Rule 1: Scale Matters
As an ambitious person, there are many ways you might choose to realize your aspirations. Starting a company is one of the best ways to accomplish your goals. But because of the extraordinary amount of effort it takes to found and grow a startup, it doesn’t make sense to choose this path unless you truly desire to be a founder. And it is our belief that if you want to be a founder, you should set out to achieve a really big outcome.
Entrepreneurs should set out to alter the landscape and bring new energy to a field. The difficulty is that, unlike architects, there is no one-size-fits-all blueprint for founders to follow. Every business is different and will have a different outcome. Most of the time when entrepreneurs frame a ‘big outcome’ they’re talking about money. Creating value for yourself is a good thing, but what about your customers, employees and investors? Others might define ‘big outcome’ as impact, through lives touched or severity of the problem solved. Whatever your motivation, the ability to scale is the underpinning that will determine whether your company fulfils your ambition or merely scratches an itch. ‘We have a lot of startups that aim to solve the founder’s own personal problems, which sometimes could be consumer-related problems such as valet parking or grocery delivery. But there are many problems out there that, while not specifically one person’s personal problem, are issues at national or global scale – things like food, water, agriculture, and climate. And we don’t have enough people solving those. If you go after those, you can start a very large, impactful, and successful company,’ said Ali Tamaseb, venture capitalist and author of Super Founders.
With startups, effort isn’t strongly correlated with outcome. In terms of stress and hours worked, it can be just as hard to build a small business as a big one. Go ask someone who’s opened a bar or a café. Many of the challenges that plague everyday entrepreneurs – worrying about cash flow, hiring and firing people, attracting and retaining customers – are going to be the same whether you’re building a brick-and-mortar store or a software company. The difference is that the payoff for all that stress is much bigger if you can find an idea that scales. Scalability is the key to the unlimited upside that sets a founder apart from your shop owner or friend who owns a recruitment consultancy.
One note of caution about scale: it’s critical that you choose the right metric to scale. It’s easy to get seduced by what are often called ‘vanity metrics’. These numbers might make you feel good about what you’re doing, but they don’t get to the core of what your company is about. For example, the number of employees might be a vanity metric. You can get a big ego boost by saying, ‘I employ 200 people.’ That might be great, but it says nothing about what they’re doing or how much output they generate. Think of WhatsApp, which was acquired for $19bn while only having fifty-five employees. Vanity metrics can apply to capital, too. If you read tech press, you’ll see startups shouting from the rooftops about how much capital they’ve raised. Money can be really useful – that’s true. But the flip side is that those founders just sold more of their company to investors, diluting their own equity.
It’s great to have people if your employees are doing something very valuable. But ultimately, people are expensive. In the same way, it’s great to have capital if you need a lot of money to scale, but capital is also expensive in terms of equity. This is why it’s so important to avoid getting distracted by vanity metrics as you scale. The more useful way to measure your progress is to think about the unit of impact you’re trying to achieve – for example, hours spent on the product – and scaling that as much as possible.
There are many ways to think about what scale means, but the single most important question to ask is this: How do you get out of the business of selling your time? Because if you are selling your time, you are always going to be the bottleneck. It’s cliché because it’s true – there are only a certain number of hours in a week. While it’s possible to increase the value of your time and make incrementally more money, you eventually hit your limit. Scaling your product takes your time out of the equation. You can sell exponentially more units – and you are not the bottleneck.
The classic unscalable business is similar to a hairdresser. Now, there are some very expensive hairdressers out there. But ultimately, they are still selling their time. Even at their most ambitious, they have only seventy hours a week available. The only way to scale is to open a full salon, which remains limited by the team’s bookable hours. If you execute well, you can make a decent profit as a salon owner. But your impact is limited to the people who sit in your chairs. There is a better way.
Rule 2: Be Ambitious From the Beginning
If you want to build a globally important company, you have to think big from the beginning. Often founders believe that if they lower their ambitions, they increase their odds of success. We believe the opposite. As we mentioned earlier, there’s nothing easy about running a small business. But it’s more than that – if you start with too small a vision, you’re actually more likely to fail.
Perhaps that seems counterintuitive, but it’s the consequence of a simple point about resources. There are two scarce resources that any startup needs to thrive: talent and capital. At least to begin with, a startup is the sum of the people in your team. To build an exceptional business, you need to hire exceptional people. And for that reason, if you want to grow fast, you’ll likely need to raise capital. You need money to hire great people, pay the rent and buy the various products and services your business will require.
The important point is that both those resources – talent and capital – are attracted to ambition. Both talent and capital have a high opportunity cost. The sort of people you want to hire to make your company a success have lots of options – including starting their own company. How do you convince such people to work for you or invest in you – particularly at the beginning when you have little money and few tangible assets – when they could make a higher salary elsewhere or become a founder themselves? Pretty much all you have is your vision – the possibility that you’re offering them a seat on a rocket ship. Faced with a set of job offers, brilliant people often choose the most ambitious one, even if it’s not the best paid.
Similarly, venture capitalists have hundreds, sometimes thousands, of startups to pick from when deciding where to invest. As we’ll discuss in more detail later, the VC business model only works if the fund can back companies that get really big – ideally, that become worth billions of dollars. And, of course, it’s very unlikely that an unambitious idea will ever reach that level.
A lot of us have the intuition that a smaller, less ambitious idea is easier to execute, but this is because we forget that ease of execution is a function of the talent and capital we have at our disposal. It’s much easier to succeed when both are readily available. But they’re only available, generally, to ambitious founders and companies, so it’s better to bake in ambition from the start.
Rule 3: Be a Missionary and a Mercenary
It’s quite popular in VC circles to divide founders into two groups – missionaries versus mercenaries. The basic idea is that mercenaries are out to make a lot of money – they spot an opportunity or a ‘gap in the market’ and go after it – while missionaries are zealously motivated to solve a particular problem. Conventional wisdom is that missionaries create more valuable companies because they’re more resilient and determined, focus on the long term and can better attract talent.
In our experience, it’s a false dichotomy – you need to have characteristics of both to be a successful founder.
The best founders are missionaries in that they can build a belief and vision around the problem they’re trying to solve. They’re motivated and enthusiastic enough about the idea to convince other people to go along with them. But they’re also mercenary enough to be willing to adapt the idea and change tack when the customer tells them they’re heading in the wrong direction. The risk for founders who are too missionary is that they keep going in the wrong direction despite that feedback because they aren’t willing to let go of their vision. You need to be missionary enough to care but mercenary enough to respond to signals from the market.
In the book Super Founders, Ali Tamaseb looks at all of the billion-dollar companies founded over the last twenty years and finds that there were no significant differences in outcome between so-called missionaries and mercenaries. He notes founders often feel pressure to fake missionary zeal, even if they’ve just stumbled into something that looks like it might be lucrative.
This itself is a risk. As we discussed earlier, it’s hard to run a company for any length of time if you can’t be your authentic self while doing so. We recommend that you’re ruthlessly honest about your motivations. What am I actually willing to invest my life in? What will actually excite me? What will actually make me come alive? Are you attracted to starting a company for its own sake or to solve a specific problem?
We strongly recommend that you only start a company where you care deeply about the customer. Founders working in markets and with customers in whom they don’t have a particular interest often struggle. Even if they gain some initial traction, it’s easy to burn out and give up when the going gets tough.
One of our favourite examples of a mission-driven company is AccuRx, now one of the UK’s biggest healthtech companies. They provide mission-critical patient–doctor communication services to over 98 per cent of the UK’s primary care doctors. Their dedication to their mission has been a key ingredient in their success. But what they have today isn’t the first version of the idea they worked on. They originally set out to build software to help doctors prescribe drugs more effectively. They struggled to get traction for the first product they built, so they started working on a different problem for the same customer. They were missionary about the customer, not about the specific idea. It was because they believed deeply that there was a big role for technology to play in improving the lives of patients and doctors that they iterated through until they found something that worked – and once they did, it worked spectacularly.
One final note of caution: as we’ve said, one danger for early-stage founders is feeling a deep sense of mission towards an idea for which there’s no demand. The key, instead, is to be missionary about your customer, as we’ll discuss in more detail later. You need to keep the mercenary side of your brain switched on to be constantly alert to signals about what your customers want and will ultimately pay for. But if you don’t also leave space for your missionary side, you’ll likely find yourself exhausted and lacking direction. The best founders combine the zeal of a missionary and the agility of a mercenary.
Rule 3.5: All Other Things Equal, Start a Software Company
As we’ll discuss in the chapters to come, there’s no such thing as a universal ‘good idea’. You have to find the idea that’s the best fit for you. This might lead you to all sorts of places. At Entrepreneur First, we’ve funded everything from rocket engines to lab-grown shrimp. That’s why this is only half a rule. It doesn’t apply to everyone. That said, we do have a strong view that, all other things equal, you should start a software company. Software is the pinnacle of scalability. You are not selling your time; you’re selling a copy of a program. Whether you sell one copy or a billion copies, most of the work is done in the initial build.
We talked about ‘technologies of ambition’ in the opening chapter. Entrepreneurship built on digital technologies – software, the internet, mobile phones, artificial intelligence and the like – represents the most powerful ‘technology of ambition’ yet. There are four big reasons why internet-enabled software businesses are the closest thing the world has seen to the perfect business model.
First, reach. If you can deliver your product over an internet connection, you have the potential to reach and impact more people than has ever been possible ever before. This should feel irresistible whether you’re an altruist or a megalomaniac. Napoleon would be green with envy at the scale of influence Mark Zuckerberg commands today. For the first time in history, you can build a product from your bedroom that touches the lives of billions of people each day.
Second, scope. There’s almost no area of human life where software doesn’t have a role to play. As Marc Andreessen – co-founder of VC firm Andreessen Horowitz – says, software is eating the world. For example, traditional taxis and hotels are hardly considered high-tech. But today, the most important companies in both sectors are technology companies: Uber and Airbnb. This means that even people with no intrinsic interest in technology itself can and will turn to digital technologies to realize their goals.
Third, cost. The cost of starting (if not scaling) a technology company has collapsed over the past decade. The ability to reuse open-source code and rent computational power in the cloud has been a game-changer for the accessibility of entrepreneurship. We know founders who started internet companies in the 1990s and had to raise over a million dollars before Day One to be able to buy the physical servers on which their products would run. Today, Amazon and Microsoft will compete to give you free cloud computing credits (at least to begin with…). It’s not much of an exaggeration to say that if you can afford a laptop, you can afford to start a software company.
Finally, economics. Software businesses have a truly beautiful property: zero marginal cost. That means – while it might cost a lot of money to design and build the product – once you’ve done it, each additional unit you sell costs you (almost) nothing – so your average cost per unit falls as you scale. Most businesses are not like this: the millionth serving of a restaurant meal or item of clothing costs you more or less the same to make as the first. It’s this characteristic that makes software so scalable – and is one reason that so many of the world’s most valuable companies are, at heart, software businesses.
So, if you consider the spectrum – on one end, a hairdresser, on the other end, a software company – you want to push as far towards the scalable side of that spectrum as possible. This means you need to be willing to make a big up-front time investment to make a product that you can sell many times over at relatively low marginal effort for the individual sale. Venture capital is designed to support this kind of business by providing the capital for this initial design and build period before the company can generate revenue.
Embracing these principles isn’t a formula for success, but it is fundamental for ambitious founders:
⦁ Creating a startup is hard, regardless of its size. Scalability (especially through software) is the key to realizing unlimited upside on your business inputs.
⦁ Don’t temper your ambition. Plotting an ambitious trajectory from the outset will help you attract capital and talent.
⦁ Look for a middle path that borrows from both missionary and mercenary mindsets and puts the customer at the centre.