What Start-Up Founders Should Learn From The World’s Best Poker Player

A Story About The Power Of Peer-to-Peer Learning

By: Feliks Eyser and Fedor Holz | May 9, 2019
Article originally posted on Medium

The Las Vegas sun usually glares brightly in July, but the casino playing

room is so dimly lit that only the poker table and the two remaining players are visible. When the dealer flips the turn card, it takes only a split second for Fedor Holz’ lightning-fast mind to realize what has happened. Holding a 7 and 8 of clubs in his hand, he hits a flush. That makes him the winner of the “Super High Roller” tournament in the World Series of Poker earning him 4.9 million USD in winnings. On top of that, the title makes him the highest ranking poker player in the world at the time. Fedor is 22 years old at the time.

Flashback to five years earlier. Fedor is an unimposing teenager, struggling at university. Below-average grades and lack of purpose make him drop out to travel the world. He plays a little poker on the side, but his results are underwhelming.

From Drop-out to World Champion

To understand this incredible transformation from unimpressive college drop- out to multi-millionaire world champion, our journey takes us to an unusual place in Canada.

Illustrations by Ariane Frida Sofie

Cherry Island is a private island, located 2 hours north of Toronto. After the boat drops you off and disappears, you don’t hear a sound apart from light breezes streaming through the trees and distant ripples from a waterfall. Right at the shore, you’ll hardly spot a luxurious cottage. It’s the only house on the entire island.

Fedor has invited a group of eight ambitious but unknown poker players to the island. He met them online and selected the ones he thought would best fit his mission: To learn from each other and improve their skills together. All the participants are skilled in different aspects of poker and willing to share their experiences, but none of them have had any significant success in poker yet.

The group spends four weeks on Cherry Island. They play, and play, and play. Thousands of online tournaments against other players. Hundreds of thousands of hands. Everyone is pushing their limits. When Fedor wakes up at 6 am, someone is already playing. When he goes to bed at 2 am, somebody else is still at it. The group lives and breathes poker. Sitting in the jacuzzi or at the dinner table, they discuss their games with the rest of the crew. In a constant stream of thousands of conversations, they learn from each other, sometimes discussing one single hand and sometimes taking apart game strategies or mathematical models. Eight intelligent perspectives merge into one combined steep learning curve for the group.

Four weeks later, something impressive had happened. Between them, the players had won almost 1 million USD, a number far higher than their wildest expectations. Even more remarkable: Less than three years after the retreat, nearly every participant of the “Cherry Island group” has reached the top 100 (or 0.0002%) in poker globally, with Fedor reaching number one in 2016. The combined cash winnings of the group today exceed more than 100 million USD.

It’s hard to believe that this is a coincidence. The story of Cherry Island is one of the best examples of the power of peer-to-peer learning and structured improvements through group reflection.

From Poker to Start-Up-Land

I first met Fedor when I asked him to speak for a small group of ambitious entrepreneurs in Frankfurt, Germany. Sitting in a bar between old whiskey

bottles and chesterfield sofas we discussed the similarities of poker and entrepreneurship.

Both disciplines can seem lonely. In poker, it’s every player for themselves. In entrepreneurship, you might have a co-founder or two, but in the end, the CEO-role can still feel solitary. “It’s lonely at the top,” they say. Success in start-up-land is a matter of countless decisions under high uncertainty, just like in poker. On top of that, you start to get biased and emotionally attached once you start playing. It’s impossible to observe your company from the outside once you’re working in it.

“It’s lonely at the top.”- anonymous first-time founder

That’s why — like in poker — in entrepreneurship, it’s so important to assemble a strong support team: By learning from each other’s perspectives and experiences you’ll personally grow much faster. Your personal growth will be the foundation of your start-up’s growth.

My Start-Up Support Team

When I scaled my marketing company Regio Helden from zero to over 300 employees, tens of millions in revenue, and ultimately exited it, I could also rely on the experiences and perspectives of eight great minds, almost working together as one.

I remember our first meeting like it was yesterday. Eight sleep deprived and ambitious internet entrepreneurs are sitting at a rickety IKEA table in a small meeting room in Berlin Mitte. The carpet is dark blue and covered with stains, but we couldn’t care less. Albert, the host of the meeting, is more concerned with the monthly growth of his e-commerce sales, than with office furniture. We’re meeting at night because we work all day. It’s hard to stay concentrated, but our thirst for knowledge (and supply of caffeine) keep us going. After Stephan shares an in-depth look into the latest growth hack for his online education product, I talk about the structural challenges of my sales organization. We go around the table and one after the other share our experiences on the topics. We challenge what we hear and offer our own perspectives. Like on Cherry Island, every member has different skills that they bring to the group. We talk for hours and share the most confidential insights. After an intense meeting, everyone goes to sleep a little bit smarter.

We keep meeting monthly and start to travel together twice a year for a couple of intense days. Throughout the years, we’ve done the most amazing things together like snowmobiling in Finland, swimming in Iceland’s lagoons, and climbing volcanoes in Italy — all while learning from each other and working on our companies. I always return from the trips with fresh energy, a new set of perspectives, and possibly a solution to my current barrier of growth. Whenever anyone of us faces a challenge like hiring a new head of sales, changing their strategy, or selling their company, they turn to our group first.

Over time, some members dropped out, but we recruited new ones, raising the bar every time. Almost ten years after our first meeting, all the experience sharing has paid dividends. Today, our companies employ thousands of employees and make hundreds of millions in revenue. We’ve come a long way since our first meeting on that cold night in Berlin. All of our members have grown immensely on a personal level.

What Your Support Team Does For You

If I had to compile all the lessons of 12+ years of entrepreneurship into one single piece of advice, it would be this:

As a first-time founder, don’t try to solve every problem yourself. Build a strong support-team of other entrepreneurs to access their experiences and perspectives.

Think of it as your version of The Avengers. Every superhero is talented in their own way, but the true power evolves, once they all come together. If you find the right peers, you’ll benefit from your Avengers support-team in several aspects:

It can give you a different perspective. It might appear to you, that you see the world objectively, but your viewpoint is just a handful of sand on a vast beach of reality. Having different perspectives will lead to more informed and better decisions. When one of our member’s companies was struggling, we figured out, that the situation was excellent to buy out an early investor at a low price. That new perspective turned out to create a lot of wealth for the founder years later!

You’ll gain a new set of experiences. As a first-time founder, you’ll face new challenges and might think they are unique to you. They are not. 99% of your problems have been solved before. Look for best practices and find a person who has done it before. Avoid trial and error whenever possible. It’s slow, painful, and inefficient.

It can give you honest feedback. Who else is going to provide you with that? Probably not your employees, investors, or customers. When one of my guys once told me that I could unintentionally come across as disinterested when discussing business, it surely made me think.

Your team can be your coach in essential situations. In poker, emotional players make mistakes. But it’s tough to stay objective when you’ve been sitting at the final table for six hours. Unfortunately, poker players cannot be coached during a match. But in start-up-land founders can! Selling a company or handling a significant setback can be mentally challenging. Don’t get caught up in these emotions! Use uninvolved eyes to gain a more objective view.

How To Put Together And Make The Most Out Of Your Support-Team

For first-time founders, it’s easy to get lost in the constant pull of the day-to- day business. So, first, make the conscious decision to join or start a group and put in the time and effort.

Pick the right people. Fedor and I tried to surround ourselves with individuals who had great ambition, high potential, as well as a thirst for learning. Try to find founders with aligned values but diverse skills.

Start small. Four to five people are enough in the beginning. Expand later and be very picky.

Start locally. Since physical meetings are crucial, put together a team in your area, if possible. I found the first members of my group through a local chapter of the Entrepreneurs’ Organization and their Accelerator Program, but there are many other options like meet-ups, start-up associations or other local accelerators.

Establish a meeting routine. Try to meet at least once a month for 3–4 hours. Agree on a structured agenda and find a way to make the meetings productive. For my group, it works best when members present a current challenge for 10–15 minutes before everyone contributes their experiences and perspectives in 3–5 minutes each.

Travel together. Intense time together in new surroundings is an amplifier for trust. It also enables more in-depth discussions than in monthly meetings. Remember Cherry Island and the value those four, intense weeks created for the group. The value and enjoyment of group travel are some of the reasons why I created Digital Founders Camps, where 10–12 founders learn from each other in four-day “workations” in places like Mallorca.

Feliks and Fedor at Coachella, April of 2019

Most importantly: Enjoy the ride and have fun. The path of entrepreneurship (and poker) is much more interesting than any goal. Walk it with people whose company you enjoy! If you surround yourself with great people, to learn, grow, support each other, travel and have fun, the journey will be worthwhile, no matter what the result is.

“If you want to go fast, go alone. If you want to go far, go together.” — African proverb

Master the subtle art of pitching perfect

April 4, 2019 | Moonshot

To pitch is to convince, compel, to persuade and sway. It’s a subtle art and one that needs to be mastered if we hope to close an investment round, secure the needed support, or convince whichever audience of whatever worthiness. Moonshot has worked with hundreds of companies to craft convincing pitches, whether it’s for the big stage or the boardroom, and we put together

this list of “truths” for creating stand out pitches that win your audience. It starts with the game plan.

I. Define your play-by-play objectives

Clearly understand and articulate your end goal and then break it down into the play-by-play of getting there. Understand success at each step or each contingency, not simply the end game. You don’t get $10M out of one meeting. And if you do, congratulations, you definitely don’t need to read this article. Getting $10M starts with one meeting, the goal of which is to get to the next meeting to get to the due diligence to get that lead investor closed so you can get to doubling down on all your other prospects who are thrilled to come together and close your round. Framing up the succession of wins that get you to $10 million helps you determine what you present, to whom, and when exactly.

Too many founders are ready to shove the whole burrito down the throats of potential investors in the first email or meeting. One deck does not serve all. You need to send the right version at the right time to the right people. In the first outreach, send just what will create the intrigue you need to get a response. Don’t be overly mysterious but don’t let all your cards show either. The goal is to get in front of the investors or decision-makers first. You don’t do that with 60 slides and an appendix.

Pitching is a subtle art — know your goals and tailor content accordingly. The Cheshire Cat perhaps said it best in that, the way you ought to go depends a good deal on where you want to get to.

II. Do your homework on them

Figure out and communicate why XYZ investor/ supporter/ benefactor matters to you. Why do you want them specifically? Why should they, as smart, successful, busy individuals, give their attention to you? If you don’t have a direct connection or a warm intro, it is essential to do your research. In a cold email or call, demonstrate that you know who they are, what they value, how they invest, who they work with — something that shows you can see them for who they really are and you’ve done some homework. This

immediately sets you apart from the spam, canned email, and the lazier unimaginative people who cram the inboxes of investors with the next greatest idea ever.

With those prerequisites out of the way, you can then really start crafting your pitch — the one you’ll use once you’ve got their attention.

 

III. Be unique, not a template

Don Draper said, “you can’t stand out if you look like everyone else.” Don’t settle for the traditional template. You might be one in a thousand pitches that investor sees each year. There is a standard template approach and trust us, nobody sees it more times than they do. So if you want to cultivate glazed eyes and disinterest, follow suit with the status quo.

Successful companies have a product (something you sell), a market (someone who buys), and a team to orchestrate that opportunity. Investors are obviously looking at these criteria, but they’re also looking for a story. How

you present your story — something they can engage with, something that emotionally moves them in some way — is how you can hook investors into the mission, and the round.

IV. Start by distilling the essentials

Not all templates are bad though and a famously successful one is AirBnB’s first pitch deck. It’s an awesome specimen of brevity and business positioning. Nine content slides! Instead of trying to duplicate AirBnB’s deck though, break down the constituent parts to distill the essential questions you need to answer for your own company. AirBnb covered the baseline material so clearly, concisely, and successfully that the exercise is absolutely worth doing on your own to lay out key pieces that you can then weave into your own story.

Those essentials are:

1. Problem: clearly define it in one strong statement.
2. Solution: clearly articulate it in one strong statement and ensure that it’s

related to the problem in the most poignant angle possible.
3. Market validation: what is the most impressive (and accurate) way of

demonstrating the opportunity you have in your market.
4. Market size: what numbers best show the size of the pie.
5. Product: articulate the simplest, clearest ABC of your product.
6. Business model: in one sentence, how are you going to make money. 7. Market adoption: in a few bullet points, how you will find your

customers.
8. Competition: who are the top players you’re up against? Plot them on

an XY graph with variables that demonstrate the industry ecosystem
9. Competitive advantage: 4–8 bullet points on what really gives you your

edge

V. Craft a compelling narrative

Once you’ve distilled the raw ingredients you can weave them into a potent narrative. A strong story takes the audience on a journey. There are highs and lows, places of tension, suspension, and ultimately closure that drives the

underlying moral or meaning home. Find areas in your story where you can create a little less linearity, more intrigue, and a bit of drama.

This can also be correlated to neuroscience and the attention of your audience. At the start of your pitch, before an investor hears anything, they’re likely dreams of ways of giving you all the money you’re about to ask for. No, they’re more likely in a state of healthy skepticism mixed with some impatience, complacence, distraction, and don’t ever underestimate hunger as a real-time factor. They’re likely comfortably situated in their “croc brains” — our animal brains that have developed over millennia in the domain of survival, instincts and emotions. Our frontal brain, developed much more recently, is in charge of reason, problem-solving, and complex analytical thought. Both are useful, but often work against each other.

As you pitch you have the opportunity to appeal and satitate the croc brain, opening a safe pathway for the prefrontal cortex to engage. Starting a pitch with the big picture and some emotional hooks, will enable you to garner the attention to move them into the prefontal cortex and actually pay attention to and absorb your graphs, diagrams, and financial projections. Don’t start out technical. Be aware of what part of the brain you’re speaking to.

As the founder, when it comes to telling your own story — the personal journey of how you got to this place — make it super brief, no matter how rockstar you are. Figure out a way to communicate what is best and most relevant about you in 90 seconds.

VI. Master eloquence

Eloquence is defined as having or exercising the power of fluent, forceful, and appropriate speech. If you can say it in fifty words, you can say it in fifteen. Be discerning and disciplined to avoid TMI. Information overload is one of the surest, fastest ways of losing your audience. If you can explain what you’re doing to a 10 year old in 10 minutes, you have achieved an amazing degree of self-understanding and succinctness.

VII. Clean & beautiful (but not extravagant) design

Bad design hurts your message and good design will beautifully support your message without getting in the way. You don’t need the most amazing design in the world and if your visual design is stronger than the message, you could come across as having spent unnecessary resources dressing up a half-baked idea. Get the content strong and then go for clean visual design that absolutely supports the message. This is especially true if you’re in seed stage and haven’t invested in or built an identity and brand yet.

VIII. Energy & power dynamics

The final piece in perfecting a pitch is in how you tell it. Somewhere between 70–93% of what gets communicated happens non-verbally. Awareness of the energy you bring, the energy in the room, and who holds the power in any given moment, goes a long way in determining the outcome of the pitch. For example, if you show up with a vibe of neediness, you give the power away. Walk into that room pretending you need nothing from them and notice how the playing field stays more equalized. A vibe of humble confidence goes further than egotistical idealism. The best thing is to show up authentically as if you have nothing to lose (even if you have to pretend) and pitch from your heart.


To really conquer all of the above, an outside objective party can be extremely helpful. Nobody knows your company/product/idea better than you do, but your deeply subjective understanding can get in the way of clearly defining the essence, telling the right story, and in keeping it brief and concise. Seek honest feedback and somebody who can help see things you may be subjectively blind to — find somebody you trust or hire Moonshot. And, remember that a “no” can be valuable feedback — ask why when you get turned down. Pitching perfect takes practice and refinement. Be creative and use your story as a captivating invitation into the future of your dreams and convictions.

StartUP FIU Food Expands North, Launching New P.R.E.P. Program in Partnership with Pro Kitchen Hub

The pathway to recipe development, entrepreneurship, & product creation (P.R.E.P.) will serve the Broward County community.

Miami (May 13th, 2019) – StartUP FIU Food announces a new partnership with Pro Kitchen Hub to launch the P.R.E.P. program. This program was designed to help food entrepreneurs gain the basic understanding of what it takes to manage, grow, and sustain a food business.

The P.R.E.P. membership program offers eleven industry specific courses in finance, marketing, and food science. Members can join the StartUP FIU Food round tables to network and learn more from our industry experts. Members will also have access to the student led labs for assistance in all three areas of concentration. At the end of the year-long membership program, participants will receive a StartUP FIU Food certificate of completion. This certificate will grant members priority admission into StartUP FIU Food’s more advanced programs such as StartUP FIU Food F.E.E.D. or Incubator program.

“Shared commercial kitchen spaces provide local entrepreneurs an amazing opportunity to expand, which is why we are very excited to launch this partnership with Pro Kitchen Hub. StartUP FIU Food will offer consulting, food industry courses, and technical assistance. Collaborating with kitchen incubators such as Pro Kitchen Hub is essential to small businesses in need of support, resources and knowledge. We look forward to expanding our services to the Broward community.”– Anna Etienne, Program Director of StartUP FIU Food

In addition to the P.R.E.P. membership program, Pro Kitchen Hub will offer the finance, marketing, and food technical courses ‘a la carte’ style. These one-off courses allow entrepreneurs to pick & choose the courses that will help them grow & manage their startup food business.

“The partnership between StartUP FIU Food and Pro Kitchen Hub is the missing link in our ability to give ultimate support to our community of food entrepreneurs. Most culinary entrepreneurs have great innovative ideas but need professional supports so they can mitigate the number of mistakes that can prevent their growth in the long run.” – Chef Vicky Colas, Founder of Pro Kitchen Hub.

For more information on P.R.E.P programming at Pro Kitchen Hub, please contact prep@prokitchenhub.com.

 

About StartUP FIU

StartUP FIU is a university-wide initiative to foster innovation and entrepreneurship to pursue opportunities in the Fourth Industrial Revolution. These opportunities include the development of breakthrough technologies, the pursuit of enterprises that close social or environmental gaps and the creation of companies that can create meaningful jobs of the future.

About StartUP FIU Food

StartUP FIU Food is an industry focused incubator that serves local food and beverage business owners. The Chaplin School of Tourism and Hospitality partners with StartUP FIU to bring world-class expertise and practical knowledge about every aspect of the food and beverage industry. The industry focus is complemented with a full range of training in small business management and entrepreneurship.

About Pro Kitchen Hub

Pro Kitchen is a modern concept in commercial shared kitchen space and food business incubator. The 7,430 square feet Pro Kitchen Hub facility is not only a shared-use commercial kitchen, but also a culinary incubator that works directly with food business entrepreneurs to assist them in starting and developing sustainable businesses. This includes helping our members through the state required paperwork and providing them with secure 24/7 access to a commercial licensed kitchen.

Media Contact:
Nicole Valle
305-919-4091
nicvalle@fiu.edu

 

The Psychology of Startup Growth

James Currier is one of Silicon Valley’s foremost experts in growth and network effects. A four-time serial entrepreneur, having founded companies like Tickle (150 million users), Wonderhill Gaming (45 million users), he helped more than 10 companies get to more than 10 million users, including Goodreads and Poshmark. He was a pioneer of user-generated models, viral marketing, A/B testing, crowdsourcing, and other influential growth techniques.

When companies come to me for growth advice, they typically ask:

What’s the one thing I can do tomorrow to get 10 million users? Which channels should I use? Which tactics?”.

It doesn’t work that way. Growth is not a one-time gimmick. To get 1000% growth, there is no silver bullet.

Growth comes from adopting the right psychology. The right mindset. From an approach you bring to your daily work consistently for years. Tactics change and become outdated, but growth is an endless creative endeavor. You have to develop your psychology for that.

We’ve seen that high-performance growth psychology has five hallmarks.

  1. Language first
  2. Empathy for users
  3. Always be moving
  4. Data love
  5. Sustain pain of failure

There are the five mindsets we spend the most time trying to communicate to teams. They seem deceptively simple on the surface. However, once you try to implement them, like many things of real value, they become more complex. We’ve unpacked them in detail below to help you put them into practice.

One more thing. We’ve often heard the general sentiment that all the good growth ideas have been tried, but we think otherwise. We firmly believe there are 10x more growth opportunities out there waiting to be discovered than have already been tried which could be used to build industry-defining companies.

You just need the right Founder psychology to get there.

1. Language first

One of the more common mistakes we see is that companies build features first and then “put language on it.”

This is backward. Language should come first.

The exact language you choose to describe your product and company tells you what you’re doing, and it tells your user what to expect. Your language defines you. It tells users how you are relevant to their life.

“Ridesharing marketplace?” Not relevant to me. “Get a ride in 4 minutes or less?” Ok, now you have my attention. If your button says “share your photos”, the feature is going to be different from “store your photos” and you have to build two different things.

Your language can be a growth multiplier or inhibitor— starting with your company name.

Few realize it, but language comes first in growth.

2. Empathy for users

The typical “good” Founder spends their whole day thinking about their product. They want their product to be noticed and loved by the user, to be useful and delightful for the user.

But thinking about your product is not the same thing as thinking about your user — although it’s easy to conflate the two.

The great Founder spends more time thinking about how the user thinks and feels. About their psychology.

Here’s the reality. Your user has a big, complex life and you are fighting to be a tiny sliver of it. They have their job, their family, their apartment, their friends, their car, their sick mom, their dog, their insurance, their debt, the next holiday that’s coming up, their kids, the kids’ schools, their smartphone with 100 apps, etc.

You are somewhere buried in there. In your world, your product is everything. 12 hours per day, 6 days a week. In theirs, your product is just a tiny sliver (at best — if you’re great).

So the question you have to ask every day is “What is your product to them so that it deserves a place in their complex lives?”

Your answer should reflect the observation that behind every interesting tech company, there’s a powerful insight about human psychology. An insight that makes that sliver stand out to their users.

For example:

  • Facebook’s insight was the human need for acclaim and social reputation: “See me perform”
  • Snapchat capitalized on the desire for privacy (even secrecy) and ephemerality: “I’m sick of performing”.
  • Instagram tapped into the hunger for glamor and appearance. Statuary and portraiture for the internet age: “See my good side.”
  • Etsy allows people to buy and sell small-scale craft goods in a time of mass commercialization. “I want to feel unique”
  • WeWork tapped into the desire for community in a rising gig and remote work economy with increasing social atomization: “I want to belong.”

Understand your user psychology — know what you are to them — and your way to 1000% growth will become much clearer.

3. Always be moving

Go back 85 million years ago. Who was the dominant life form on the planet?

Dinosaurs. They were huge. They were on top of the food chain. They were the giants that ruled the earth.

Dinosaur companies vs. startups


But they weren’t alone. Scurrying in the underbrush you had a tiny, shrew-like creature — the ancestor of modern mammals. A quivering, overlooked nobody who lived in terror of colossal predators. The shrew had no advantages against the dinosaurs except one…

…it moved constantly. Every minute of the day, even in its sleep, it kept moving.

Then an asteroid came, and everything changed. The climate was radically disrupted. Survival competition took on new dimensions. Ultimately, the shrew won out. Why? Because its small size and speed prove to be advantageous in times of rapid change, while the dinosaurs, victims of their own dominance, lumbered to extinction. Their huge size became their greatest weakness.

The shrew should be the totem of great Founders. Startups today should be familiar with its story and adopt its mindset. As Andy Grove said, “Only the paranoid survive.” You, too, inhabit a world dominated by giants. You, too, have no advantages, except one: speed.

Move constantly. Make more moves than anyone else. To grow, you have to run quicker experiments. Iterate faster. Never stop. This requires the shrew psychology.

4. Data Love

If you want to grow, you have to be committed to measuring everything. You must test, measure, and iterate. That’s the engine that powers growth.

Data can’t be an afterthought. “Data-driven” can’t be a buzzword. You have to truly commit to it. Devote significant engineering resources to measurement. Even up to half of your engineering resources.

You have to love your data. That has to be your psychology. Your daily stats email should be a core part of your culture and outstanding enough that everyone at your company can be proud of it.

When I go and look at startups, I want to see everybody looking at triangle retention charts. I want to see the stats dashboard displayed on a big screen on the wall of your office in full view of everyone.  Seeing that means that Founder took the time and effort out of his weekend to go out and get a TV and hall it up and deal with the wiring and the mounting and all the other headaches of getting it set up. It’s a sign that the Founder really loves their data.

5. Sustain pain of failure

Iterating relentlessly is the next part of the growth engine, and it’s much easier said than done.  It means that in your psychology, you have to learn to sustain the pain of failure.

You’re going to fail daily. Most of the things you put time and effort into will come back negative. Most new tactics aren’t going to work.

You’ve got to be able to mentally move on from the losses. And so do each of the members of your team. It’s the system, it’s the growth psychology that can’t fail.

There’s a great quote: “Success is going from failure to failure with no loss of enthusiasm.” That’s the psychology you need to embrace in order to grow 1000%. Such improvements don’t come easy. You need the grit and grind that lets you keep going past when others give up.

Putting it to work

The Founders — and the CEO in particular — need to have the psychology described above. But how can you implement the principles of growth psychology with a team of 6 or more people?

These five steps will go a long way:

  1. The CEO must teach this mentality to the team, particularly the willingness to sustain repeated small failures.
  2. Employees must be told that they’re directly responsible for growth as part of their job, even if their title says something else like Product, Engineering, or Marketing. Everyone is on the growth team in this sense, especially the CEO.
  3. CEO must give their team clear authority to change product and allocate human resources in pursuit of breakthrough growth.
  4. The team should be more aggressive in pushing the boundaries of growth than the CEO. If you’re in a growth position and the CEO is pushing you to run more experiments instead of vice versa, you’re in the wrong job.
  5. You have to keep taking big swings. 10% growth per month is OK, but once you’re there, there’s probably a way to grow 40% per month. Finding 40% growth, or even 1000% growth, requires creativity and stepping outside your own box. As our friend Andy Johns pointed out in a recent conversation with Pete Flint, over-reliance on low-risk A/B testing and optimization will not get you to 1000% growth.

Growth is ultimately a company-wide effort, but the quality of that effort comes from the psychology of the CEO. Through a thousand small actions every day, Founders imprint their psychology on their startup.

Because of this, a well-cultivated growth psychology has ripple effects for the future success of your company. It’s the difference between a startup plagued by slow growth and a startup empowered by data visibility, constant movement and big plays for 1000% growth. If you’re in the second camp, come talk to us.

Viewing Valuation as a Discount of Future Future Value

Why does growth rate matter so much? Why does growth rate influence valuation so much? I was reading a book recently written by a hedge fund manager who discussed valuation frameworks. His explanation was one of the best I’ve come across.

If your business is growing at 100% next year, then 90% the year after, and then about 80% the year after, the business will have grown 6.9x. That’s the way I’ve always looked at company.

But this hedge fund investor said it a different way: 85% of the value of the business will be created in the next 3 years. At 10% growth, the company’s value today is 77% of the value in three years. The value won’t change that much. It’s already the most of the size it will be.

Same cup, same water, just a different perspective.

The chart above shows how this changes with different growth rates. It assumes a company starts growing at the growth rate on the y-axis. This growth rate falls 10% each year. On the x-axis, you can see the fraction of the enterprise value (EV) that will be created in the next 3 years.

Instead of looking at today’s valuations as a multiple of current revenues, we can think about it as a discount to the future value. This math makes that perspective concrete.

State of the cloud 2019

BY: BYRON DEETER, KRISTINA SHEN, AND ANNA KHAN

A decade ago there weren’t any private cloud companies valued at $1 billion. Today, there are 55 private cloud unicorns. If we include the additional 44 public cloud companies, there are 99 cloud players valued over $1 billion. What’s truly remarkable about the cloud ecosystem isn’t just the sheer size of the market, but also its interdependence.

When a cloud company scales it often signals the growth of others, but there are a number of other signals to the cloud sector’s velocity. For example, this year, the demand for cloud shares and cloud liquidity hit record highs, outpacing 2015, which was the last record-breaking year.

The demand for cloud shares and cloud liquidity hit record highs, outpacing 2015, which was the last record-breaking year.

With IBM’s purchase of Red Hat ($33B), Microsoft’s acquisition of GitHub ($7.5B), and SendGrid joining forces with Twilio ($2.9B), there was more than $90 billion spent in large mergers and acquisitions. More than $50 billion was also added to the market cap through cloud IPOs, including DocuSign, Dropbox, Elastic, and Carbon Black.

For more than a decade, we’ve had the longest bull run in U.S. history. At $175 billion, the top 100 private cloud companies have never been worth more. At this point, many founders are probably wondering how they can protect their companies from volatility.

The longest bull run in U.S. history.

While uncertain times are still ahead, cloud founders don’t have to thwart their aspirations of growth. Developing a new level of operational rigor by following the G.R.I.T. framework is one way for founders to understand their growth and build an enduring business along the way.

Operate with G.R.I.T.

Operational rigor is what separates early stage companies from the most influential cloud leaders. But take comfort in the fact that it’s possible: Twilio’s Jeff Lawson and Shopify’s Tobias Lütke are just two examples of the many first-time founders who were running cloud businesses during and post-recession.

At Bessemer, we recommend cloud founders operate on G.R.I.T.— a critical set of metrics that resilient, enduring cloud companies use as yardsticks of success.

Growth (ARR)

The first operational metric is annualized recurring revenue (ARR) growth. While companies such as Slack, Twilio, Shopify, and more are all considered successful in their own right, each one had their own path to earning its first $100 million in ARR.

Years from $1 million to $100 million

Here’s a breakdown on how long it took for companies to go from $1 million to $100 million AAR:

Years it took for companies to go from $1 million to $100 million AAR

  • The top 25 percentile of public cloud companies spends 5.3 years on average to reach the $100 million milestone.
  • The median 50 percentile spends 7.3 years to reach $100 million in ARR.
  • The bottom 25 percentile spends 10.6 years to reach $100 million in ARR.

If you want to build the next big cloud company, here’s our Good, Better, Best framework for ARR. A cloud founder should aim for one of these timeframes:

Bessemer Growth Benchmark

  • Good: Cloud companies operating on “good” ARR growth models earn the first $10 million in four years, and reach $100 million ARR in ten years. (e.g. Cornerstone On Demand)
  • Better: Those that are better positioned earn the first $10 million ARR in three years, and reach $100 million ARR in seven years. (e.g. Shopify)
  • Best: The best performing cloud companies reach $10 million ARR in two years and reach $100 million ARR in five years. (e.g. Twilio, ServiceNow)

Enduring companies don’t just have contingency plans for when a recession hits. They set these goals and figure out how to achieve them based on the expectation that there will eventually be changes in the market.

Retention is your best friend

Retention, the amount of revenue accrued over a period of time, including upsells, is one of the most influential levers for cloud and SaaS businesses to pull when growing ARR. Some of the best performing SaaS businesses we’ve seen in the past decade have higher than 100 percent net retention rate because they’ve built a metered business that sells more to a customer as its business scales.

However, retention rates have different meanings depending on customer segments.

Here are the retention benchmarks a cloud company should aim for, by customer segment:

Retention for different customer segments.

  • SMB customers that have an average account contract value less than $12K see a gross retention rate between 70-80 percent and net retention rates between 80-100 percent.
  • Mid-market companies that have an average account contract value between $12-50K should aim for a gross retention rate between 80-90 percent and net retention between 90-120 percent.
  • Enterprise businesses that have an average account contract value $50K+ should aim for more than a 90 percent gross retention rate and more than 100 percent net retention.

Retention is a major driver of valuation.

An additional one percent in net retention can increase valuation by $100 million.

Improving net retention rate has great ROI.

If a company’s retention rate doesn’t fit within these bands, it’s time to investigate the culprit behind the “leaky bucket.” Churn is always a symptom of larger problems. By identifying and addressing the root cause of churn, a company can directly impact top line ARR growth by just retaining its current book of business.

In the bank

For early-stage cloud founders, the cash you have in the bank reigns Queen (or King). Also known as “runway,” cash is the fuel to build your product, acquire new customers, hire employees, and invest in growth opportunities.

Efficiently managing runway is the lifeblood of an early-stage company’s longevity, and it begins with three critical rules:

How to manage your runway.

  • Buffer your budgets for a contingency plan;
  • Target for 18-24 months of runway, at a minimum;
  • Be as judicious as possible when expanding your team.

Hiring is an effective way to grow a business, but it’s also the most expensive. When in doubt, hire slow and release fast when a new team member cannot drive forward the company’s goals. The way cloud founders allocate their runway will ultimately determine their destination.

Targeted spend

Cloud founders must always spend wisely to fuel growth. In 2017, Bessemer created a way to measure wise spending by coining the Bessemer Efficiency Score, which is defined in two ways, depending on the size of the company.

For startups earning less than $30 million ARR, the efficiency score is defined by net new ARR over net burn. In the Good, Better, Best framework when evaluating efficiency, the “best” score for a company at this stage is greater than 1.5x.

Bessemer efficiency score

This metric is different than ARR growth because it measures a company’s spending habits. It’s great if a company grows 3x, but if it’s spending crazy amounts to get there, this rate wouldn’t be considered efficient growth.

In a bull market, startups can get away with less efficient growth by acquiring new customers at a higher cost than necessary. However, this approach reflects a lack of discipline and doesn’t make for resilient companies. The good news is that when you do develop more efficient businesses, they are rewarded in all markets.

How to calculate your score

The G.R.I.T. framework highlights critical metrics when evaluating resiliency. By tracking ARR growth, retention, years of runway, and efficiency, the G.R.I.T. framework also translates into an equation.

Here we illustrate how to turn each metric into a variable and calculate a company’s G.R.I.T. score.

G.R.I.T. framework and equation

Based on Bessemer’s research and the most resilient companies in the industry, we provide another Good, Better, Best benchmark so any cloud founder can see where they fall and how they can improve overtime.

What’s your G.R.I.T. score? Once a cloud founder equates where they land within this framework, they’ll have a clearer idea of where their business can improve, or if it’s time to celebrate (and maintain) a high G.R.I.T. score.

30,000-ft view of The Cloud

Since Bessemer penned the canonical laws of cloud computing more than ten years ago, our investors continue to explore how cloud businesses evolve over time and how these ten laws have aged with time. G.R.I.T. is a new framework for founders to build an enduring cloud business.

A few short years ago, we predicted that the public cloud market would reach $500 billion by 2020. We were happily proven wrong when we hit the mark two years earlier in March of 2018.

Less than a year later, the total cloud market cap sits right around $690 billion. Now, it’s time to set our sights on the next major milestone for the cloud industry, and see how new companies will innovate with emerging technologies.

2019 predictions

Every year at Bessemer, we share our top cloud predictions, which we believe will impact how enduring companies change the way we live, work, and engage with software.

1. Robots to the rescue

State of the cloud prediction: robots to the rescue.

We see “robots” as the change agents of the world. Machine learning and artificial intelligence will be instrumental technology for all the apps, platforms, and services cloud founders are building, particularly in industries where people deal with massive amounts of data like healthcare and agriculture.

Robots are especially exciting when they free up human time to work on value-based thinking rather than automated tasks. We see this particularly in business areas like fraud, customer support, and accounting, with companies, such as ScaleFactor or Ada Support.

2. Product has purse strings

Prediction #2: Product has pursestrings

Product is foundational to any software company– it’s what you build and sell. However, in the past, product teams were not the traditional, target decision-makers and buyers when businesses evaluated software purchases. They had unlimited budget for headcount, but not software. We think this may have been shortsighted.

If product is the center of the organization and touches all areas of the company (sales, marketing, engineering, and customers), there should be platforms that help people manage, measure, and build the designs, plans, and roadmaps behind products.

We’ve seen entrepreneurs realize this gap and build exciting tools, like Gainsight. There are many more solutions to come since product-centricity gives teams a deeper understanding of every aspect of the software, customer lifecycle, and business.

3. Open source makes money

Prediction #3: Open source makes money

Open source communities have always been beloved in the Valley – they are tight-knit, full of brilliant engineers, and at the cutting edge of innovation. But in the past, finding commercialization or liquidity has been a challenge. In 2018, there were two record-breaking IPOs for the open source community with Elastic and Pivotal.

We also had three of the largest M&As in history with Red Hat at $33 billion, MuleSoft, and GitHub. Private companies like npm, Confluent, and Hashicorp are developing and innovating open source for the enterprise.

4. Deeper verticalization of mobile

Prediction #4: Deeper verticalization of mobile

We thought the mobile channel would manifest across both horizontal and vertical sectors, but on further reflection, mobile development is progressing rapidly in vertical sectors like construction, HVAC, etc.

ServiceTitan, for example, offers software and mobile solutions for businesses in field services, and their technicians.

Just think about people you know and how they work. There will certainly be more deskless workers who are always on the move and need access to technology, so we expect to see significant change in the vertical category.

Technical roles such as product, data science, SREs, QA, and others within an organization are prime, underserved buyers. As every company becomes a software company, these technical roles will have growing budgets and purchasing power to make decisions about what types of software they want to use to help them do their jobs better.

PagerDuty, for instance, makes the lives of IT Ops and SRE teams much simpler by providing a reliable alerting system to guarantee alerts are sent when needed.

Periscope Data empowers data analysts to very quickly visualize their SQL queries and create beautiful dashboards.

5. Low code/no code

Prediction #5: Low code/no code

The Low Code/No Code movement will provide technologies with amazing DX (developer experience) and offload smaller tasks so engineers can focus on more complex problem sets with the help of companies like Twilio and Auth0. No code solutions also give knowledge workers powerful functionality without requiring engineering resources. This includes easy automation, such as Zapier and UiPath, and business apps within the Salesforce and Workday ecosystem.

These are only five of the many trends we’re excited about at Bessemer, and we look forward to seeing how these ideas continue to contribute to the Cloud ecosystem.

In Case You Missed It

By: Cynthia Corzo | May 2018

More than 82,000 small businesses employ 53.3 percent of Miami-Dade County’s workforce, according to a new study commissioned by the Florida SBDC at FIU. This stands in sharp contrast to the rest of the U.S., where large companies employ the majority of workers.

Produced by the FIU Metropolitan Center, Small Business. Big Impact: Report on Small Businesses in Miami-Dade County 2018 also reveals a high concentration of microbusinesses, those with fewer than 10 employees, in the region. Of six comparison counties studied, Miami-Dade had the highest percentage of microbusinesses, representing 81.3 percent of all businesses in the county.

The study, which provides an in-depth look at Miami- Dade County’s small-business establishments, also looks at the wages paid to employees. The average annual wage is $44,803 at a one-employee firm in Miami-Dade and $43,437 in a firm with two to nine employees.

However, the average wages were not typical. When looking at the aggregate median wages – a listing of the average wages paid by firms based on company size – half the one-employee companies paid an average wage of $24,000 or less. For businesses with two to nine employees, half the companies had average wages of $30,667 or less.

While South Florida is adding new businesses at a rapid rate, those companies are not necessarily producing jobs. The report shows that between 2005 and 2015, the number of non-employer establishments in the Miami-Dade area rose 55.9 percent, almost three times the national rate.

“Not all entrepreneurship and not all small businesses contribute to the economy equally,” says Jacqueline Bueno Sousa, regional director of the Florida SBDC at FIU. “This study helps us understand which small businesses and entrepreneurial ventures are having the biggest positive impact.”

Florida SBDC at FIU is the small business development center at the FIU College of Business. The center works with more than 900 entrepreneurs and business owners each year, offering no-cost consulting and guidance on topics including growth acceleration, access to capital and market analysis.

2018 Small Business Profile

OVERALL FLORIDA ECONOMY


• In the third quarter of 2017, Florida grew at an annual rate of 3.0%, which was slower than the overall US growth rate of 3.4%. Florida’s 2016 growth rate of 2.4% was down from the 2015 rate of 3.9%. (Source: BEA)

• In January 2018, the unemployment rate was 3.9%, down from 4.6% in January 2017. This was below the January 2018 national unemployment rate of 4.1%. (Source: CPS)

EMPLOYMENT


Figure 1: Florida Employment by Business Size (Employees)

  • Florida small businesses employed 3.3 million people, or 42.2% of the private workforce, in 2015. (Source: SUSB)
  • Firms with fewer than 100 employees have the largest share of small business employment. Figure 1 provides further details on firms with employees. (Source: SUSB)
  • Private-sector employment increased 2.1% during the 12­ month period ending in January 2018. This was below the increase of 3.3% during the prior 12-month period. (Source: CPS)
  • The number of proprietors increased in 2016 by 2.6% rela­tive to the previous year. (Source: BEA)
  • Small businesses created 152,330 net jobs in 2015. Firms employing fewer than 20 employees experienced the largest gains, adding 92,180 net jobs. The smallest gains were in firms employing 100 to 499 employees, which added 22,733 net jobs. (Source: SUSB)

TheSmall Business Profiles are produced by the US Small Business Administration’s Office of Advocacy. Each report incorporates the most up-to-date government data to present a unique snapshot of small businesses. Small businesses are defined for this profile as firms employing fewer than 500 employees. Net small business job change, minority small business ownership, and exporter share statistics are based on the 2015 Statistics of US Businesses (SUSB), 2012 Survey of Business Owners (SBO), and 2015 International Trade Administration (ITA) data, respectively.

INCOME AND FINANCE


• The number of banks decreased by 14 between June 2016 and June 2017 to 138 banks. (Source: FDIC)

• In 2016, 449,537 loans under $100,000 (valued at $5.6 billion) were issued by Florida lending institutions reporting under the Community Reinvestment Act. (Source: FFIEC)

• The median income for individuals self-employed at their own incorporated businesses was $41,226 in 2016. For individuals self-employed at their own unincorporated firms, this figure was $18,986. (Source: ACS)

Median income represents earnings from all sources. Unincorporated self-employment income includes unpaid family workers, a very small percent of the unincorporated self-employed.

EMPLOYER BUSINESS OWNER DEMOGRAPHICS


Figure 2: Florida Employees per Business by Owner’s Demographic, 2015

Figure 2 shows the average number of employees per employer business by owner’s demographic group according to the Annual Survey of Entrepreneurs (ASE). Unshaded bars display US values; data were withheld because they do not meet Census Bureau publication standards or could disclose information regarding individual businesses.

TURNOVER AMONG ESTABLISHMENTS WITH EMPLOYEES


Figure 3: Florida Quarterly Startups and Exits

• In the third quarter of 2016, 20,880 establishments started up, generating 88,109 new jobs in Florida. Startups are counted when business establishments hire at least one employee for the first time. (Source: BDM)

• In the same period, 18,474 establishments exited resulting in 75,721 jobs lost. Exits occur when establishments go from having at least one employee to having none, and then remain closed for at least one year. (Source: BDM)

• Figure 3 displays quarterly startups and exits from 1992 to 2016. Each series is smoothed across multiple quarters to highlight long-run trends. (Source: BDM)

The BLS data covers only business establishments with employees. BLS refers to startups as births and exits as deaths. These terms are distinct from the BLS openings and closings categories. Openings include sea­sonal re-openings and closings include seasonal shutterings. Quarterly startup and exit values may not align with Figure 3 due to smoothing.

INTERNATIONAL TRADE


• A total of 59,617 companies exported goods from Florida in 2015. Of these, 56,664, or 95.0%, were small firms; they generated 58.9% of Florida’s $49.5 billion in total exports. (Source: ITA)

SMALL BUSINESS EMPLOYMENT BY INDUSTRY AND COUNTY


Table 1: Florida Employment by Industry, 2015

 

Figure 4: Florida Small Business Employment by County, 2015

SMALL BUSINESSES BY INDUSTRY


Table 2: Florida Small Businesses by Industry and Firm Size, 2015

Figure 4 and Tables 1 and 2 display data from the 2015 SUSB. Table 2 includes additional data from the 2015 Nonemployer Statistics (NES).

REFERENCES


How much runway should you target between financing rounds?

Entrepreneurs have limited access to hard data that could help them make sound decisions when trying to build a successful new company. This is generally due to a fundamental lack of information about the materialized events of previously successful companies.

Consider that there are a few hundred thousand companies founded each calendar year in the United States (Bureau of Labor Statistics, 2016), but only ~ four thousand venture capital deals are reported in any given year. Each year between five and six hundred VC-backed entities are acquired, and a few hundred become publicly traded companies (WilmerHale, 2017). That’s honestly not a lot of data, and unless an entrepreneur has access to any of this historical data — or has the time to do the research — they’re pretty much driving blind when making critical decisions.

There are numerous questions that entrepreneurs need to answer with incomplete, or worse, false information. One example is—

How many months of runway should I target between rounds when pursuing venture capital financing?

According to CBInsights, running out of cash is the second leading cause of startup failure. Needless to say—it’s an important question to get right. If an entrepreneur tries to answer this question by triangulating from Google results, they’ll find a few sources that tell them the conventional wisdom is anywhere between 12-to-18 months.

CBInsights estimates the median time lapse between funding rounds for Tech companies to be somewhere in the neighborhood of 12 months for Seed to Series A and 15 months for Series A to Series B. On Quora you’ll find peers, who with no doubt good intentions, also confirm the 12-to-18 month conventional wisdom. Some experienced VCs however, such as Fred Wilson, recommend planning for about 18 months of runway between rounds. Steve McDermid, Corporate Development Partner at A16Z, also suggests being prepared for the process to take longer than one might expect, and to give yourself “plenty of cushion when assessing your cash runway”. So what’s an entrepreneur to do?

Is it possible that the startup failure rate is so high partially because conventional wisdom tells founders to prepare for 12-to-18 months between financing events when in reality they should be preparing for longer like the experienced VCs suggest? We ingested all of Crunchbase to find out.


Methodology

To answer this question, I looked at all startups that raised a k round and subsequently raised the following k+1 round in the traditional venture capital sequence. In layman’s terms, that means I segmented by all companies that successfully raised a Seed round, and subsequently raised a Series A. Then I took all companies that raised a Series A and subsequently raised a Series B— independent of whether or not they had previously raised a Seed stage round, or ever raised a Series C in the future—and so on—until the Series E stage.

The methodology described above gives us five distinct samples of materialized financing events from the traditional venture capital sequence, which allows us to estimate the average time it takes from one financing round to the next. In statistical terms, that means we’re approximating the population parameter (length of time) which characterizes venture capital financing sequences, by relying on the Law of Large Numbers and sample statistics. In total, we evaluated 13,916 materialized financing sequence events. Given the nature of the venture capital funnel and the number of companies that are actually able to raise their next round, this is a more than sufficient sample size for parameter estimation.

(Top) Kernel density estimates for 5 distinct funding sequences, with vertical lines indicating the average value for each sequence. (Bottom) Kernel density estimates for 5 distinct funding sequences, with vertical lines indicating the median value for each sequence. Sample sizes — Seed to Series A (n=2623), Series A to Series B (n=5558), Series B to Series C (n=3422), Series C to Series D (n=1644), Series D to Series E (n=669).

The general shape of the distributions suggests that the bulk of k+1 financing events take between 5 and 35 months from the prior event (plus/minus one standard deviation from the mean), and the long tails suggest that outliers exist which have taken considerably longer to go from one round to another (as long as 115 months, or 9.6 years!). The presence of outliers also tells us that the average values on the left plot (dashed vertical lines) are misleading, since averages are highly susceptible to outliers. The median is a much more robust measure of central tendency in the presence of outliers, so we should put more emphasis on the medians on the right plot.

As perhaps expected, the median time lapse between Seed to Series A is less than the median time lapse between A to B, B to C, C to D, and D to E. Interestingly, the average and median time lapse seems to reach a maximum at the B to C stage, and decreases thereafter. The Series D to Series E distribution is also notably more spread out, which to us suggests that later funding stages are likely more dependent on individual company characteristics.

Depending on the financing sequence, the medians indicate an expected value range of 15 to 19 months, while the averages suggest a range from 18 to 22 months. Blending the samples together creates the average density distribution in the plot below, with overall mean and median sample statistics.

n = 13,916, mean = 20.6, median = 18, s.d = 14.6

So, is it possible that the conventional wisdom of 12 to 18 months between financing events is an influential factor leading to high startup failure rates? Yes, because the hard data says entrepreneurs should plan for at least 18–21 months of runway, and as much as ~35 months if they want to play it safe and stay within one standard deviation from the mean.

Building a product takes time. Finding the right talent takes time. And it turns out that fundraising takes time, too. If it takes you less than 18 months to raise another round then great—keep going—but don’t reduce your probability of success by planning for less than 18–21 months of runway between your financing events.


Now that we have a good grasp on the time it takes for one round to the next, the question remains: What’s the probability of successfully raising the next round in the sequence? We answer this question in Dissecting startup failure rates by financing stage.

What to Look for When Investing in Startups

BY HOWARD MARKS

If you want a safe bet with little risk, investing your money is easy. Just buy Treasury bonds. They carry practically no risk and are guaranteed by the full faith of the United States Government. However, in exchange for that safety, Treasury bonds return a small percentage of the investment that varies based on the Federal Reserve policy.

However, to have much higher returns, sometimes a multiple of the money you invested in the first place, there’s only one possible way to achieve those returns. That path is investing in more speculative vehicles, such as privately-held companies, also known as private equity.

The problem is this: unless you have a disciplined portfolio strategy, your one or two private equity bets may not work. The companies you invested in may fail. Statistically, this is likely to happen. Investing in private business is very risky, but you are rewarded when a company succeeds.

I am going to try to identify the key principles in deciding how to invest your money when it comes to private companies. In my career, I have done probably over 80 investments, and these principles have worked for me.

I wished I would have taken more risk and invested in more companies, but I was a little too conservative and thus passed on some very interesting companies who later grew into very successful businesses. Without further ado, here are my five things to look for when investing in startups:

#1: The Founders

When it comes to building a successful business, people come first. This means you want to evaluate how focused and passionate a founder or a group of founders are.

It is true that having a strong educational degree from a competitive school is important, but it is not as valuable when it comes to building a business from scratch. What you need to build a business is grit, the intersection of passion and resilience.

When the founders of a company quit, the business has little chance of success. Founders that demonstrate the right amount of passion for the mission are a huge advantage. They are not working for money. The right founders are on a campaign to change the world, to improve people’s lives or make an industry more efficient.

When the right founder talks about their company, it feels very personal, and listening to them speak will inspire anyone they get into contact with. I have heard many times that founders “John Smith and Jane Doe” are crazy because they are not willing to listen or take any advice from experienced professionals. I have also heard founders whose company was bankrupt every 6 months, and yet they never gave up. All of these traits are what you should expect from a very risky investment that becomes a success.

#2: The Team

Besides the founders, you want to see a team of people who complement the skills of the founder. Some founders are visionaries but terrible at managing people. Others are excellent managers but lack technical expertise to build the product they’re overseeing.

You should look for a team with expertise in the areas that the founders lack. Look into key areas of a business, such as product development, marketing and sales. Make sure that the team is well-balanced and has the right tool sets for growth and for building out the product they sold in their pitch.

Founders steer the ship, but the team provides the manpower. Without a dedicated, a startup won’t succeed.

#3: The Idea

When reading business plans, it’s common to see a great idea or innovation, but is it going to be commercially viable? Is the technology or solution going to work once it’s actually deployed? Is the business scalable? A successful business is far more than just an idea; it’s about execution and market-fit.

I like to see patents or proprietary technology which demonstrate the depth of knowledge and creativity from the founders or their technical team. For non-technical companies, I look for a strong sense of the customers and their needs. Sometimes the founders are themselves are the market they are trying to target.

#4: The Competition

It is important to understand the landscape of the competition. Is this idea being pursued by a number of companies? Is there a large business like Amazon poised to enter, or pivot to, the same space and destroy every startup innovator in sight?

Competition is actually important and should not be taken as an outright negative when considering a startup investment. In a way, competition serves as a proof of concept and demonstrates a marketplace and its viability.

No competition is actually very rare when you consider that every startup is disrupting something: Amazon disrupted book stores and then all of retail, Uber taxis, Airbnb hotels. When I was the founder of Acclaim, we built online video games to disrupt the existing video game industry from the 1990s. If a company doesn’t have direct competition in the form of another company trying to do the same thing, there is still the competition of whatever company has the attention of the consumers the startup wants to target.

However, while competition can be a healthy sign, in some circumstances it is negative. If the competition is against a large company that is also disrupting the same market, I become wary of the investment — though it’s not enough for me to discount the investment altogether.

Large companies simply have more resources to put into solving the problem, building the product and marketing it to consumers. These resources reduce the time it takes for a large company to get control over a segment of the market, which means the startup has less time to launch. In this scenario, companies who are not careful can be easily “Amazoned,” swallowed, and taken out of the market.

#5: The Money

I also look for founders who invest some of their own savings into their company, even if it is a small amount (though it is often a big financial commitment from them). Sometimes, the founders are not paying themselves until the business reaches some scale. This is a great sign of personal sacrifice and proof of “skin in the game.”

Good founders are also resourceful when it comes to securing capital. Some will go the traditional routes of VCs and banks. However, this route is hard for most founders because Venture Capitalists are only interested in a narrow segment of founders and ideas. They follow recent trends and require founders to have a high level education or strong expertise in the field they are pursuing as they are looking for the next unicorn valuation in order to deliver promised returns to their limited partners. However, only 5% of VCs provide returns to their investors, so whatever formula they use to predict the winners isn’t necessarily right.

Other founders will target angel investor networks or leverage their friends and family. Others will go to Kickstarter to test out their idea, and after they complete a successful campaign, the business has some capital as well as lots of eager customers. Still others will try equity crowdfunding, which in the 3 years of its existence in the US has helped over 1,500 companies raise capital.

Founders who are ready to explore new avenues for capital demonstrate a strong will to do whatever it takes to win.

Conclusion

Investing money is not easy and requires research and vetting, and there is no way to guarantee success. However, only those who risk can benefit from the next explosive company.

Our country has hundreds of examples of entrepreneurs who were bold enough to believe they could change the world, and they did. Your role as an investor is to back those dreamers, be part of the journey to success, and fund the future.

If I had to do it all over again, I would double down and pursued more entrepreneurs even after their first venture failed. It is never too late. This may be the best time to become an active investor when equity crowdfunding has opened up the gates for everyone to be a Venture Capitalist.