Why Founders Shouldn't Think Like Investors
22 Mar 2024 (8 months ago)
How VCs Think (24s)
- VCs are trained to think in terms of market sizing, building PowerPoints, analyzing fundraising trends, market analysis, reading surveys, networking, paying attention to the stock market, market multiples, and M&A market.
- They use large company metrics and analysis to evaluate small companies.
- This type of thinking is useful for investment bankers, public market investors, and those in similar industries.
- Founders should not adopt the VC mindset when starting their first startup.
- They should not focus on market sizing, PowerPoint decks, or competitive analysis when they don't have any customers or traction.
- Founders should focus on the basics:
- Does the idea make sense?
- Do they have the technical skills to build the product?
- Can they get customers?
- Founders may adopt the VC mindset because they have worked in VC-related industries or have been exposed to VC thinking.
- This can lead to founders sounding like investors rather than expressing their own passion and opinions.
What's Changed (4m56s)
- Founders now have easier access to investors' thought processes due to increased content marketing from investors.
- Startup classes taught by non-founders, often investors, emphasize market analysis, pitching, and identifying ideas based on market trends.
- These classes may not provide practical insights for founders since they lack hands-on startup experience.
First Principles (6m41s)
- Some founders believe that by emulating successful VCs, they can increase their chances of picking a good idea and succeeding.
- However, great investors typically find and invest in companies that already have product-market fit and traction.
- Early-stage investing involves a different skill set, and founders may not learn much from investors at this stage.
- Founders may experience fear of choosing a bad idea and wasting time.
- Some founders are overly concerned with whether their idea is "Venture scale" and may avoid starting a company if they believe the revenue potential is limited.
- Startups involve high risk, low information, and high commitment, and these core aspects cannot be changed.
- It's better to focus on areas of strength and problems that founders know well and have personally observed.
- Relying on VC analysis and judgment to evaluate ideas may not be effective, as investors often respond positively to ideas that don't work.
Positive Feedback (10m6s)
- Thinking like a VC can lead to positive feedback from VCs, such as easier access to meetings and investor interest.
- Investors may respond positively to ideas that aren't necessarily good, and founders should be aware of this.
- Some founders follow fundraising trends and base their startup ideas on what is currently raising money, which can be risky.
- Founders who think like VCs may encounter challenges when it comes to acquiring their first customers.
- Getting first customers is difficult and shouldn't be underestimated.
- Founders often focus on scaling and fundraising while overlooking the challenges of acquiring first customers.
- Launching quickly can provide valuable insights and help founders learn from their mistakes.
- Founders often focus on scaling up too early without first acquiring their first customer.
- Unlike in video games, where scaling up is straightforward, startups face real challenges in getting off the ground.
- Investors prioritize macro-level strategies, such as Excel spreadsheets and build orders, while neglecting micro-level execution.
- Micro-level execution, such as understanding the product and fixing issues, is crucial for early-stage startups.
- Successful CEOs can shift between macro and micro perspectives and excel at both.
- Founders who think like investors need to unlearn certain skills and knowledge that may not be relevant to early-stage startups.
- This includes corporate politics, Excel spreadsheet modeling, and other skills learned in large companies or investment banking.
- Founders should embrace a beginner's mind and turn off the sources of knowledge that contribute to investor-like thinking.
- Spending time with users can provide a different perspective on problem-solving.
- Founders should focus on specific details and solutions rather than relying solely on market analysis.
- Founders who have deep knowledge and experience in a specific industry are better equipped to identify and solve problems.
- Resisting the urge to think like an investor can give founders superpowers.
- Founders with a different filter for good ideas can see opportunities that others miss.
- Successful YC stories often involve ideas that were initially considered bad or off-trend.
- The investment community's predictive powers are not very good.
No Exit Strategy (21m42s)
- Founders often include an exit strategy in their pitch deck, which is unnecessary.
- Thinking like an investment banker requires an exit strategy, but founders don't need a full plan today.
- Founders shouldn't filter out great ideas because they might only reach a certain revenue, as it's rare for companies to reach high revenue without the founder knowing how to grow it.
- It's okay to not have a full plan and embrace the adventure of entrepreneurship.