Ali Tamaseb is a partner in a successful venture capital firm in San Francisco (DCVC). He has spent over four years collecting and analyzing more than 30,000 data points on startups, and has also conducted 15 case studies, interviewing players involved in such startups. The aim of his work is to be better able to understand what characterizes successful startups. The author’s goal is thus to come up with a list of critical success factors for what characterizes those startups that have grown to have more than a billion dollars in sales. Examples of what tends to drive such successes might be for startups to offer highly differentiated products, and for founders to have a solid education. Whether to be first to market or not does not seem to matter.
The book falls into three parts. Part one discusses the characteristics of successful founders: backgrounds, education and experience. Part two covers the startup company itself, including its products, the market, competition and timing issues. Part three discusses various aspects of fundraising, which is, of course, a very critical issue in order to achieve success.
Several myths about what constitute successful founders are debunked. Age does not matter, nor whether a founder is operating solo or whether there are several co-founders. Whether a founder’s background is technical or commercial does also not seem to matter. But to have experience from earlier startup does seem to be a great plus. Similarly, to know a lot about the business where the startup is operating is key, i.e., to know what one is talking about! And to be able to attract good talent is equally critical, i.e., to be able to create a strong, hustling team.
Most successful founders seem to have university degrees. College dropouts are typically rare, but there are indeed success examples here too, such as Bill Gates or Mark Zuckerberg. In general, successful founders tend to come from top-ranked schools, with Stanford in the lead, perhaps also because of its location in Silicon Valley. It all seems to translate into the critical importance of having strong credibility.
When it comes to having relevant work experience this seems to be particularly important for entrepreneurs operating in health/bio-tech businesses, but less so if in consumer businesses. An ability to effectively handle computers seems critical.
It is essential for a successful founder to be a strong communicator, as well as to be an effective networker. The ability to raise necessary funding is typically a function of this.
Beyond this, what seems to characterize so-called super founders? An almost obsessive propensity to build, even tinker, and to plan, so that “the billion-dollar business idea” pivots into something that solves real world problems seems paramount. A key aspect here is an ability to scale, to move fast! And to be willing and ready to work hard is, of course, a given.
The author now shifts to analyze specific ventures, especially what it might take to come up with good timing in the markets where the startup firm operates, how to handle competition, as well as the creation of defensible positions. A fundamental starting point seems to be ready to conduct a careful, rigorous analysis of one’s business. To be able to identify how to enhance speed seems to particularly matter.
To be effective when it comes to experimenting “trial an error” seems to be key, so-called pivoting. To have no emotions at stake is a precondition for effective pivoting. And to be relatively small appears to be an advantage. The aim would be to pivot it all into something that works, and fast! And so-called “pain killer” products seem to work better than so-called “vitamin pill” products, i.e., solving problems that customers might be faced with.
It seems to be better to focus on big, existing markets where one might aim at capturing a growing market share, rather than to try to create a new market. Many business ideas have been tried before. To be the first may not be optimal, but rather to be as close as possible to an inflection point. Timing is all!
To have competitors is not only the norm but might also even be good. This might lead to more focus, so as to explore weaknesses when it comes to competitors, to enable a driving down of costs and/or enhancing product quality. To develop a more defensible business might come out of this, above all having better engineering capabilities, as well as creating network effects (you become stronger as you grow!) and brand building. Patent protection, i.e., creation of intellectual properties may also be important.
In summary, successful startups seem to entail early pivoting to find product-market fit, developing “pain killer” products aimed at helping one’s customers to save time and money. Hopefully this product might be highly differentiated. And to compete for market share in already established markets seems to be the way to go, rather than to attempt to create a new market. To develop a defensible position is of course also key, to protect oneself from competition.
The third part of the book deals with fundraising for startups that hopefully by now been conceptualized (part two), under the leadership of effective founders (part one). The dynamics seem to be important here, namely, to start out with the little amount of capital that one might scrape together, so called bootstrapping, while one is developing a viable business concept. Venture capital from outside sources may then relatively easily be found later on. Rapid growth might thereby be financed. And a sequence of initially bootstrapping for then later to find venture capital also tends to cause less dilution of a founder’s ownership share than if he/she might have attempted to try to attract venture capital from outside at an earlier stage. And with too much dilution a founder might easily start feeling that he/she in essence could now almost be working for the venture capitalists!
What about impacts from the state of the economy? How do funding issues differ when there is a bull market versus a bear market? It goes without saying that fundraising tends to be easier when the market is strong. A firm’s valuation can be set much higher then, and to take one’s firm public, through an initial public offering (IPO) can more easily be done. Even to sell one’s firm might become easier, enjoying a good price!
But recessions might also have positives. First of all, valuations may be lower, opening up for venture capital to secure larger ownership shares to their investments. And for a firm itself it may be relatively easier to hire good talent. The firm’s business concept must be strong and realistic, however, in order to be able to secure new venture capital.
Typically, it is of course relatively easier to raise whatever capital might be needed when a business is capital light. Various service businesses, without manufacturing and inventories, and with distribution drawing on the internet might fall into this category. Software companies have very high margins also! It is well known however that to finance a startup in next rounds can often be hard, especially if the firm’s performance is not as high as perhaps promised. (The “Death Valley” challenge!).
There are many so-called accelerator or incubator programs available, to support startups. Accelerators will typically support startups with the knowledge and funding to accelerate customer acquisitions, i.e., to grow faster. Incubators are normally longer term in focus, providing knowledge and funding for products and idea development, i.e., pivoting. First time founders in particular may benefit from these forms of support.
So-called angel investors typically provide much of the funding that come with accelerator and incubator programs. Angel investors must themselves have a portfolio of early startups where they have taken a stake. Many angel investors evolve into leaders of venture capital funds later on, leveraging their expertise to assess startups by being able to draw on funding from several other investors, in addition to their own funds.
Venture capital funds may be looking for different types of characteristics in the firms where they are investing. But a common factor for most venture funds is to assess the quality of the particular management team in a given firm. Important additional factors might be the fit with the field (medical, for instance), as well as the strength of a firm’s products and technology. And the “proposer” of a company is likely to matter. “Why is this firm growing?”, “why is this company going to be an important part of the future in ten years?”. Venture companies tend to prefer to invest in strengths, not focusing on lists of weaknesses. They do not necessarily focus a lot on valuations. For them, the upside potential tends to be the key.
Fundraising abilities are in many ways an “acid test” regarding the viability of a startup. Successful startups tend to have found it relatively easier to raise funds through farly larger first rounds. A simple, well-formulated pitch by the founder of the firm is crucial and being able to change one’s thinking along the way.
The author offers a set of critical issues regarding what might be particularly important to keep in mind when it comes to achieving success, among which the following six seem to stand out:
Speed of learning is key, particularly when it comes to successful pivoting. To listen to the market is also a major issue.
To develop “pain killer” products/offerings seems important.
These products/offerings should be differentiated.
To be close to the “take off” point is significant.
It is critical to go for so-called network effects, i.e., to become stronger as one grows.
To get started ASAP, to build experience.
All in all, this reviewer finds the books to be very useful. The combination of large data analysis and insightful interviews, all done by a highly competent researcher/author has led to an exceptionally insightful book. A must read!
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