Archive for March, 2010

I believe that figuring out the right category as early as possible is critically important for startups.

Timo, Jarkko and I founded Lifeline Ventures on October 2009*. Since then we’ve taken a closer look at 100+ typically very early stage startups. When I meet the founders I always ask them to describe their category in one sentence. Somewhat surprisingly, only a handful of teams has been able to do this; typically, the category is way too broad and vague.

*) When reading my posts, keep in mind that I’m not exactly an industry veteran.

I ask the question because one of our key investment criteria is whether the company has the potential to become a category leader.

This isn’t as megalomanic as it may sound, because the category can be, and almost always needs to be, very specific. It could be as narrowly defined as, for example, “adenovirus-based gene therapy for metastatic cancer” or “social TV for sports fans”.

A well-defined category enables answering two questions:

  1. is the category relevant-enough today or in the near-future, and
  2. who are the current and potential competitors.

I tend to get excited if the answer to the first question is positive and the team has, or they can credibly build, sustainable advantage over competitors. In the case of pre-launch, pre-revenue, pre-almost-anything company, there just isn’t that much other relevant data to base the investment decision on.

The main advantage of being a category leader is that it has a lot of strategic options, including the expansion by taking over other categories. Also, it’s just so much easier to operate (sell, recruit, partner, …) when you are not standing in the shadow of an 800 pound gorilla. Almost always you’d rather be, as Brad Feld suggested, the 12 pound gorilla of a more specific category. If your solution is both global and scalable, surprisingly narrow categories are big-enough for creating a serious business.

Cappuccino

Actually, I hereby promise to buy a tall cappuccino (one per team, tax excluded) for every entrepreneur who comes to the meeting with a relevant, specific category. See you over a cup of java!

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The unbearable probability of succeeding

Posted: March 2, 2010 in Misc
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One of my strong beliefs is that, when it comes to building a company, the probability of succeeding is a constant.

With the help of top mathematicians, I’ve formalized this theorem:

P(success) = C

(Stephen Hawking remarked that each equation in a book halves its sales, so I guess the title just halved the audience of this post to three people. That is, however, the price one has to pay for scientific rigorousness, and I have no alternative than to live with it.)

What does the theorem mean in practice? Basically, I claim that the probability of succeeding is independent of the aggressiveness of your goals; a startup trying to change the World is as likely to succeed as another one going for a smaller, “more realistic” goal. The most significant implication of this is that you should always think big and aim as high as possible.

In case you find the idea profoundly stupid, here is the reasoning behind it:

  • It is much easier to attract top talent if you have a larger-than-life mission. This applies to co-founders, employees, advisers, partners, investors – you name it. It is true that if your goal seems almost impossible to reach and/or you are short on street credibility, most of the people just ignore you or think you’re nuts. However, today the World is both small and flat, and you’re likely to find enough superstars who share your passion. And when you have a kick-ass team, the impossible goal starts to look… less impossible.
  • If you aim very high, even a partial success could be a life-changing event for you. Despite of the common belief, the startup game is not based on the winner-takes-all rule – it’s more about winner-takes-a-lot. If you tried to create a billion dollar market cap company, but ended up exiting, let’s say, with only 1% of this valuation, it’s still $10m, i.e. a lot of cash. (By the way, I don’t think it is in general a good idea to think about the exit when founding a company, but more about this in one of the later posts.)

So, are you aiming high-enough? Am I? I think we better leave this topic.