Karri Saarinen: How to be Grow Capital Efficiently in a World of BS Growth | E1221

Intro (0s)

• There is a preference for startup dilution to be at 10% or less, as opposed to the typical 20% dilution. The only real protection for a startup founder is to achieve success, as lack of success allows investors to exert control. (0s)
• The conversation includes excitement about a collaboration and a discussion with Miles at Excel, who suggested starting with context rather than typical questions about founding a company. (26s)
• The discussion touches on potato farming in Finland, highlighting the variety and quality of potatoes available there compared to California. In Finland, there are many varieties, some of which are seasonal or region-specific, offering a stronger taste and texture. (46s)
• There is a personal anecdote about growing potatoes in Finland during the summer and the speaker's efforts to grow their own potatoes at a cottage. (2m20s)

Impact on Product Thinking From Airbnb & Coinbase (2m50s)

• At Coinbase, the experience of working in a small team environment was highlighted, where significant features were developed by just one or a few individuals. For example, the Coinbase exchange trading platform was initially built by a single person, and upon launch, it handled millions of dollars in transactions, which has now grown to billions. (3m3s)
• The early-stage experience at Coinbase demonstrated the potential impact and efficiency of small teams in creating widely used and revenue-generating features. (3m12s)
• At Airbnb, the focus was on the importance of user experience, driven by Brian Chesky's passion for how the product feels to users. This approach emphasized prioritizing the user experience over other metrics or external pressures. (4m6s)

Brian Chesky or Brian Armstrong? (4m37s)

• A comparison is made between two leaders, Brian Chesky and Brian Armstrong, highlighting their different personalities and suitability for their respective companies. (4m38s)
• When asked to choose between the two for an investment, the preference is for Brian Chesky due to his dynamic nature and ability to drive through challenges with energy and determination. (5m3s)
• Brian Chesky is noted for his commitment and focus, exemplified by his dedication to weightlifting, which demonstrates his ability to achieve goals once he sets his mind to them. (5m30s)

On Founder Mode (5m45s)

• Founder mode can be dangerous for some founders, potentially leading to negative behaviors. It is important to understand what founder mode entails, as the concept is not always clearly defined. (5m46s)
• Standard advice for founders is to hire competent leaders and allow them to manage their respective areas, rather than trying to handle everything personally. However, founders should still be actively involved and not completely step back from operations. (6m14s)
• Reflecting on personal experience, there was a period of being too passive, particularly in areas like marketing and sales. Recently, there has been a shift towards more active involvement, with regular discussions with the leadership team to improve these functions. (7m1s)
• The need to learn and adapt is emphasized, especially when transitioning from a design background to managing go-to-market strategies in enterprise-focused businesses, which can be more complex and nuanced. (7m22s)

Quality Growth vs. Hypergrowth: What’s the Difference? (7m53s)

• Quality growth is described as growth that is sustainable and based on real, effective elements within a company, as opposed to being artificially enhanced or accelerated. (7m53s)
• Unlike hypergrowth, which often involves rapid scaling and growth hacking, quality growth focuses on genuine improvements and customer satisfaction without excessive spending on marketing or sales. (8m6s)
• Companies pursuing hypergrowth may invest heavily in growth, sometimes spending more than they earn, which can lead to unsustainable financial practices. (9m0s)
• Quality growth is exemplified by a company that relies on the inherent value of its product to drive growth, with minimal marketing expenditure and no sales team for the initial years, allowing the product's superiority to naturally attract customers. (9m19s)

Is Hypergrowth Essential for Fundraising, Making Quality Growth a Luxury? (9m46s)

• In the context of fundraising, companies are often compared based on their growth rates, with those achieving hypergrowth being more likely to secure additional funding rounds such as Series A or Series B. (9m47s)
• Hypergrowth is perceived as essential for raising money, making quality growth seem like a luxury. However, an alternative approach is to focus on sustaining the business without the need for constant fundraising by achieving profitability and managing expenses effectively. (10m9s)
• The necessity of raising funds depends on market dynamics and the specific industry context. Companies should evaluate the market they are entering and determine the appropriate strategy, whether it involves rapid growth or focusing on being the best in class. (11m1s)
• In some markets, like those with established legacy solutions, the focus should be on quality and innovation rather than speed, as rapid growth can compromise product quality. (11m20s)

Monetizing Quickly with Feature Products vs. Long-Term Platform Approach (12m23s)

• Startups should focus on monetizing quickly by targeting a niche market or a smaller group of people with a feature product, even if they have a long-term platform vision. This approach allows them to build a user base and expand from there. (12m24s)
• Founders often struggle to find product-market fit because they expand their ideal customer profile too broadly before launch, which can lead to a lack of resonance with any specific audience. It's crucial to identify and focus on a core group of users who will truly care about and pay for the product. (13m50s)
• A strategy of maintaining a smaller, more focused team can lead to better results and profitability. Smaller teams can make a significant impact quickly, and keeping team size manageable helps control expenses and maintain company culture. (14m34s)
• The company prioritized organic growth and word-of-mouth over advertising in the early stages, spending minimal amounts on marketing. This approach was effective because their initial target customers, such as early-stage startups, typically rely on recommendations rather than advertisements. (16m4s)
• As the product matured and became suitable for a broader audience, including larger enterprises, the company increased its advertising spend to raise awareness and establish credibility in the market. (17m1s)

Does Karri Wish To Target Enterprise Earlier? (17m25s)

• To successfully target enterprise customers, it is essential to elevate the functions of product development, marketing, and sales simultaneously. (17m25s)
• Selling to enterprises requires a capable sales team that understands how to manage enterprise accounts and influence decision-makers. (17m46s)
• Effective marketing is crucial for enterprise sales, as potential customers need to be aware of the company and its offerings before engaging in the sales process. (17m59s)
• The product must meet the needs of enterprise customers and function well once purchased. (18m12s)
• Enterprise customers began purchasing the product about a year ago, just before the Series B funding round, indicating early recognition of the product's value by some companies. (18m16s)
• Over the past year, the company has gained traction with enterprise customers, allowing them to identify and address product weaknesses and refine their sales and marketing strategies. (18m36s)
• Continuous improvement and alignment of product, marketing, and sales functions are necessary for successful enterprise engagement. (19m2s)

When Profitable, Why Raise a Series B and Dilute Further? (19m11s)

• Raising a Series B round, even when profitable, can be beneficial for marking up the company's valuation periodically. This helps in aligning the company's perceived value with its actual progress and revenue. (19m12s)
• There is often a disconnect between the company's stage and its perceived value, which can affect equity offerings to potential candidates. A Series B round can help address this by reflecting the company's advanced stage. (19m58s)
• Signaling to customers and the market that the company has progressed beyond a Series A stage can enhance its reputation and credibility, as there are fewer Series B companies compared to Series A or seed-stage companies. (20m17s)

How Impactful is Having Sequoia for Hiring? (20m37s)

• Having a well-known venture capital firm like Sequoia involved can signal high ambition and credibility to potential candidates, although it is not the primary reason people join a company. It provides a sense of safety and assurance that the company is reputable because a top-tier VC has invested in it. (20m37s)
• Raising a funding round during uncertain market conditions, such as during a downturn when companies are laying off employees, can be a strategic move to ensure long-term sustainability and avoid raising funds when the market is at its worst. (21m28s)
• The decision on how much to raise in a funding round, such as a Series B, often involves considerations of dilution. The goal is to keep dilution as low as possible while still making sense for the company and investors. (22m10s)
• Sequoia's involvement in earlier funding rounds, like seed and Series A, allowed for lower dilution in subsequent rounds because they already had ownership, which can be optimized for. (23m1s)
• It is important to aim for a reasonable valuation that does not lead to down rounds, which can be demotivating. The focus should be on good progress in valuation and maintaining investor engagement without excessive pressure. (23m27s)

Should Founders Have a Board from Seed or A? (24m22s)

• It is suggested that founders do not need a board at the seed stage and can consider forming one at the Series A stage. Having a board at Series A is seen as standard practice and can provide good governance by including an outsider's perspective. (24m22s)
• At the Series B stage, adding another board member can offer different perspectives during board meetings. It is important for founders, especially solo founders, to control board seats to maintain influence. (24m58s)
• The real protection for startup founders is achieving success, as investors have various ways to exert control regardless of board composition. Legal frameworks and board control are less significant if the business is not successful. (25m42s)
• Successful investor meetings involve informed participants who understand the company and are willing to engage deeply. During fundraising, it is beneficial to have a targeted list of potential investors rather than a broad approach. (26m20s)
• Founders should not be constantly raising funds but should always consider the next round, including the ideal outcomes and timing. Building relationships with investors between rounds is important, even if not actively fundraising, to prepare for future opportunities. (27m21s)

Which Investor Karri Most Wants to Work With? (28m32s)

• There is an ongoing consideration about whether there is a need to raise more capital or if the current situation is sufficient. (28m32s)
• Research is being conducted into alternative methods of capital raising, such as using secondary capital instead of primary capital. (28m43s)
• One potential approach is to structure the business more like a public company, where the team's equity is more liquid, providing secondary opportunities for the team. (28m55s)
• This approach could benefit the team by making their equity feel more valuable and tangible, rather than just a potential future gain. (29m9s)
• There is a question of whether additional investors are necessary, given that there are already a significant number of investors involved in the business. (29m22s)

“Giving VCs Homework” (29m30s)

• A strategy is described where a separate document is created for each investor, which includes a memo and questions for the investor to consider. This approach helps simulate the working relationship with the investor and assess their thinking style, whether tactical or high-level. (29m30s)
• The goal is not to find specific answers but to evaluate if the investor's communication and thinking style align with the company's values and approach. The focus is on finding a fit rather than expecting the investor to think in the same way. (30m11s)
• There is a preference against investors who rely heavily on benchmarking or applying playbooks from other companies, as this may overlook the unique challenges of the business. (30m21s)
• It is noted that venture capitalists often advise founders to hire more leadership roles, such as a VP of Sales or a Chief Revenue Officer, but this advice can be dangerous if it is not the right time or if the right fit is not found. (31m24s)
• The importance of understanding what new leadership hires will actually do and change within the company is emphasized, as there is often uncertainty about their specific contributions. (31m52s)

Hiring (32m8s)

• When identifying talent, it is important to ask candidates about something they have built that they are really proud of. This helps to assess whether they care deeply about their work and can articulate why it matters to them. Passionate individuals often describe their projects with enthusiasm and detail, indicating a desire to exceed expectations. (32m8s)
• Hiring mistakes often occur when decisions are made under pressure, leading to the selection of candidates who are merely suitable rather than exceptional. It is crucial to avoid hiring someone unless there is a strong conviction about their fit for the role. (34m23s)
• In the early stages of a company, every hire significantly impacts the culture and sets standards for their respective functions. For example, the first marketer or engineer hired will establish the benchmark for those roles in the future. Founders should perform the role themselves until they find the right person, especially for key positions. (34m55s)
• There is a distinction between upstream and downstream roles in terms of their impact on the company. Upstream roles, such as leadership or product positions, have a significant influence on the entire organization, while downstream roles, like support, have a more limited impact. This understanding can guide hiring decisions, balancing the need to fill roles promptly with the importance of finding the right candidate. (35m51s)

Where Karri Feels Insecure in CEO Role Today (36m48s)

• The role of a CEO is inherently insecure because it is constantly evolving, with changes in the company, team, and market dynamics. (36m49s)
• Past successes may not be sufficient as the company grows, necessitating new and improved approaches. (37m11s)
• There is a persistent concern about whether enough is being done and whether the focus should be on current tasks or future planning. (37m21s)
• This insecurity is a regular part of the CEO role, with ongoing reflections on performance and priorities. (37m35s)

How Has Becoming a Father Shaped Karri’s Leadership (37m54s)

• Becoming a father has influenced leadership by increasing awareness of the impact one's words and actions can have on others, similar to how children learn behaviors from their parents. (37m55s)
• There is a heightened consciousness about how communication within a company can shape the behavior and attitudes of its members, reflecting the influence a parent has on a child. (38m21s)
• Personal anecdotes highlight the lasting impact of parental behavior, such as developing habits from observing a parent's actions, underscoring the importance of mindful communication. (38m31s)

Angel Investing as a Founder (38m47s)

• Angel investing as a founder can be time-consuming, involving tasks such as reading emails and evaluating potential businesses for investment. (38m47s)
• The criteria for investing are simplified to knowing the person involved and believing in their work or product category. (39m11s)
• A positive aspect of angel investing is the opportunity to observe how other people build their companies, receive investor updates, and learn from other founders, even if they are at an earlier stage. (39m27s)
• The process of filtering deal flow and deciding which companies to invest in is not enjoyable, leading to a focus on supporting known individuals or projects that are personally believed in. (39m47s)

Quick-Fire Round (40m12s)

• Companies often mishandle remote work by not fully integrating it into their operational culture, instead treating it as a temporary or reversible decision. (40m19s)
• In hindsight, bringing in a sales team earlier could have been beneficial, although the learning experience of initially handling sales internally was valuable. (40m41s)
• There is a belief that quality and doing things well still matter, despite a market trend where many products are marketed as high quality but fail to meet expectations upon use. (41m33s)
• At Linear, personal involvement in reviewing every project for quality and design is a practice that may become challenging to maintain as the company scales. (42m17s)
• Superhuman is highlighted as a product that exemplifies quality, being fast and having the necessary features, such as efficient shortcuts for frequent tasks. (43m12s)
• A specific email client is described as purpose-built for certain users, such as investors, and while it may not be the best for everyone, it is considered ideal for those specific needs. (43m47s)
• There is a reflection on the absence of unwanted recurring events in the calendar, indicating effective time management and prioritization of activities. (44m5s)
• A favorite blog post is mentioned, which discusses "Ramen profitability" as an ideal way to build a startup, emphasizing the leverage gained from being profitable and not needing investors. This concept was not an explicit goal initially but became motivating and freeing as it seemed achievable. (44m29s)
• Negative experiences in investor meetings are described, particularly with larger funds where meetings feel impersonal and lack engagement, leading to a sense of questioning the purpose of attending. (45m27s)
• The decision to sell a company for three billion dollars is considered, with the outcome depending on the circumstances and future prospects post-sale. The default stance is not to sell unless there is an exciting opportunity to improve or collaborate with another organization. (46m18s)
• The presence of a common competitor, such as Jira advertising against Linear, is seen as beneficial, providing motivation and a sense of purpose in the competitive landscape. (47m2s)
• When facing competition in the market, it is beneficial to differentiate by solving the same problems in a unique way rather than replicating existing products. This approach can create value by offering something distinct rather than slightly improved versions of what already exists. (47m28s)
• A frequently overlooked question in product development is why it is important to build a product that people actually want to use, especially in the enterprise sector. The focus often shifts to features and comparisons rather than user desirability, which is crucial for the product's success and adoption. (48m32s)
• The credibility of a company can be undermined during fundraising if it relies on feature comparison charts against competitors. These charts are often biased and do not accurately reflect the necessity or value of the features, leading to a misleading representation of the product. (49m39s)
• Comparison charts are criticized for being dishonest and subjective, as they often misrepresent the capabilities of products. The emphasis should be on explaining the necessity of features rather than simply listing them, as unnecessary features can lead to feature creep. (49m59s)