The Entrepreneurs I Love
Hard to believe it’s been more than three years since I first entered the venture capital scene back in 2012. As I reflect back on some of my fundamental changes and learnings as an investor, one in particular pops out: the importance of passion. But not an entrepreneur’s passion: my own. I was influenced in this regard by a well-known venture capitalist who related to me an experience from early in his career - one of the first companies he ever brought to his partnership for investment. The company was undeniably a healthy business – good margins, growth, etc. But the founders weren’t energetic, the vertical they were focused on wasn’t overly captivating. His partners asked him: are you really so passionate here that you want to commit to spending the next ten years of your life with this group of entrepreneurs?
He realized he wasn’t.
I think many investors make this mistake. When we enter the industry, we want to be active investors, get out into the market and learn. We focus on all the macro factors – market size, growth rates, customer reference calls, etc. But we forget about ourselves, our passion.
What I’ve discovered about myself is that while I may have some high-level categories that excite me – network effect businesses, millennial-first companies, on-demand services – an entrepreneur I fall in love with can get me passionate about the sleepiest of verticals or products.
I’m sure everyone is different but for me, here are the two types of people whom, when I meet them, I want to dive deeper and deeper, irrespective of their focus:
Imaginative – The vast majority of entrepreneurs I meet are working on an incrementally improved solution to an existing problem.
The entrepreneurs I gravitate towards take a different approach. They start in the same place – recognizing an existing problem – but then let their imagination stretch the solution to the farthest ends of the impossible. Only once they have reached the idealistic, ultimate dream for how a problem could be solved – even if it requires the world to operate in some magical universe – do they begin to work their way back to reality.
I call this the “what if” exercise. The benefit is that by imagining an end-point wholly independent of existing assumptions or axioms, one has a shot to fully re-imagine an industry, rather than simply iterate on it.
The second benefit is that by clearly identifying the endpoint, an entrepreneur can brainstorm many different paths backwards to the existing pain point – slowly applying existing constraints or restrictions as reality re-emerges. In my mind, this provides the greatest opportunity for an imaginative business.
Ground-Up Unit Economics – I’ll admit this one surprised me and superficially appears to be the inverse of my “imaginative” profile (although I’ll explain why it isn’t). This is an entrepreneur who clearly identifies the unit economics, operating margins, etc she feels are necessary to build a category defining, healthy business – and works outward from there to assess what level of products or services can be offered that meet those unit economic profiles.
This type of focus is obviously more relevant in a retail or consumables type of startup. But I love it for a couple of reasons:
I feel that many startups identify their competitive set on the traditional four-quadrant vector map. Yet, that is merely an exercise in differentiation. What I find more helpful is assessing my competitive set by weakness or strength in operating model. I have said many times that two fundamental factors provide for a real margin of error when building startups: frequency of purchase, and unit economics.
When an entrepreneur shows me how their competitors have fundamental, conceptual, operating flaws in their business that constrain their gross margins to (for example) half of what’s achievable by operating differently, I get really darn excited – especially in a category I care about! Because I know how important margins are.
Second, I feel like this is just another approach to the imaginative profile. An entrepreneur assumes an end point (in this case, unit economics) and works her way backwards to the best possible product or experience that can be offered under that constraint. As Jack Dorsey famously says: “constraints yield creativity.” Moreover, starting with this constraint can often reflects a level of diligence and responsibility to a business that is downright refreshing.
At the end of the day, as an early stage investor, I feel like my job is to bet on people. But within that larger mandate, I tend to invest in the two types of people mentioned above.
If you don’t fit one of those two buckets, don’t fret. All VCs are different. What inspires me, might turn off someone else. But I do think all investors should go through the exercise of reflecting on what types of people they feel passionate about. At a minimum it will help us respond to entrepreneurs faster, pass a founder to another partner whose passions are more closely aligned, and not waste time on instances where our passion simply isn't there.