Pros and Cons of Random Rich People Investing in Your Startup, A List of Mistakes Founders Should be Making and more - Tactician #0040

22/01/2024

PROS AND CONS OF RANDOM RICH PEOPLE INVESTING IN YOUR STARTUP

Charlie O'Donnell, Founder at Brooklyn Bridge Ventures, provides insights and advice to entrepreneurs considering investment from high-net-worth individuals outside the traditional venture capital ecosystem, highlighting both the potential benefits and challenges of such investments in “The Pros and Cons of Rando Rich People Investing in Your Startup”

• Understanding Investor Expectations:

  • The author stresses the importance of aligning with investor expectations, stating, "The first thing you need to get straight with a high net worth individual—what is their return expectation? Can they lose this money? How long do they think it will take to make a return if there is one? Do they know how rarely these types of companies succeed?"

• Deal Closing Considerations:

  • The complexity and cost implications of non-standard deal terms are highlighted: "One of the biggest downsides I’ve experienced when you deal with non-VCs is the addition of non-standard terms to a deal...Not only will it cost you multiples more than average in legal fees to get this deal done, but you might wind up with some gnarly documents with terms that prevent other investors from wanting to come in."

• Governance and Board Representation:

  • The author notes the tendency of high-net-worth individuals to seek board representation and the importance of this governance aspect: "More so than a lot of actual VCs, a lot of high-net-worth folks tend to ask for board representation—even in the super early stages of a company...Helpful investors should use their sage advice and support of the founder to make them into better, data-driven decision makers to impact a company, instead of relying on their contractually held voting rights."

• Establishing Clear Agreements and Expectations:

  • The importance of clear agreements and setting boundaries is emphasized: "Before you figure out whether the person is going to be helpful or distracting, make sure you’ve papered the arrangement in such a way that the only thing you promise them is an opportunity to invest and your best efforts to make them a return. Everything else should come in time through open communication and patience on both sides."

A LIST OF THE MISTAKES FOUNDERS SHOULD BE MAKING

Jason Cohen, Founder at WP Engine, reframes common perceptions about errors and setbacks, arguing that certain types of mistakes are actually signs of good decision-making and strategic progress in “The “errors” that mean you’re doing it right”

• Pivoting a Strategy After Creation:

  • "A strategy that never changes is wrong, and the most likely time to discover that it’s wrong is just after you wrote it down..."

  • "Will you lose credibility?... These are risks you have to take, because executing the wrong strategy is far worse."

• Refactoring Infrastructure After Growth:

  • "If you’re not refactoring your infrastructure after a tenfold increase in growth, you over-engineered your original infrastructure."

  • "Having scaled WP Engine to millions of websites serving tens of billions of requests daily...you don’t know what will break under scale until you’re already scaling."

• Fixing Bugs After Major Release:

  • "If you’re not fixing bugs due to releasing quickly, you released too late."

  • "While releasing garbage is a bad policy, it’s also bad to wait until 'everything’s perfect.'... Contact with customers lets you know which bugs are more important to fix next."

• Delaying Scaling of Support or Sales:

  • "It’s a classic funded-startup mistake to scale out either of these organizations too soon... Wait until it’s breaking for lack of scale, then scale."

• Letting Someone Go Soon After Hiring:

  • "If you held onto someone even though you knew isn’t was never going to work, you’re doing a great disservice to that person, and your team, and your company, and yourself."

  • "One likely outcome is that you lose good people, because they see you building a team they don’t want to be a part of."

• Ignoring a Competitor’s Move:

  • "If you’re not ignoring most of your competitor’s moves, then you’re playing their game, not yours."

  • "Sometimes it will turn out that you really do need to react, but that signal will come from customers, not because you’re reacting to everything that competitors do."

• Rejecting Lucrative but Distracting Deals:

  • "If you’re not rejecting lucrative deals that don’t align with your strategy, then you don’t have a strategy."

  • "Money is not more important than strategy, and it cannot be more important than your values, otherwise you’re saying that you don’t actually have either one."

GROWING TOPLINE REVENUE, WITHOUT FOCUSING ON TOPLINE REVENUE

Nicole Glaros, Business Advisor at Divirod Inc., challenges the conventional emphasis on rapid top-line revenue growth, advocating instead for a focus on improving quality in “Bigger isn’t always better. Better is better”

• Dangers of Exclusively Focusing on Revenue Growth:

  • "When you throw dollars into marketing and sales, without a healthy, underlying business, the top line will grow, giving you false positive feedback... However, problems are being created, and are scaling faster than the revenue, and eventually those challenges will consume the company leading to its ultimate demise... Or you can’t see that there’s disagreement on the direction of the company at the leadership team level... Or your team spends more time firefighting than driving results, creating incredible inefficiencies and destroying the bottom line."

• Benefits of Prioritizing 'Better' Over 'Bigger':

  • "But if you focus on better, the company’s topline revenue often will grow naturally without any additional sales and marketing effort, and often with the same, dare I even say lower, costs – making the business itself healthier in all dimensions... Fewer customer support calls, Fewer bugs, Happier customers, Fewer refunds, Higher lifetime value, more renewals, Lower churn, Higher referral rates, increased virality coefficient or network effects, Happier employees... All of these items equal less cost, or more revenue, or both."

• Areas to Improve for Sustainable Growth:

  • "Look for areas in the business to improve. Here are common ones: Product market fit... Removing bugs... Improving UX... Become obsessed with reducing the number of customer support calls... Become obsessed with how much customers love your product... Removing steps in any process you have internally... Removing policies... Identify redundancies in the business and remove them... Look for gaps in the business 'it’s not my job' and fill them... Push reversible and inconsequential decisions down in the business... Improve alignment... Simplify... Monitor the unit economics and key levers as you work on areas to improve, you should see movement!"

• Risks of 'Grow at All Costs' Strategy:

  • "However, there is a play that says 'grow at all costs', and in extraordinarily rare examples, this play works... But for this play to work, you have to be in a winner-take-most market... Given all of that is out of your control, you literally cede control of your future and company to fate... If it were me, I’d want to stack the odds in my favor by building a healthy business before focusing on growth."

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