Today I heard a story about a start-up that’s down to its last few months of cash, doesn’t have a line of sight to profitability, and is at odds with its investors. I’m not involved and haven’t spoken to the investors or the founders, but I do know the company is in a tough spot. Everyone knows it. Instead of coming together to find a way out, the founders and investors are at odds; they can’t see eye to eye, which is making a bad situation worse.

Every company is bound to hit a bump in the road. Some of the bumps will be painful for everyone involved. Today we’re in an environment where companies are facing the prospect of down rounds, which isn’t ideal for founders or existing investors. Down rounds aren’t the end of the world, though. Meta (formerly known as Facebook) did a down round in 2009. Knowing that hiccups are inevitable, founders should conduct their due diligence to understand how prospective investors have historically handled challenging periods with other portfolio companies. Depending on your circumstance, what you find out may not change who invests in your company, but it can inform how you interact with your investors or the term sheet details (number of board seats, etc.) you agree to.

It’s easy to get along with everyone when money is flowing, but the good times won’t roll forever. It pays to understand how the people you’re considering partnering with handle tough times.

Over the last few weeks, several founders have shared their 2023 plans with me. A few of them intend to fundraise—otherwise, they’ll run out of cash. With those founders, I chatted about cash balance, burn, and runway. And I always asked them what plan B is if the fundraising environment further deteriorates. Most of them have no plan B. Raising is the only option they’re considering, which bothers me.

When I hear a founder say they must raise, it makes me think of this blog post from Bill Gurley. Though it’s a few years old, it’s relevant to today’s environment. Bill was ahead of his time in his thinking. I like how he laid out the following alternatives when founders can’t raise a clean round of financing at a flat or up valuation:

• Dirty term sheets – These are terms sheets that give founders the valuation they want but come with many surprises down the road. Bill does a great job of explaining this and who “shark” investors are.
• A clean round at lower valuation – Valuations don’t only go up. Many high-profile companies raised down rounds and went on to have massive success. A down round is better than a dirty round (i.e., a dirty or structured term sheet).
• Positive cash flow – I focused on this when I bootstrapped my company. The best way to gain leverage and control your destiny is to not need to raise capital from others. Easier said than done for sure, and not an option for all founders, but a good exercise for founders to go through. I personally think we’ll move to a focus on a path to profitability over growth for start-ups because valuations will likely start being pegged to profits rather than revenue.
• Go public (i.e., IPO) – This is more of a longer-term goal. Bill makes the point that founders’ and employees’ common stock is treated as equal to investor stock after an IPO because investor preferred stock converts to common. This eliminates liquidation preferences and other rights that preferred stock has over common stock.

Bill’s post is thoughtful and contains a lot more great material relevant to the current environment. It’s worth a read for founders and anyone else in, or considering entering, the start-up world.

I had the chance this week to catch up with a founder who hasn’t gotten the traction he’d like in his fundraise. He has a solution that’s working. It’s generating revenue and has a small, but loyal, customer base. But the long-term viability of the solution doesn’t resonate well with all investors. They wonder if it can be scaled.

I know a little about his industry. I keep up with thought leaders and have formed my own views on the direction of the industry. I shared my vision for where the industry is going. As we chatted, I realized that his pitch is missing a vision for the future. The current solution is likely a stepping stone to something bigger, but his pitch doesn’t communicate that because he doesn’t say what his vision is for the industry. Nor how his solution helps turn his vision into reality. Therefore, investors fixate on the scalability of the current solution instead of thinking about how it can evolve to create value in the world of the future.

Having strong opinions about what the world will look like in the future and how your solution fits into that future world is important for a founder. And not just for pitching investors, but also for recruiting team members and landing business partners.

Creating a vision for the future isn’t easy. It requires understanding a problem so deeply that you can predict how the world will evolve because of the problem. Founders should have conviction regarding their vision but also understand that it might not be 100% accurate—and that’s OK. The important thing is to have a vision you can support with an understanding of the problem that others don’t have along with conviction that makes others want to be part of the mission to turn your vision into reality.

I’m a fan of continual improvement, and I’m always looking for techniques to make it happen. I enjoy reading about ways for individuals and teams (e.g., a company) to optimize performance. Lately, I’ve been reading about individual optimization—sleep, diet, exercise, and cognitive performance. I made some notes:

• Things that move the needle the most on personal optimization aren’t the most appealing options (sometimes you dread them). And doing them can be an unpleasant experience. But when you finish and are on the other side of your decision, you feel great and happy you did whatever it was. Examples include big things like a grueling physical workout. But they also include little things like cutting a TV show short to go to bed early.
• The things that slow or even prevent personal optimization are often attractive options that feel great in the moment. But you don’t feel great, or you have regret, when you’re on the other side of the decision. I’m thinking of things like excessive alcohol consumption (i.e., a hangover), an unhealthy meal, or even staying up late to watch a movie. All of them feel good in the moment, but later that day or the next day when they negatively affect your performance—not so much.

Sometimes I focus on the desirability of an activity—how I’ll feel as I do it. If I dread it, think it will be unpleasant, or just don’t want to do it, sometimes I opt out. That’s the wrong approach. Given my desire to optimize my performance, I want to change the criteria I use to make these decisions. I want to focus on how the activity will make me feel afterward. Said differently, I’ll ask myself “Will this make me feel better or improve me?” If the answer is yes, I should do it. If the answer is no, I should say no (though there will always be exceptions).

Asking myself this question is a simple mental hack to make better decisions that optimize my performance.

The market is a big factor in a start-up’s success. I was telling a founder that I was able to scale my start-up to over $10 million in annual revenue because of the market. Without a big and growing market, it wouldn’t have happened. Sure, I did some things right (and a lot wrong), but the market was key.

My company sold automotive products online. Most customers were individuals and small businesses. The parts we sold had historically been hard to locate and difficult to transport due to their large size. We built technology to aggregate inventory in a single place and optimize fulfillment and transportation.

That’s all fine, but the thing that allowed us to scale was the market. It was big and growing quickly. Consumers were rapidly adopting online shopping. Online shopping as a percentage of overall spend was increasing rapidly. People started with smaller items to get comfortable shopping online and eventually embraced the idea of buying large, bulky things like mattresses, couches, and auto parts online too. As the online market for bulky items expanded, we benefited tremendously. If consumers had never gotten into shopping for bulky items online, we never would’ve been able to scale the company to the level we reached.

It’s important to understand the market for the problem you’re solving. You can be a rockstar founder with a rockstar team and an amazing solution and still not scale your company quickly—because of the market.

Had a great chat with the founders of a new start-up. They’ve been pitching investors and trying to close their current fundraising round. They’ve had some success but haven’t been able to raise all the capital they need. Part of the challenge is the fundraising environment. The founders can’t control that, so today we focused on what they can control. Here’s what we discussed:

• Origin story – Their pitch jumped right into the problem. This didn’t do the founders justice and was a cold way to begin the pitch. They’ve been in this space for two years, learning and experimenting. One of the founders built a large company before starting this new business and is applying the learnings from that start-up to build this one. We refined the origin story and made sure it includes how the founders discovered the problem they’re solving, how much time they’ve spent obsessing and tinkering with solutions, and how their experiences uniquely qualify them to solve this problem.
• Analogy – The solution made sense, but it took time to understand. I had to ask pointed questions about the value of the solution. Eventually, I said they’re “XYZ for 123 space,” and it clicked. That analogy was to the point and will connect the dots for any investor they pitch.

With these tweaks and some practice, I think these founders should be able to raise the capital they’re seeking.

Pitching isn’t easy. It takes time to refine a pitch. Sometimes going over the pitch with friendlies who can provide honest feedback will accelerate the refinement process. For early-stage founders, I highly recommend including the origin story in the pitch.

Outsize success requires making decisions with imperfect information. You’re going to get some of them wrong. I believe a material percentage of them, 25% or more, will be wrong. That can be a big number. For every twenty decisions, you’ll get five or more of them wrong. What people don’t realize is that you can get lots of things wrong and still be wildly successful if you’re deciding and executing quickly.

You don’t just make bad decisions and end up having outsize success. There are a few key things to be aware of. One is to reflect and learn from your mistakes. Each decision produces information. Spend time thinking about the information that decision produced and why the decision was wrong. Sometimes it’s chance and there’s nothing you could have done to change the outcome. Often, there’s something you missed. You want to understand what you missed so you don’t make the same mistake going forward. When I reflect, I learn; when I learn, I improve my decision-making; and when my decision-making improves, I increase the percentage of decisions I make correctly with imperfect information (it will never be 100%, though).

The last thing you need to do is important and something I haven’t always done: when other people are involved in your decision-making process or affected by your decision, verbally acknowledge your decision was wrong. It’s hard for many people (including me) to do because of pride and ego. But there are so many benefits that it’s worth putting those things to the side.

When you’re the leader, you set the tone. When people hear their leader acknowledge that he or she isn’t perfect, they realize they don’t have to be perfect either. When people hear their leader share reflections from an incorrect decision, they start to reflect more and share their learnings. This has a huge impact on culture. People start to embrace acting with imperfect information instead of being paralyzed by the fear of making mistakes. They begin experimenting more and taking ownership of the results of their decisions.  

It's also important to speak directly to those who expressed opposition to your decision. It’s important to acknowledge that they were right and you were wrong. It’s not about competing with them; it’s about encouraging people to have confidence in their instincts or analysis. If someone is right and you don’t listen to them, you don’t want to discourage them from sharing their thoughts next time. You want them to have more confidence and conviction in sharing in the future, especially if they help your decision hit rate.

If you talk to people who’ve achieved outsize success, you’ll see they’re just like the rest of us. They made some decisions that were incorrect. What separates them from everyone else is the speed at which they decided and executed and what they did after a bad decision.

I recently spent time chatting with an entrepreneur. I wanted to connect with him because he’s in a non-tech sector I’m interested in getting more involved in. As we chatted, I realized that he has his finger on the pulse of what’s happening in a niche corner of his sector. He understands where it’s going, too. He’s been able to spot opportunities earlier than others and create solutions based on those opportunities. The key to his success is being at the ground level of this niche in his sector, spotting an opportunity early, and executing on what he sees.

The conversation helped me realize the scale of success this entrepreneur could have in the future. I wondered if he recognizes the potential and knows what’s keeping him from getting there. As we chatted, he shared that he does recognize the potential in what he’s doing. He explained his vision of where he wants to be and quantified what success looks like for him. Then he shared what’s holding him back:

• Capital – Executing on the opportunities he identifies requires capital. He’s got some personal capital but needs more to execute on larger opportunities. He doesn’t know how to access investor capital (not venture capital).
• Structure – He knows how to execute profitably on the opportunities he finds using his own capital. He doesn’t know how to structure deals that involve outside investors. He’s not sure what waterfall (i.e., profit sharing) or other deal mechanics are available to be used or how they should be combined to attract investors.
• Presentation – He understands why something is a good opportunity because of his positioning at the ground level and is confident executing with his own capital, but he isn’t sure how to present the opportunity to investors who don’t have their boots on the ground like he does.
• Back-office admin – He hates dealing with accounting, tax filings, entity formation, and a variety of other back-office tasks. It’s a burden that takes time away from finding and executing on opportunities. He does some of this himself and outsources some of it.

He candidly said that in a perfect world, he could get these things taken care of by someone else, focus on doing what he’s great at—finding and executing on opportunities—and take his business to the next level quickly. He realizes that a perfect world isn’t likely to appear. He plans to tackle all of these but realizes it will take time.

This entrepreneur is likely on the cusp of breakout success. I wonder how many other smaller entrepreneurs with “spotter” abilities exist and what solutions are out there to serve the needs of this group.

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I chatted with a founder recently about personal growth and about great founders constantly leveling up as their company grows. He asked a good question: how do I recognize personal growth opportunities?

It’s simple for me—I’ve got one when I’m faced with an important task or challenge that I really don’t want to do. I’ve generally got a list of various things that I need to get done. The one that makes me cringe or that I dread doing is the one that’s likely to lead to personal growth. It’s not 100%, but it happens more often than not when I get that feeling.

I’ve learned to lean into the things I dread with the hope that I’ll grow from them.

It’s often seven or more years before a start-up has a material liquidity event such as an IPO or acquisition. Founders should be comfortable with a journey of that length if they want to pursue entrepreneurship.

I recently had a chat with a venture investor who considered starting his own venture capital firm. One of the main reasons he hasn’t is the realization that it will commit him long-term. It will likely take twelve to twenty-four months to raise the fund. Funds usually have a ten-year life cycle, so once he begins investing that capital into start-ups, he’s committed to managing the fund for a minimum of ten years. That’s an eleven-year-plus commitment he’s not willing to make. Instead of writing larger checks from a VC fund, he plans to write small angel checks. He’s putting more of his own capital at risk, but he wants to preserve flexibility over the next decade.

This investor has deep domain experience and a strong network in a particular sector. Any early-stage founder he works with will get a tremendous amount of help and is more likely to achieve product–market fit.

Listening to this got me thinking. I wonder how many seed-stage venture investors (current or aspiring) who could help companies find product-market fit avoid starting a venture capital fund because of the decade-long commitment.