Refusing To Fail

I heard Phil Mickelson, the legendary golfer, tell a great story the other day.

He was asked what makes the best golfers the best golfers in the world. He told a story about how a long time ago, he really struggled with short putts. One day his coach recommended that he try to make 100 three-foot putts in a row. If he missed one, he'd have to start all over again. And he should keep practicing this until he can reliably make 100 in a row. He claims that one time he made it all the way to 99, missed the 100th, and started over. 

Years later, he was mentoring an up-and-coming amateur golfer who was struggling with short putts, and he gave that golfer the same advice. Several months later, he checked in on how the golfer was doing with his putting, and the golfer said, "yea, that was really hard, I got to where I could make about 50 in a row, and I gave up.”

This golfer never made it in the PGA.

This is a great analogy when thinking about startup investing. Often, in the early days, you're really investing less in the idea or the product or the market; you're really investing in the founder themselves and their willingness to persevere and navigate through the idea maze and do what, in some cases, seems impossible. Some people work on some projects where for whatever reason, they will absolutely refuse to fail. Elon Musk is a great example. Both SpaceX and Tesla should've failed multiple times. But he persevered and forced it to happen through sheer will. Of course, he's incredibly smart and talented, but that wouldn't have been nearly enough. This quality doesn't exist in everyone, and even for those that do, it doesn't exist for every project at every time in their lives, given changing life circumstances and priorities.

This golf analogy is a good one to consider when you're investing at an early stage where you don't have much to go on other than the talents, skills, and dedication of the founder and founding team.

First Principles Thinking & Product Design

Will Ahmed, the founder of the Whoop, a popular fitness tracker, wrote a great Tweetstorm the other day about the wearables space. In it, he demonstrated an excellent example of first principles thinking around building a product. I wrote a post about the importance of first principles thinking in company building a couple of years ago. I found this Tweet inside of the Tweetstorm from Will to be the most striking.

This is a perfect example of first principles thinking in company building that sets out a framework for product managers to make literally thousands of small (and big), follow-on design decisions. The increase in efficiency and speed of decision-making is nearly infinite when leaders think and communicate this way.

Not to mention, it’s also a great strategy. Very few products can remain “cool”, for everyone, for many years. Whoop knows this and from day one (it seems) they’ve been pushing to get closer and closer to invisible, while most of their predecessors have tried to be cool and stay cool. A strategy of being cool while working towards invisible seems like a far more sustainable approach.

The 10 Best Books I Read In 2021

2021 was another year that was largely dominated by COVID, which meant lots of time to read some great books. I continued my near-obsession with books about Navy SEALs and books on surviving in the ocean. Not sure what that's about. Anyway, here’s this year’s list. Find past lists here.

1/ The Company: A Short History of a Revolutionary Idea by John Micklethwait and Adrian Wooldridge. This is a great book on the history of the corporation. It tells the story of how and why humans formed LLCs and joint-stock companies from ancient Mesopotamia to the multi-national corporations of the 1980s and 1990s. In short, without these structures, we'd have very few of the innovations we enjoy today. Entrepreneurs need legal protection to be able to take risks and innovate. This is a brilliant summary of the history of how we organized ourselves around these ideas. I only wish it was longer and went a bit deeper.

2/ A Speck in the Sea: A Story of Survival and Rescue by John Aldridge and Anthony Sosinski. I'm not sure what it is about these survival stories, but I love them for some reason, and this one was great. It tells the story of a fisherman thrown off a boat in the middle of the Long Island Sound in the middle of the night while his friend was sound asleep below deck and the subsequent search-and-rescue mission. It's a well-written, enjoyable read. I can't imagine what he went endured out there alone at night in the middle of the ocean in complete silence. 

"You forget that you hear waves only when they ride up on the shore; in the middle of the ocean you hear nothing. The silence is deafening."

3/ The Art of Impossible: A Peak Performance Primer by Steven Kotler. I really enjoy Kotler's books. Really interesting, motivating, and data-driven research on human performance and people accomplishing things they never thought they could through what he calls a quartet of skills — motivation, learning, creativity, and flow. The book talks a lot about meaning and purpose at work, which is so important for leaders to remember. From the book:

Once people feel fairly compensated for their time—meaning once that number starts to creep over $75,000 a year—big raises and annual bonuses won't actually improve their productivity or performance. After that basic-needs line is crossed, employees want intrinsic rewards. They want to be in control of their own time (autonomy), they want to work on projects that interest them (curiosity/passion), and they want to work on projects that matter (meaning and purpose). 

4/ Finding Ultra: Rejecting Middle Age, Becoming One of the World's Fittest Men, and Discovering Myself by Rich Roll. I've been listening to Roll's podcast for a while now and finally got around to reading his memoir. A well-written account of his transformation from an out-of-shape 40-something to an ultra-endurance athlete living a plant-based lifestyle. 

5/ Shoe Dog: A Memoir by the Creator of Nike by Phil Knight. I've been meaning to read this for a few years now, but I didn't expect how great it would be. Awesome book. A really enjoyable story, even if you're not interested in shoes or business.  

6/ Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail by Ray Dalio. In this dense and somewhat disturbing book, Dalio studies the repeating patterns of the major underlying shifts in wealth and power over the last 500 years. A very, very important book for investors to internalize to have a point of view on how things might play out in America and other highly developed countries over the next couple of decades. From the book:

”I've learned that one's ability to anticipate and deal well with the future depends on one's understanding of the cause/effect relationships that make things change, and one's ability to understand these cause/effect relationships comes from studying how they have changed in the past."

7/ The Attributes: 25 Hidden Drivers of Optimal Performance by Rich Diviney. Diviney is a former Navy SEAL commander that argues in this book that we need to evaluate people on attributes rather than skills or experience. Things like grit, drive, teamability, mental acuity, and leadership. I've become really interested in Navy SEAL training and how they weed out candidates. This book gives a glimpse into how it works. SEAL's go through a training period called 'Hell Week' where they weed out the majority of candidates. They keep recruits awake for most of the week. They'll make them carry huge logs across a wet sandy beach for hours in the middle of the night and then tell them that they can rest once they're done with the log training. But then they change their mind and tell them to do a 2-mile swim in the cold ocean in the pitch dark. I'm fascinated by the type of person that doesn't just quit but instead wades into the water to complete the swim. What do those people have in common? The book doesn't fully answer that question, but it does give some great insight into what separates the highest performers from the rest of the pack.

8/ The Death and Life of Great American Cities by Jane Jacobs. This is a very dense and masterful deep dive into the ingredients involved in successful urban planning. As someone that has lived in big cities for the last 20+ years, I found myself nodding in agreement at the endless insights inside this book. Really well done.

9/ How Innovation Works by Matt Ridley. This is a book about the conditions that drive innovation, from antibiotics to automobiles. He argues that innovation doesn't come from top-down, corporate or government programs. Instead, it comes bottom-up via entrepreneurial capitalism through relentless tinkering and iteration. An easy read with countless useful examples. 

10/ Angel Investing: The Guide to Making Money and Having Fun Investing in Startups by David S. Rose and Reid Hoffman. This is the bible on individual investing in startups. A really comprehensive guide that covers every topic you need to know related to this extremely risky investment category. Written in 2014, the book is somewhat dated given the madness surrounding venture investing over the last few years, but all the fundamentals are covered with some great frameworks on how to manage risk.

Finally, I didn't read a lot of fiction last year, but I did get around to reading Angela's Ashes by Frank McCourt. Obviously not the most uplifting book, to say the least, but the writing is just phenomenal. Highly recommended.

Hope you enjoy some of these.

DoorDash’s Empathy Policy

I read the other day that DoorDash is requiring all of their employees (including their CEO) to make at least one food delivery per month. A lot of engineers were less than thrilled with the idea.

I love this idea. One of the challenges in building b2b software is that your product/engineering team is often very disconnected from the user and the user's problems. DoorDash is lucky that many of its employees likely use the product from the consumer side. That's a massive advantage because they have built-in empathy for the user.

But they're also building for the business user (the Dasher), and many/most employees at DoorDash likely have little to no experience delivering food to a customer. Forcing them to do it once a month drives business user empathy and, likely, a much, much more delightfully built business-facing product.

Throughout most of my career, I've worked with companies that build software products for business users. So I've experienced this challenge first hand. If you're building software for, say, police departments, it's highly likely that most of your engineers will never have worked at a police department. There's nothing wrong with this. Their job is to build software. You want people that are great at building software, not great at enforcing the law. But that means that there is an inherent lack of empathy for the user that has to be dealt with proactively. That's why I love DoorDash's decision to get product managers and engineers out in the field to really feel what their Dashers feel. There's no doubt this will result in a better product.

One exercise I'd challenge b2b software companies to work through is to take stock of how many employees they have that truly have been in the user's shoes. Using the example above, it's worth asking how many employees inside the company have worked for a police department or have had a job where they "could've" used the product they're building? Lots of companies wouldn't have a great answer to that question. And that's ok. But those companies have to make proactive moves to drive empathetic product development.

DoorDash's policy is an excellent step in that direction.

The Operator Shortage

Howard Lindzon described the current state of startups really well the other day on the Animal Spirits podcast. I’m paraphrasing, but he said something like:

There are lots of good ideas. There are lots of founders that want to pursue those ideas. There’s lots of cheap capital for founders to raise and build companies around those ideas. But there’s an extreme shortage of qualified operators to go and execute on those ideas.

There aren’t enough high-quality operators that have actually built companies from the ground up. As a result, we’re seeing significant wage inflation across almost every function inside of startups. The ability to recruit and retain top talent is more important than it has ever been in tech (Apple just offered $180k bonuses to engineers to get them not to leave and go work on the metaverse or crypto). Good companies won’t have a problem raising capital, but almost all of them will struggle to hire the best people.

Build a brand that attracts both customers and potential employees. Hire managers with high levels of followership.

Be a company that people want to work at with leaders that people want to work for. Nothing is more important in this market.

Execution, Execution, Execution

Most sales teams don’t need more TAM to sell into, they need to get better at executing against the TAM they already have.

Most product teams don’t need more ideas, they need to get better at executing against the ideas they already have.

Measuring ROI In Enterprise Software

One of the main topics I talk to founders about is how to measure the ROI of their product and how to communicate that ROI to a prospect. This topic almost always comes up in sales conversations, and it’s important to be able to lead this conversation with clarity and authority.

I like to use a simple framework for how to think about a product's ROI, using three broad categories of measurement:

1/ Product usage and engagement. Registered users, monthly active users, transactions, data delivered, etc. Depending on the product, this can be more or less impactful. This is a useful way to think about ROI for a product that doesn't need to be used by a user (like an employee discount program or coaching software). This is not a very effective way to measure ROI for things like expense reporting or benefits management where users are required to use the product to accomplish something.

2/ User satisfaction. This is a bit of a step up over usage metrics in that it measures not just whether or not users use a product, but whether or not they like it. This can be an effective way to measure the ROI of an enablement tool where usage is not optional and financial gain is difficult to measure. NPS is a good measurement for this but I love the way Superhuman tracks this using this question: 1. How would you feel if you could no longer use Superhuman? A) Very disappointed B) Somewhat disappointed C) Not disappointed. There’s a great First Round article on this topic that’s worth reading.

3/ Revenue/Cost savings. This is of course the most impactful way to talk about ROI. It’s especially effective when a company is trying to create a category. In the early days of selling Zocdoc (an online appointment booking software for healthcare clinicians) revenue generated from the service was a crucial part of the ROI conversation. Most doctors didn't feel like they had to put their schedules online, so the only way they'd buy is if they were comfortable that they'd make money. While this was always important, it became less so over time. Online appointment booking became a standard. They had to do it. So other metrics and measurements became more important (e.g. does the staff like using it?).

Depending on the stage of category creation for your product as well as its competitive dominance, it’s important to understand where your product sits in the framework above. Some products need a hard financial ROI, others don’t.

The canonical example of the latter is Salesforce.com. A few years ago, I asked a Salesforce sales rep how they talk about ROI with their customers and he looked at me like I was crazy. The CRM category has been created and it’s now quite mature. Almost all companies of a certain size need a CRM. It’s sort of like calling Verizon and asking them about the ROI on your cell phone. At some point, you just need it. So Salesforce doesn't need to convince you that your sales teams will make more sales because you're using Salesforce, they just need to convince you that everyone uses it or uses something like it and that you need it too. They can validate their ROI by showing usage stats (the bottom of the stack). And if your team isn't using it, that's likely your own fault because you haven't done enough training or promotion to get employees to use it. And of course, they'll be happy to sell you a service that will do that for you.

When taking a product to market, it's important to recognize where your product sits on this stack. Are you selling something that will only be purchased if there’s a crystal clear ROI, or are you selling something that is required to keep the lights on?

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Footnote: If you’re interested in learning more about category creation, I highly recommend the book Play Bigger by Al Ramadan.

Footnote 2: Generally, when talking about ROI you have the buyer and not the user in mind. However, it’s important to understand how both are thinking about assessing the ROI of your product.

Footnote 3: Eventually, all ROIs come down to dollars and cents. As an example, user satisfaction might lead to better employee retention which saves your customer money. But don’t go there if you don’t have to. ROIs generally have lots of assumptions that are easy to disagree on and challenge. Striving to show a financial ROI when it’s not needed can complicate/undermine the story you’re trying to tell.

Learning How To Learn

Perhaps the most valuable skill one can have today is the ability to learn new things. The world is changing so fast. Static, top-down learning and development programs are quickly becoming outdated and irrelevant. 

The good news is that there is so much information available for free. Any self-motivated individual can learn almost anything on their own — assuming they know how to learn in a self-directed way.

In my mind, there are three steps to being proficient at self-directed learning:

1/ Identify what you don't know that's important to learn.

2/ Find resources to learn about the things you don't know.

3/ Do the work to learn about the things you don't know. 

Identify what you don't know. This is the hardest part. Because often you don’t know what you don’t know. This is where it's helpful to have mentors that can help identify your blind spots. It's also helpful to have a network of other people who are doing your job or the job you want to do. 

For an aspiring sales leader, here’s a list of things they should be learning as they climb the ladder from individual contributor to a sales manager to an executive.

Individual Contributor:

Sales tactics (discovery, outreach, access, presenting, proposals, objection handling, creating urgency, closing, etc.).

Understanding your buyer and your buyer's industry (business model, competitors, motivations, priorities, org chart, decision framework, regulatory, etc.).

Sales Manager:

Management (hiring, firing, employee engagement, giving feedback, setting priorities, territory management, performance management, etc.).

Sales strategy (forecasting, OKR management, customer segmentation, prioritization, leadership reporting, etc.).

Executive:

Management against industry metrics (e.g. in SaaS - CAC/LTV, Rule of 40, Payback period, growth rates, gross margins, etc.). 

Company strategy. Setting mission and vision. High-level qualitative goals and financial goals. 

Thinking like an investor. Understanding how financial metrics, storytelling, and a long-term plan connects to a company’s valuation. Understanding the mindset and motivation of investors that would invest in your company. 

Find resources. This is relatively easy these days. Use Twitter to follow experts in your areas of interest. Setup a Feedly account to get a feed of blog posts related to the interest area. Setup your podcast feed to receive daily podcasts on the topic. Read the best books on the topic. Join communities (such as Pavillion or SaaStr) to interact with peers. Leverage your investor networks (First Round Capital has a great one). Find a coach. Find a mentor.

Do the work. Once you've identified the learning area, start to obsess about it and immerses yourself in content. You'll quickly identify areas that you didn't know you didn't know. Learn about those things. Create habits that force you to keep learning. Listen to one podcast per day. Read 50 pages per day. Set a goal of having coffee with at least one mentor or person that does the job you want to do each month. Repeat. 

Discipline In Company Buildling

I love this Tweet from Dan Hockenmaier.

It's very common for early-stage startups to over-title people to get them in the door. Often they don't have the clout or the cash to get great people, so they use a senior title as a way of convincing someone they like to join the team. This is a mistake and causes all kinds of issues down the road. When the company is finally able to recruit people that are legitimately at the Director or VP level, those people are going to look at their peers and demand a higher title.

The company will then have a similar problem at the VP or C level. It will result in a disjointed and confusing org chart that will need to be blown up. And if the company wants to hire above the person they over-titled, they may have to let that person go or give them a demotion (which will likely cause them to leave). The hard work will have to happen at some point. Over-titling people in the early days just kicks the can down the road. In his book, the High Growth Handbook, Elad Gil points out that, in the early days, Facebook and Google gave employees the lowest titles possible (VPs that came over from Yahoo! or eBay came in at the Manager or Director level).

With all of that said, the much more significant implication of Dan's Tweet is less about a decision around what title to give someone, and more broadly around the topic of discipline in building a startup. Startups are so hard to build and there will be all kinds of temptations to cut corners, delay hard decisions, and take the easy way out. Some examples:

• Give away free pilots.

• Build one-off features to close a deal.

• Agree to overly flexible payment terms.

• Hire an experienced person even if they're not the right fit with the team.

• Delay terminating an employee that is damaging culture.

• Partner with a well-known brand even though it doesn't align with the company strategy.

• Raise more capital than is needed.

• Pivot product roadmap based on a few customer requests.

I could add 100 more things to this list. The startups that consistently resist these temptations are the companies that win. Eventually, a lack of discipline will catch up to the startup and will make success even harder than it should be.

When joining a startup, look for signals of good discipline. You might not get the title you want, but that’s a small price to pay to get a seat on a rocket ship.

Irreplaceable vs. Replaceable

Here's the story of a company and a founder that has been told many times.

A company has become huge. They've had overwhelming success. But they've become slow and bureaucratic, and innovation has slowed. It's become a boring place to work.

A star employee, let's call her Jane, sees a clear opportunity to improve the company's situation. She has some great ideas on how to breathe fresh growth into the company. Jane's ideas are ignored. Nobody listens to her.

But Jane can't get her ideas out of her head. She needs to pursue her idea. So she leaves the company, raises some money, and builds a product and a company around her idea.

In order to succeed, Jane needs to build a great team. Because there are so many challenges in launching a new company that will beat the incumbents, she needs a team of superstars. She needs to hire people that are amazing. People that are able to run through walls. People that are irreplaceable.

So Jane builds a team full of stars.

And it works. The team of stars is able to take market share and grow rapidly. They have lots of success. They scale and have hundreds of employees. Soon they have thousands of employees.

Now, Jane's burden isn't to disrupt a business or industry; her burden is to protect what she's built. At this point, Jane needs to hire people that are replaceable. If someone is irreplaceable, that's a problem. She needs to build systems and processes and support around her employees so that no single employee is critical to the company's success.

Jane's company has gone from requiring people that are irreplaceable to requiring people that are replaceable. And the cycle continues…

As startups grow, they shift from breaking new ground to protecting their ground. This shift happens gradually and impacts some functions and roles before others. It's very difficult for companies to make this shift. It requires adaptable people, different people, and lots of process building. And you obviously will always need lynchpin employees in some roles.

The irreplaceable vs. replaceable concept is a simple framework for how to think about company building in the later stages of growth.

LTV, CAC, & B2C

Whenever I consider investing in a B2C startup, I immediately ask about the company's LTV/CAC ratio. From the Corporate Finance Institute:

”LTV stands for "lifetime value" per customer and CAC stands for "customer acquisition cost." The LTV/CAC ratio compares the value of a customer over their lifetime, compared to the cost of acquiring them. This metric compares the value of a new customer over its lifetime relative to the cost of acquiring that customer. If the LTV/CAC ratio is less than 1.0 the company is destroying value, and if the ratio is greater than 1.0, it may be creating value, but more analysis is required. Generally speaking, a ratio greater than 3.0 is considered "good."

I’m less interested in the actual numbers than I’m interested in how the company is thinking about improving the numbers over time.

You could argue that a startup shouldn't be overly concerned with this metric in the early stages because they're still building the initial product or trying to find product/market fit and get the company off the ground. I disagree. B2B startups can get away with deprioritizing this metric in the early days because a good sales team can reliably acquire large amounts of users and revenue in large batches. And because of the way decisions are made within an enterprise, churn is typically significantly lower.

For B2C companies, LTV/CAC should be a part of the story from the beginning. Acquiring individual users is difficult and expensive. And since Facebook and Google, there haven't been that many widespread and effective ways of acquiring new users. Most of the high-quality channels are saturated. 

Ideally, B2C startups can bake user acquisition into their fundamental product offering; e.g. a supplier in a marketplace might bring their customers to the platform at no cost to the platform. AirBnB is a good example where landlords will often ask renters to book rentals through AirBnB.

Obviously, this won't be possible for every company. But the point remains: user acquisition and churn mitigation are critical considerations for any B2C startup right from the start.

Employee Stock Options & Funding Rounds

A friend of mine sent a link to a press release about a company that just closed a huge funding round at a huge valuation that expects to go public over the next few years. He wanted my thoughts on other companies that he could join that have had similarly successful funding rounds. His thinking was that he could make a lot of money on the next few financing events, even an IPO.

I think job searchers need to be careful with this kind of thinking. A successful funding round with great investors is a very positive signal. And it's always tempting to jump on the latest rocket ship. But there are a few things potential employees should consider before joining a company following a large funding announcement:

You're not going to get credit for the company's past success. If a company raises a Series B round at a $100M valuation, following a $10M Series A round, the company's valuation has grown by 10x. That's a lot of value creation. But if you join the company after the Series B has closed, you've missed out on all of it. The stock options you receive will be priced at the post Series B valuation. So you're starting from zero. You'll only get credit for the value you create going forward. You have to place a bet on the company's ability to continue to build value on top of what they've already created. A small caveat here: there's often a difference between the valuation investors paid and the company's fair market value, as determined by auditors. So employees that come in after the round might not pay as much as investors paid.

Valuations are super high right now. Because private company valuations are typically marked against the public market, and the public markets are on a 12-year bull run, valuations are arguably inflated at the moment. If the bull market continues, this isn't a problem. But if prices come back down to earth, valuations could come down, and you may find that your options are underwater (meaning they're worth less than the price you'll have to pay for them). 

The later you join, the less equity you'll get. Startups reward early employees with lots of equity (potential upside) in return for taking the risk of joining before anything has been built. As time goes on, this risk decreases, and so does the amount of equity the company needs to grant to attract great people. Less risk typically means less equity.

The less senior you are, the less equity you'll get. Generally, the really material stock option grants (.5% to 2% of the value of the company) are reserved for the most senior executives. Employees at lower levels will receive a fraction of that.

Your options have to vest. In most cases, you won't just get an equity grant. You'll have a vesting schedule. Typically over four years with a 1-year cliff. Meaning you won't have the right to buy your options unless you've been at the company for more than a year. 

Your vested options aren't liquid. Not only do you have to create value on top of the last funding round, but you also have to find a way to cash out at some point. Generally, this is only done through an acquisition, a secondary offering where an investor buys some amount of employee shares, or an IPO. While IPOs have made a resurgence, it's enormously rare that a startup makes it that far; of the tens of thousands of startups out there, less than 200 companies went public in 2019. 

With all of this said, don't get me wrong, funding rounds are an exciting thing. And they're absolutely a signal that the company is onto something. And I’m a huge fan of investing in private companies as early as possible. My point is that potential employees should act like an investor and dig deep on how much value they believe can be created following the big announcement, and what share of that value they'll receive, and the likelihood that that value will be liquid within a reasonable time frame. 

This is particularly important for salespeople as they negotiate job offers. There's a tradeoff associated with optimizing for your own success (cash from commission) versus the success of the larger organization (equity). Depending on the circumstances, one can be a lot bigger than the other. The above considerations are important inputs into how to think about the company you might want to join and the compensation plan you want to advocate for as you negotiate an offer.