Stop Thinking Like A Startup
The origin stories of many successful venture-backed startup companies are often characterized by the extreme efforts of brilliant founding teams who, upon identifying an important problem in the world, creatively and aggressively pursue an innovative solution for an unmet need.
Popular mantras to “fail fast” and “break things” encourage the spirit of exploration, rapid iteration, and a bias toward action as founders work to find product/market fit, outmaneuver the competition, and achieve breakout velocity and scale.
I love speed as much as the next VC, but lost in that imagery is how great founders often temper their urgency with that age-old virtue, patience, to make critical decisions with the long view in mind.
Know When It’s A Sprint
The principle of patience is something I’ve thought about over the years as I’ve participated in many risky investments at the earliest stages of entrepreneurs’ long journeys. I’ve seen startups grow rapidly, only to flame out later as customer churn caught up to them. I have also seen teams stumble miserably out of the gate, cut expenses to conserve cash, and then relaunch a year later with a high-growth, winning product.
I’ve seen founders and their trusting teams endure extreme highs and lows. Often they respond with increased urgency, all while patiently understanding that meaningful, enduring companies take significant time, sacrifice, and even a little luck to build.
Most entrepreneurs move with a sense of optimistic urgency, but great entrepreneurs push a relentless pace inside their companies while also being realistic about product capabilities and limitations; sales cycles and implementation times; as well as external, difficult-to-assess factors like market timing, buyer behavior, and competitors’ movements.
The better the entrepreneur, the better his or her ability to know when and where to sprint and when to maintain a steady cadence (or even slow down) as events unfold and pieces are put into place. This ability has important implications for fundraising plans (amounts, uses, timing) and is directly tied to the company’s capital efficiency, enterprise value, and market position.
The best founders launch companies in spaces they intend to revolutionize and dominate for decades with a “North Star” purpose for existence that guides the team’s priorities, decisions, and execution in the immediate term.
Know When It’s A Marathon
For a particularly illustrious example from Utah’s tech ecosystem, look to Qualtrics, founded in 2002, the company recently exited to SAP for $8 billion in the largest enterprise software M&A deal in history. Making an outlier story even more unusual is the fact that the Qualtrics founders quietly built a killer software product while efficiently growing revenue for a decade before raising their first outside capital in a massive $70 million Series A round in 2012.
The founders maintained strong ownership, influence, optionality, and leverage late into the game and commanded a high multiple of revenue at exit, paid in cash (eight single bills of billion-dollar denomination, I presume). Patience in founders can be an underappreciated but highly valuable trait, especially when returns are compounding and strategic leverage is increasing.
While it’s hard to imagine another Utah startup exiting at a higher private valuation than Qualtrics any time soon, it isn’t a stretch to believe that this magnitude of exit will become more attainable for homegrown tech companies moving into the future. It has been said that Qualtrics took about four or five years to get to $1 million in annual recurring revenue―a level that companies often exceed with our seed investments―and then grew incredibly efficiently to $35 million by 2012―a level that, admittedly, none of our companies have achieved without raising additional capital.
Know When/If To Raise Capital
The Qualtrics example reminds us that the Silicon Valley model of raising big, early rounds while burning capital fast is not the only way to launch a high-growth technology startup that wins in the long run. Most venture capitalists are looking for opportunities with huge outlier potential in companies that can scale rapidly with their investment. They have little patience for companies that prioritize efficiency (let alone profitability) over growth and too often have a short attention span. In this sense, there can be a disconnect between the patient entrepreneur and the growth-obsessed venture capitalist.
Qualtrics may never have become Qualtrics if it had raised too much capital too early on in its trajectory. Imagine running a marathon with unknown route, distance, and weather conditions after having committed to sprint as hard as possible right out of the gate. In a sense, this is what some entrepreneurs accept when taking big rounds at high valuations early in their development which can limit their flexibility and options in the face of an uncertain path ahead.
That being said, it might be a good idea to raise capital early if: 1) bootstrapping isn’t an option and the product requires significant developmental resources, 2) the opportunity has winner-take-all dynamics or favors the fastest mover, 3) the company has nailed early metrics and is ready to grow aggressively, or 4) the entrepreneur has identified significant benefits in working with a particular firm―immediate access to networks, relationships, and capital that might be too hard to build alone, for instance.
As an investor in early-stage companies, I realize my potential hypocrisy on this topic but would highlight the importance of establishing clear expectations between founders and investors and to find transparent alignment―or not―early in the fundraising process. As is the case with most important decisions in life, taking on early investors comes with tradeoffs that are neither good nor bad but should be well understood and appreciated by entrepreneurs and their would-be financial partners.
What Investors Are Looking For In A Startup
Other next-wave Utah startups, including portfolio companies like Lucid Software (2010) and Podium (2014), have opted to raise early capital―with its associated dilution and investor influence―to grow at an even faster rate. Although it’s too early for founders to declare victory in either case, the expectations are high for big outcomes. Just how big is unknown, but thanks to Qualtrics, everyone knows that Utah tech deals can be valued in the billions. Although, this requires the guts and patience―not only of founders but also of investors―to turn down big acquisition offers along the way and to weather the inevitable market downturns, as did Qualtrics.
When Kickstart makes an investment at the seed stage we are implicitly signing up for an eight-year―or more―journey with a founding team. We look for entrepreneurs who demonstrate a passionate vision for the long-term evolution of their industry. No entrepreneur knows exactly what he or she will build at the outset, but there must be an anchor vision that compels people to venture into the unknown during the prime years of their lives and through countless small victories and defeats.
This requires managing the interplay between urgency and patience, moving aggressively and intelligently forward while avoiding the burnout so common in the frenetic startup environment. The startup race is an ultra-marathon grind infused with meaning along the way by the worthiness of the vision, cultural resonance within the team, and steady progress toward a shared future augmented and enabled by the magic of their innovations.