I caught up with an early-stage founder considering his company’s next steps. The runway is shrinking. He’s pursuing several paths, including raising more capital or selling the company. The market isn’t as big as he initially thought, and the business doesn’t have the potential to become a nine- or ten-figure company. He’s accepted that fact and doesn’t want to pursue an option that requires a nine- or ten-figure exit for success.

The probabilities are low that this founder’s current company will get him the type of exit he hoped for when he started the company. He feels he has a lot left in the tank and wants to use that energy on something high return.

This founder is an entrepreneur at heart. He has the drive and intelligence to build something amazing. Unfortunately, the market for his first business is smaller than he and his investors envisioned. He also happened to raise capital in the 2020–2022 window when valuations were inflated. These and other dynamics have taught him painful but valuable lessons that he’ll carry forward.

This founder is part of a group of founders who, I think, will experience pain with their pandemic-era companies but go on to have wildly successful second acts. They may not realize it, but the things they’re learning and the relationships they’re building now will be immensely valuable and contribute significantly to their future success.

I had an interesting conversation with an early-stage founder who’s launching an AI company in San Francisco. He walked me through a demo of his MVP. Then he shared a prediction.

He believes ChatGPT will cause an explosion in vertical software solutions. Building is easy using ChatGPT, a fact that has aspiring founders flooding to build solutions using the service. The low barriers to entry and ease of building will likely prevent founders from scaling a solution that appeals broadly (i.e., horizontal software). There will be too much competition. Instead, founders will go niche. They’ll find small markets they can dominate. They’ll build solutions for painful problems that affect a smaller base of people but have been overlooked historically because of the small market size.

He also believes these companies will be able to scale faster because of ChatGPT. This, combined with the niche nature of the market, will make founders aim to sell earlier than we’ve seen historically and at less than unicorn (i.e., $1 billion) valuations (assuming they haven’t raised too much capital). 

This founder’s perspective is interesting and something I want to think about more.

Over the last few weeks, I’ve been learning about a new topic. Part of that effort has been seeking out credible people who deeply understand it. It’s not always easy to figure out who deeply understands a particular topic. I’ve noticed that finding the first person can be a challenge, but once you do, they’ll usually lead you to others.

YouTube has been a helpful source. I’ve been able to find videos of interviews from fifteen years ago up to today for some of these people. This has been an efficient way to evaluate people and learn the new topic. When I’m comfortable that someone is a master of the topic, I’ll watch as many interviews of them as possible and buy any books they’ve written on the topic. 

Today I was reading a transcript of an interview of a successful investor. He casually mentioned a generally accepted investing principle that he’s observed to be invalid over many years of investing. He went on to say that he believes many investors don’t understand that this principle isn’t true or the impact of that fact.

This caught my attention because another investor, someone who’s well regarded and well known, briefly mentioned something similar in an old interview I dug up. When two or more credible people have reached the same conclusion, it’s contrary to what others believe, and it hasn’t been noticed or discussed (that I know of), that’s something I take note of and want to investigate further. 

I’m curious to understand their insights that led to this contrarian perspective and will dive into this more.  

An early-stage founder asked me for feedback on his fundraising deck, and I went over it with him. Then he asked me to also look at his data room and provide feedback.

The data room was well organized and included more detailed information than I’d expect for an early-stage company. I asked the founder about that, and he said it’s the expectation these days—without this level of detail, his chances of getting funded would be significantly lower.

My takeaway is that investors are focusing more on substance, and founders are starting to get the message. Investors are taking longer to evaluate investment opportunities and diving deeper into whatever data exists to help them make an investment decision. They want to understand the problem, the market potential, and whether the solution is adding (or could add) real value to customers. Founders looking to raise should be aware of this and prepare accordingly.

Six months ago, I began experimenting with a new schedule. I wanted to be more intentional about how I use the time when my brain is most productive (mornings). Specifically, I wanted to read long-form writings (books, papers, etc.) when I first wake up instead of exercising. (I still exercise, but usually at lunch or in the afternoons.)

This change has had a much bigger positive impact than I anticipated. A few takeaways:

• Optimized learning – My brain absorbs new, and sometimes complex, concepts better in the morning when it’s fresh. After reading something new, I think about it throughout the day and sometimes have a new insight. I don’t do mindless or busywork activities when my brain is fresh.
• Relearning how to read – I took time to study the most effective way to read. I’m now more intentional about focusing on a single concept I want to learn about and seeking out books by those who have mastered the concept (or have a superior understanding of it). I read these materials with the intent to understand the critical part of their argument, not the supporting details. This has accelerated the pace at which I read and understand a concept. After I understand one concept, I move to the next concept and repeat the process.  
• Pace – I finish books much faster, which means I’m learning much faster. 
• Habit – Reading first thing in the morning has established a habit that is second nature now. My brain expects to learn something new every morning.
• Book list – I've found that as I’ve accelerated the rate at which I consume books, I've also accelerated the rate at which I add new books to my reading list.
• Challenge – I initially set a daily goal for my reading that pushed me. I now regularly hit that goal and will expand that goal to push myself a little harder.  
• Night reading – I still read in the evenings too, but I tend to read historical books, such as biographies. For me, nighttime reading is not optimal for learning new concepts.

This experiment has instilled a new habit into my life that I think will have a big impact in the long run. I’m still tweaking things a bit but should have my approach fine-tuned and daily goals solidified by the beginning of the new year.

This is my one-hundred-eighty-sixth weekly reflection. Here are my takeaways from this week:

• No – This week was a reminder that the power of saying no more than yes is underestimated. Saying no allows for more focus on the things that matter most and maintains the optionality of new opportunities. Saying yes to too many things can result in lack of focus and loss of future optionality.
• Strategic sales – I’m hearing more early-stage founders with diminishing runway discuss the possibility of selling their business to a strategic acquirer if they can’t raise additional capital.

Week one hundred eighty-six was another week of learning. Looking forward to next week!

This week, I connected with an early-stage founder who’s fundraising. A few funds that are deep in the process want to do customer diligence calls—they want to talk to the handful of early-adopter customers that are larger companies. The customers don’t understand venture capital or start-ups. The thought of talking with “investors” looking to invest in a provider of a service they deem critical makes them queasy. They’re not sure if this is a sign that the company is in trouble financially and they should rethink the relationship.

If a company has a product with paying customers and it wants to raise venture capital, the investment firms are going to want to talk to the customers. They could construe not being allowed to do so negatively. “If your product is so great, why can’t we hear that directly from your customers?” goes the thinking.

 One way around this is to pitch your most important customers on your big vision. They know the product you’re offering and how it solves their current pain point, but they may not know more than that. Once you share your big vision with them, they’ll likely be more excited to be part of that journey and help turn the vision into reality. They’re also more likely to understand that going on that journey will require growth capital. When they’re asked to do reference calls with venture capital investors, the investors can be described as “partners to help provide the capital that will allow us to execute on our vision” (which is true for VC), not a financial lifeline.

A friend talked to me about an early-stage start-up because I’m familiar with the space. He asked my opinion. The space has lots of downsides, the main one being the small size of the market. And it’s complex, which makes completing transactions difficult, labor intensive, and expensive. He said he wished the founder had chatted with me before starting the company. I agreed. I learned a lot about the space the hard way and would have happily shared what I know.

Something for founders to consider doing before building a new solution is seeking out founders who’ve already built in the space they’re entering. Lessons can be learned from the successes and failures of other founders that can save lots of time, energy, and money. Oftentimes those founders are excited to share what they learned with someone who’s equally passionate about the space. It’s an activity with a high upside and relativity low downside that anyone can do.

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I’ve been keeping tabs on several early-stage founders who are aiming to raise capital before the end of the year. Their funding experiences so far are on the extreme ends of the spectrum (for various reasons). From what I’m hearing so far, it sounds like funding rounds will end up in one of two camps.

• Fundraises will be extremely successful and engender a high degree of interest from several firms. These founders will likely be given offers to raise materially more capital than they set out to raise (which isn’t necessarily a good thing).
• Fundraises will be completely unsuccessful, with zero interest from firms. If these founders are running out of runway, they’ll likely struggle to raise a bridge round.

These initial thoughts are subject to change as the market changes. But if they hold, it sounds like an extreme case of haves and have nots this fundraising season.