As a result, I spend a lot of my time thinking about the qualities that make some companies succeed. The biggest cliché in VC is to say, “we back great founders”. People invest in people, duh. As an investor, you want to see the excitement in their eyes, feel the fire in their stomach, and believe that they have grit to fight. I could be pitched the same idea by two different people and only get excited about one of them. Investing is a sensory process. But since character traits only reveal themselves over time, how do you evaluate founders? That is the million-dollar question in venture.
To be or to want to be a founder, you have to be in some sense crazy. To believe that you can make a difference in the world takes audacity, especially considering the odds are so highly stacked against you. But over time, I have come to distinguish between two types of crazy in founders — the calculated enthusiasts and the naïve optimists. The calculated enthusiasts are the good kind of crazy. They are bold and audacious, but they actually sound believable. Like Sam Altman said, “You want to sound crazy. But you want to actually be right.” Calculated enthusiasm sounds like a pretty hazy term but these are the qualities that I repeatedly see in calculated enthusiasts that get me excited:
They are Problem Driven
I’ve heard too many entrepreneurs present themselves and immediately jump into a really cool technology or beautifully designed product before articulating the problem they’re trying to solve. Calculated enthusiasts start with the problem. They focus on a single value proposition and their attachment to a singular problem keeps them laser focused on doing one thing really, really well.
More startups die of indigestion than starvation. — Bill GurleyBuilding a company from nothing is hard enough — calculated enthusiasts make it easier by starting with a compelling problem that addresses a clear pain point.
They Understand the Importance of Distribution
No matter how great your product or service, it means nothing unless people know about it. Acquiring customers is not easy and companies that win are not necessarily those that build the best product, but those that are best at reaching customers.
The notion that you can grow your startup through paid media alone is flawed. While this might have been true a few years ago, it doesn’t work anymore. Thousands of apps are introduced to the app store every month, and yet most smartphone users download zero apps per month. With big brand putting a lot of money into Facebook ads and programmatic display, you need to create distribution advantages for your business to stand out.
Having a great distribution hack can be the difference between a viable business and a defunct one. AirBnB couldn’t have started without Craigslist. Uber solved the traditional chicken and egg problem by subsidizing adoption in the early days. Dropbox wouldn’t have scaled as quickly without their free storage for sharing with friend’s tactic. OpenTable’s consumer reservation marketplace wouldn’t have succeeded without creating standalone value for restaurants through their booking management systems.
All of these companies had highly idiosyncratic, highly effective go-to-market strategies.
Having a good idea is step one, but the second, less obvious step is figuring out how to get that product/app in the hands of users. Naïve optimists employ hope as a distribution strategy. Calculated enthusiasts understand that unless they engineer distribution, they’ll never get to the first 10,000 users.
They have thought through Defensibility
I always ask founders what they perceive to be the biggest challenge their company will face. Naïve optimists shun skepticism, while calculated enthusiasts give thoughtful and honest answers, combining an awareness of their flaws with reasonable hypotheses about how they might overcome these challenges over time.
Thinking through the defensibility of an idea is something many founders often ignore. Defensibility can come in many ways — it can be in the form of proprietary IP, unique domain competence, access to scarce supply, high switching costs, or it can be intangible assets like a startup’s founding team or brand. For example, not everyone can launch a make-up line with the success Glossier has seen — it is Emily’s background and story what have allowed her to build the brand equity she has in such a short time span.
They have a Disruptive VisionMissionary founders endure in situations where mercenaries often quit, because they have a massive transformative purpose that keeps them going.Slack is not selling a group chat tool, they are selling organizational transformation. Stewart Butterfield understood that people don’t buy what you do; they buy why you do it.
Thinking in exponential terms is the undercurrent running through today’s breakout companies. Amazon is endless selection and convenience at the best price. Netflix’s original marketing was more selection and convenience than your neighborhood Blockbuster, and no late fees. Airbnb is all about unique accommodations and it’s cheaper than a hotel. All of these companies are a 10x improvement on experience AND price. They’ve defined a new space, challenged conventional wisdom and changed the rules on incumbents.
While it is impossible to discern every quality a founder has, the way founders talk about themselves and the company they are building illuminates the founders’ beliefs about the world, and about the reality they will create as a result of those beliefs. Calculated enthusiasts are problem-driven, thoughtful, self-aware, mission-driven, determined, and resilient.
If you are a naive optimist, you will be disillusioned when you realize you don’t have customers, or revenue, or a clear path forward (true of most companies in the early days). When you’re aware of your risks, you don’t get demoralized — you keep pushing through the obstacles because you knew from the beginning that was part of the game.
A lot of things need to go right for a seed to sprout: fertile soil, the right mix of rain and sun, and good luck so it’s not eaten by a passing bird. The same goes for a company. For a company to take off, a multitude of factors come into play.
But in seed investing, where people are the only thing you have control over, you better be sure you’re backing a calculated enthusiast and not a naïve optimist.
If you're a calculated enthusiast working on a great idea, feel free to email me at firstname.lastname@example.org