them a chance to rethink what they do.” But more importantly, it gave them a new network-geographic context. New network forces. New resources, ideas, jobs, and commonly accepted standards.
It could be that this dependence on location-based networks is changing thanks to the internet and telecommunications in general, since it’s now easier to maintain and form networks in spite of geographical distance. But we’re just 25 years into the digital world, and that process will take 50-75 more years to play out.
In the startup industry, digital tools like Signal and The Company Brief open up access to knowledge and communication formerly only available to people living in Silicon Valley for many years.
Some people are able to use the internet to find, build, and maintain human networks — usually around a niche or interest like gaming, cars, or fashion. For most, the Internet simply reinforces or super-imposes upon the networks they build in real life. For everyone who doesn’t do most of their networking online, physical location matters.
The network math of cities underlies their attractiveness, and helps explain why the planet is rapidly urbanizing. In short, because of a city’s network properties, as it gets bigger, it gives its citizens 15% more of what they want in terms of income, ideas, speed, and stimulation, and it costs 15% less to give it to them in the form of roads, electricity, water, gas lines, gas stations and safety services. That 30% gap is significant and is driven by a city’s network effects.
The higher rate of social interactions in a city has important consequences for your ongoing network topology. Larger cities mean more access to network clusters, leading to a greater diversity of talent, ideas, and backgrounds versus smaller cities. It also means meeting new people will be easier, but forging strong bonds could possibly be harder.
With all this in mind, when deciding where to live, here are some questions to ask yourself:
Are the people in this city like me? Each city has a vibe that may or may not fit with you. Each city calls ambitious people to improve in some area. NYC calls you to earn more money. Seattle and Portland call you to recreate more. DC calls you to be more connected. SF calls you to create more, invent more. It’s the garage where the crazy uncle is inventing crazy inventions. If you can find a city that drives you in the way you want to be driven, then you’re in luck and you should settle down and build your network and your life with your people. If one city doesn’t call to you, find a sub-network of people that call to you in a city you don’t mind.
How long can you see yourself staying there? The networks you build when living somewhere atrophy when you move somewhere else. Your networks are a form of wealth, and every time you move, you’re resetting your bank account.
How important is your career to you? Because GDP scales nonlinearly with population size in cities, your career earnings will grow faster in a city than elsewhere. More importantly, the opportunity to build out your professional network and meet top talent in your industry will be higher in bigger cities.
How much do you enjoy a fast pace of life? In a big city, everything moves faster. People walk faster, opportunities arise more frequently, you meet new people and encounter new ideas more often. It’s all an inevitable consequence of greater network size and density.
How much do you enjoy or value meeting new people? If you are looking to build out the middle and outer layers of your network hierarchy, cities are a great place to do it.
Are the core parts of your network topology filled in? Do you have close relationships that you’re happy with and can rely on? If not, a smaller city may be a better place for you than a big one.
Crossroad #7 – Reassessments
At any point, you can choose to reassess the course you’re on.
The network gravity has been building up since your birth and gets stronger over time. Each network adding and integrating with the others, changing the math on your dashboard until it’s near destiny. But you can decide to ignore that network math and forcibly make a change. This actually gets easier for older people who are done with their “shoulds.” When they’ve raised their kids, built their careers, earned some money. That’s why you see mid-life crises. The network force has been guiding someone for their whole lives, and then it stops exerting so much pressure and the person can consider their own innate interests and agency.
The most lasting and effective way to change your life is to change who you’re surrounded by. Since networks so powerfully shape who we are and what we do, the best way to change ourselves is to change our networks.
This is a big limitation at the way we look at self-development and self-transformation. We think we can just roll out of bed one day, make a few new year’s resolutions, and become a new person. But this approach ignores the biggest part in the equation of who you are and what defines your life — the network force.
This isn’t to absolve us of responsibility for our actions and to shift the blame to others. Rather, it’s to underline the fact that we are powerfully constrained by our network contexts. So the smartest use of energy for those of us looking to make a change can often be to carefully reassess the networks we’re a part of, and find ways to join new ones that are better suited to the life path we want to be on.
On the flip side, if life is going well and you’re happy, understand how important networks are. Double down on your relationships. Cherish the people in your life and be aware of the value of their relationships and the networks you’re a part of.
Our networks are our most valuable resource. They are the way our lives express themselves. Those networks are made up of all the people you care about, the people you, inspire, move, and help to live their best lives.
by James Currier (@JamesCurrier). James is a Managing Partner at NFX, a seed-stage venture firm headquartered in San Francisco.
Most of the discussions around “Founder-Market Fit” tend to focus on the more tangible concept of industry expertise. In my years as a Founder and investor, I’ve found that there’s a lot more to it. We see four dimensions that contribute to Founder-Market Fit:
Let’s break it down.
I often tell Founders “don’t start a company unless you can’t not do it… unless you can’t sleep at night and your brain is exploding with the idea.” Founder-Market Fit means you would choose to work on the idea in your free time. It means you can work effortlessly on your product and customer issues. It’s the kind of thing where you don’t notice the time passing. There’s nothing you’d rather be doing. It’s something you need to see out there in the world, and you’re going to will it into existence.
World-class, iconic companies are almost always founded by Founders with that level of obsession because it equips them to endure for the long haul that it takes to build a company without burning out or losing faith.
If you have this kind of obsession, you become a Founder not because you want to move to Silicon Valley and be an entrepreneur and live the lifestyle but because you are compelled by something deep inside. Something creative that resonates in an inexplicable way with the market.
One sign of this healthy obsession is knowledge.
I’m often surprised and disappointed by otherwise competent Founders who haven’t taken the time to go deep in their market and know everything about former attempts to build similar businesses, their current competitors, and future potential competitors.
Studying a market from a distance is not to be underestimated. Founders should talk to 10-30 practitioners and experts who have done something related to what they are targeting. Founders should create an extensive competitive map, researching and studying everything online about competing companies including failed companies in your market. This helps build a deeper idea maze quickly and more fully.
A lack of such attention to detail typically conveys to me that a Founder doesn’t love their market enough to have real Founder-Market Fit. Founders should be obsessed and go deep enough to clear this bar.
Willful naïveté gives you courage, which is good, but shouldn’t ever be an excuse for superficiality.
If you’re building a company in a market which doesn’t exist yet, it might be harder to study up on others, but not impossible. Every significant company had direct antecedents.
Further, in these cases of brand new markets, Founder-Market Fit may reveal itself in the rich process of mapping out the decision trees and probabilities that Founders anticipate the market might manifest. Mapping this “idea maze” and being able to discuss it succinctly indicates a Founder is sufficiently aligned with their market.
Lack of obsession for — and knowledge of — the market is almost always a bad sign.
2. Founder Story
Customers care a lot more about who the company Founder is than most Founders realize. The Founder has to fit with the market, i.e. the customer, and vice versa. Customers have to identify with the Founder’s story and believe that there’s a compelling “why” inside the Founder — that there’s a human behind the company.
For evidence of how influential founders’ stories can be, note Steve Jobs. Apple customers famously identified with Steve Jobs, his garage story, and his reason for “why.” It defined how the customers related to Apple products on an emotional level. Apple users identified with his story as a creative genius and ascribed similar aspirations to themselves.
Facebook’s acceptability on all college campuses was influenced by Mark Zuckerberg’s origin story as a Harvard student. Like Facebook’s early users, Zuck was simply a college student who wanted to use technology to help improve the thing that matters most to college students — their social lives.
LinkedIn carried more credibility because Reid Hoffman was part of the PayPal mafia as well as high-status Silicon Valley insider.
Imagine a company founded by someone in a suit who’s story was nothing more than “I saw a market opportunity.” The story wouldn’t likely be compelling to users, and the company would be less likely overall to gain traction as a result. A compelling narrative signals to both customers and investors that the Founder has a mission and is in it for the long haul and for the right reasons. This is so true that even though Pierre Omidyar founded eBay because it was a good idea, he and his PR team made up a story about his fiancé collecting Pez dispensers as a way of humanizing the Founder story and the “why” of the company.
Markets tend to attract people with similar personalities. Are you the kind of personality that can fit in and make connections with your peers in your market? If so, it’s a positive indicator. The personality profiles — dress, norms, behaviors, passions, interests, recreational preferences, common lingo — tend to coalesce within clusters of professionals.
Having peers that you can connect with, that can bring positive energy, practical advice, and constructive feedback, is essential. Creative genius does not last long in isolation. Most innovation happens as a result of people forming networks with a high density of ambitious, competent people in a similar field or market. This particular kind of network effect is the main reason why Silicon Valley stubbornly remains the dominant force in tech startups to this day, and why Los Angeles does the same with entertainment.
Another example of how personality can fit with the market or product is Mark Zuckerberg. Time Magazine suggested that Mark was the perfect person to build Facebook because his personality lead him to be desperate to automate human interaction. He was obsessed with it and had unique intuition into the problem due to his personal daily experience. Hard to say, but perhaps that rings true with those who know him best.
As mentioned earlier, experience is often overrated when it comes to Founder-Market Fit. If you look closely you’ll understand a lot of nuance is required to properly evaluate how experience influences Founder-Market Fit.
First, too much experience is not always a good thing. Certainly, we do look for Founders who have enough industry experience that they understand the market. But not so much experience that they don’t have any disruption left in them. At some point, if you stay in a sector too long, you get the curse of too much knowledge, and you stop being able to see fresh or new ways of doing things. The angle for innovation becomes harder.
Ignorance is an opportunity for one out of fifty. Knowledge is an opportunity for one out of five. Too much knowledge is a blocker to innovation.
Second, the type of business you’re building matters. There’s a difference between the optimal amount of experience in B2B vs. B2C vs. bio/health.
We know from our own experience that the typical way to invest in B2B/enterprise is to find people who did it before and are doing it again in the same space. Experience is more important in the B2B space, where the complexity of the industry raises the threshold of how much domain knowledge a Founder needs before they’re going to get it right. The more regulated and enterprise-facing the space is, the more you need a ton of experience and credibility to have a shot.
It’s skewed even further in healthcare and biotech, where closer to 80% of founding CEOs have directly relevant experience.
Experience seems to matter the least in consumer.
This disruption/experience curve isn’t definitive, it’s just a guide towards how to think about it. As with any general framework, there are exceptions.
Third, a further insight that few talk about is the difference required by the CEO and a VP of Sales / CMO / CTO or whoever is second in command. We’ve noticed that the number two ranked person at a startup tends to be technical, but industry experience is less important for them as it is for the Founder/CEO.
As a Founder, if you don’t fit neatly into any of these frameworks, it doesn’t mean you don’t have Founder-Market Fit. It’s just one out of multiple indicators. There is usually a correlation, but not always.
The benefits of Founder-Market Fit
Having Founder-Market Fit improves your chances of building a transformative company:
You have a higher chance of getting a critical insight
It keeps you 100% focused on the problem with an obsessive, almost maniacal commitment because it resonates so deeply.
You’ll resonate with other people in the sector you’re in, and the more people you have on your side, both in the company and in related companies, the greater your chance of success
You will actually be able to pull off nuances in the product experience and product language that make your product best-in-class.
What investors look for
As a seed-stage investor, we look at many things when evaluating whether to invest in a company. See the Ladder of Proof for an overview or NFX Managing Partner Gigi Levy-Weiss on How VCs See Your KPIs for a breakdown of how we look at traction metrics. But the quality of the founding team is paramount.
With Founders, we look for speed, grit, intelligence, and yes, Founder-Market Fit as we’ve broadly defined.
Ask yourself if you have Founder-Market Fit. It allows you to see yourself from an outside point of view and form a realistic estimate about how you will do in terms of having a real disruptive insight, executing on that insight, and raising capital.
by James Currier (@JamesCurrier). James is a Managing Partner at NFX, a seed-stage venture firm headquartered in San Francisco.
While network effects are often referred to as a singular phenomenon, we’ve done a lot of work to dispel this myth. In 2017 we published the NFX Manual where we laid out 13 different types of network effects we had identified over the prior 15 years. At the time, we said there were “13 and counting”, knowing that more would show up as we work with 100s of businesses with network effects.
Today, we’re sharing the newest network effect we’ve identified: a 14th type that we call Expertise Network Effects (nfx).
Products which can develop “expertise” network effects are typically tools used by professionals to do their job — the instruments with which they ply their craft. As professionals become more skilled in their jobs, they also level up their expertise in tools required to do their jobs. If the tools are sophisticated enough, the tools require particular expertise of their own.
Employers often require proficiency in such tools when hiring, and so professionals have a strong incentive to develop expertise in tools with wide adoption that they can list on their resume and use as selling points on the labor market.
Companies likewise become more likely to employ the tools with the widest adoption by professionals because a) they want their employees to be able to interface to other companies in the industry, and b) they want to be able to attract the top talent who likely will want to use the most popular tool, and c) they know they can more easily replace the professional with someone else trained on the most popular tool.
And this is where the network effects kick in — for every new person in the labor market that develops expertise in a given product, the more valuable that product becomes to all players using or integrating that tool; i.e. all the other skilled users of the product (see the Appendix at the end of the article for a more detailed explanation of the mechanics of this network effect).
Here are some examples of industries and products where you see strong expertise nfx:
Accounting Software (Quickbooks)
CRMs (Salesforce, Hubspot)
Analytics (Google Analytics, MixPanel)
Computer Languages (Python, React)
Spreadsheets (Microsoft Excel)
Architecture (Revit, Autocad)
CMS platforms (WordPress)
Design software (Adobe, Figma, Invision)
Video editing (Adobe, Final Cut, Avid)
Mechanical Engineering (SolidWorks, CAD, Avid)
The two key distinctions of expertise nfx from other types of nfx is that a) they arise from the know-how required of a person to use a particular tool and b) the value transfer mechanism takes place through labor markets.
Expertise nfx can be seen as a form of individual embedding that aggregates into a network effect because the switching costs compound as a function of the collective effort it would take the entire industry to learn a new standard tool or protocol.
It follows that the strength of any tool’s expertise network effect grows as a tool reaches a critical mass point in the labor market and becomes the industry standard. You wouldn’t be wrong to point out that when becoming an industry standard, an expertise nfx has the flavor of protocol nfx.
It’s also true that the strength of a tool’s expertise nfx scales with the level of product-specific expertise required to use it. Sometimes called “groove in,” the more effort to learn a tool, the more resistance there can be to switch to an alternative. This helps to prevent multi-tenanting where an employee could use two tools equally well.
For example, if you spend months learning how to use Excel with its various shortcuts and interfaces, you’re likely to resist switching over to an alternative tool like Numbers. You’ve already developed a level of comfort and know-how that won’t all translate.
Our recognition of expertise nfx began during a conversation I had with Intuit Founder Scott Cook two years ago in Palo Alto. We were discussing different nfx and feedback loops to explore if there were ideas that could be used within Intuit, and he described how bookkeepers using Quickbooks as their system were more likely to get clients because other bookkeepers were also using Quickbooks. I came to realize that the phenomenon he was describing was a whole new type of network effect that didn’t fit into the 13 types we’d already identified.
The implication of expertise nfx for Founders is perhaps hidden— if you’re a Founder competing with a professional tool like QuickBooks or Salesforce, you have to realize you’re not just competing with the direct product utility. You’re also competing with the ease of hiring people proficient in the industry standard — hiring managers who know to look for bookkeepers that know Quickbook, for example — versus your alternative with a smaller number of users.
With professional tools, you typically see the labor market coalesce around the industry standard. Salespeople are trained to use Salesforce, so even if you make a much better or easier-to-user alternative, you’re competing against the switching costs of learning something new compounded across the entire labor pool.
So even if your product is 10x better or easier to use, it won’t necessarily matter if it’s too different from the industry standard and requires too much additional time and effort to learn. This is why you often see professional tools cloning or mirroring features of the industry standard. Numbers and Google Sheets, for example, are a pretty close ripoff of Excel. They are still finding it difficult to displace Excel because of the strong expertise nfx Excel has accrued over the years.
It’s interesting to note that if you’re a Founder building a professional tool in a category with no clear incumbents, making your product easier to use will make it easier to spread but perhaps less defensible in the end. The easier it is to learn how to use one tool, and the more skill with your product translates to others, the lower the costs are to switching to an alternative.
If you’re a Founder building a tool for professionals, ask yourself which side you’re on. Are you competing against an industry standard with an expertise network effect, or are you operating in a white-space category?
If you are competing against an industry standard, have you done everything you can to minimize the switching costs, or find new use cases in order to avoid or complement the incumbent? If you’re in a white space, have you done all you can to foster expertise nfx in the labor market and between companies?
Expertise nfx can be a powerful foe or ally.
Appendix: the mechanics of expertise nfx
Expertise nfx are one of the more complicated types we’ve written about in terms of the underlying mechanism, so we’ve added this appendix to explain how they work at a more technical level.
Expertise nfx are 2-sided, so the cross-side network effects of increased supply (the experts) makes the product more valuable for employers or product-builders (demand) because they’ll have an easier time hiring different professionals who are skilled in the use of the same tools.
The indirectsame-side network effects for supply come into play when, as demand for the expertise in a tool grows, all the existing experts in the tool gain more value from their expertise in that particular tool. In addition, there are also direct same-side network effects because professionals can exchange information and work together more easily if they’re using a standard tool.
This fulfills the purest definition of a network effect — showing how a product with expertise nfx grows in value as the network of users grows. As with other 2-sided network effects, there are multiple types of network effects — indirect and direct, cross-side and same-side, operating together all at once.
The expertise network itself is similar to a marketplace in structure. It consists of experts as supply-side nodes, product builders and end-users as demand-side nodes, and the tool itself as a common link between the two sides of the network.
However, the expertise network effect looks more like protocol nfx than 2-sided marketplace nfx. Just as the ethernet standard became the dominant protocol after it had reached a critical mass of adoption by early local computer networks, so too a product with expertise nfx will become the dominant industry standard when it reaches a critical mass of adoption by professionals. And it will be difficult to replace for the same reasons it is hard to replace a protocol (like fax, which is still in use) — the switching costs are too high.
The success of such an adoption strategy is often less about technology and more about marketing, social engineering, and choice of market niche. That’s why VHS beat Betamax, even though Betamax was arguably a better standard.
Similarly, products with expertise nfx and wide enough adoption will have an advantage over technically more advanced products with less users. Once a standard is established, a technically “better” alternative rarely sees much traction.