63 ms·

Thought Experiments to De-Risk Your Startup

215 points by lpolovets 10y ago

btrautsc 10y ago
this is great
highCs 10y ago
Just in case you got trapped, this is mostly a boilerplate which goal is not to help you but the author to get the appropriate image that would allow him to invest in companies that are doing well. > How do competitors view you? Think about your 2-3 closest competitors. If you asked their CEOs to truthfully describe your company's strengths and vulnerabilities Well, your 6 months old startup has no "strengths and vulnerabilities". It should also not have direct competitors. Only big companies have this kind of things. You have code, users and growth. > Are you ready for a Series A? > Imagine that instead of being the founder of your company, you're an investor You already ask yourself these questions. > The debate from hell This one is decent and I'm nice. You already did this with your cofounder most of the time. > Was your MVP truly minimal? Who cares, you've survived. > Stomach-churning churn numbers You will stress automatically about churn. > The missing key Don't hire "key role". Only big companies do that. > Laughed out of the room Decent and I'm nice. > Unexpectedly large market By the way, only investors say market when talking about startups. While this has sense, it's kinda a concept for big companies again. Your startup has early users and say pool / niche of those. > Unexpectedly small market You rarely have an unexpectedly small market. Most of the time you have no market at all: you have built something people don't want. > How does the trajectory of the world over the next 5-10 years align (or misalign) with what you're doing? If you're growing, you're "aligned". And on and on. The intention is not really to help you here I believe.
- dang 10y ago
  This sort of dismissal based on platitudes ("Most of the time you have no market at all") is the sort of comment we don't want on Hacker News. Anything can be dismissed this way, and anyone can do it. It feels good, gets upvotes, and generates more of the same—and thus the discourse clogs up up with more and more of this. That's bad. And what does your apparent critique boil down to? "The intention is not really to help you here I believe"—in other words, (a) you read minds and (b) you assume your conclusion. For higher-quality discussion, we should apply the Principle of Charity: that is, assume the strongest plausible interpretation of an article and respond to that. Poking holes in a weak one may be fun but it is not substantive.
  - shurcooL 10y ago
    > gets upvotes Why would it get upvotes if it's not helpful? Just trying to understand.
    - dang 10y ago
      Sadly, the upvote system reacts eagerly to many things that are bad for HN, e.g. indignation, snark, cynicism, sensationalism. One can speculate about why—my theory is that it plugs into reflexive neural circuits, rather than the slower, reflective ones that make for more thoughtful reactions—but the fact itself is painfully well-established.
      - pcmaffey 10y ago
        Really interesting counterposition of the terms "reflex" and "reflect". Both share the same etymological root and core meaning, but through application have mirrored distinctions that make them perfectly beautiful opposites, in the way you're using them.
        Nomentatus 10y ago
        It's common for etymological roots to branch to opposites, or simply invert. And then maybe revert again. Almost too common to note, really. A byproduct of how core association is to our minds it would seem.
        dang 10y ago
        I couldn't agree more. It's the best way I've found to explain the difference between what we do and don't want in HN comments: https://hn.algolia.com/?sort=byDate&prefix=false&page=0&dateRange=all&type=comment&query=by:dang%20reflexive%20reflective https://hn.algolia.com/?sort=byDate&prefix=false&page=0&date...
      - DenisM 10y ago
        You theory lends itself to validation. One aspect is timing - upvotes produced later after reading will be more thoughtful. The other aspect is effort - if upvote required certain effort over a length of time, that upvote too would be more meaningful. On the other hand, a short burst of heroic effort points to a reflexive reaction. If we could somehow inject effort into the voting we would get some really meaningful weights for each vote. This could be calibrated with manual review of sample comments. We could also use this knowledge to calm people down - confronting a person with a lengthy task might give them time to rethink their position. So... how is that for an idea: having voted on something you get an option to return and double-down your vote, but no sooner than five minutes later. To try more things we could also show the user his recent upvotes, and mix in some comments he did not vote on, so that the user had to stop and think.
- mjevans 10y ago
  I think you're dismissing the competitors too early. It can be viewed more broadly as well. You are not just competing with similar businesses, but also the potential that customers literally 'do nothing'. In addition to that, there could also be legacy solutions or alternative ways of avoiding the issue that your company seeks to solve. Another important spin on this might be if you /should/ have had competition but they no longer exist. That's something that the search here can turn up and provide further input for the other thought points.
  - greglindahl 10y ago
    A great way to look like an idiot is to get up in front of VCs and say there's no competition. The points that you bring up are all much better things to talk about than a flat "we have no competition" claim.
jeffdavis 10y ago
"during first meetings, most investors are looking for "reasons to say no" Is that true? There's always a reason to say "no" to a startup. I would think that they are looking for reasons to say "yes", and then getting more skeptical as they get interested.
- mrkurt 10y ago
  I think it's worded funny. Most investors are already saying "no" in their head, and looking for reasons to justify it. The trick is to get them to trying to justify a "yes". This was always the power of a crazy revenue graph — impressive revenue growth immediately flips people around.
- lpolovets 10y ago
  (I'm the author.) It's not exactly true but it's a decent approximation. Because the investment rate is so low (~1%), and because professional VCs often see 1000+ pitches per year, red flags are a quick way to allocate time more efficiently. If I see 1000 pitches, 100 might be very strong right off the bat, 200 have promise, and 700 have a number of aspects that would make me reluctant to invest. I will pass on the 700 quickly so that I can focus more on the other 300. If my investment rate were higher -- say 15% -- then I might drill into some of those 700, too. But because it's 1% and there are only so many hours in a year for meetings, if I see a red flag or a few yellow flags in a first meeting, I'll use that as justification to give a quick pass. I think most VCs are similar.
  - CalChris 10y ago
    Same with resumes.
    - lpolovets 10y ago
      Exactly! That's a great analogy.
  - randall 10y ago
    This is why YC is such a breath of fresh air for entrepreneurs. VCs aren't bad for this behavior, it's completely rational, but if the big winners look like red flag city initially, a higher investment rate of smaller capital allocations can net better outcomes. (Airbnb / Pebble for the up and downsides) YC's scaling over the last few years w/ sam + pb (and now michael) is a feature that some see as a bug of dilution. 200 companies a year now get extra access to angel money at a minimum, some percentage of which (mine!) likely wouldn't have normal access b/c of red flags.
ChuckMcM 10y ago
I really resonate for planning with the 'debate from hell' and while its fun to posit a world class debater on the other side, sometimes it helps to imagine a clueless idiot as well. Founders are clearly founders because they really like their idea, and people "just don't get it" and are spewing irrational arguments at it in an offensive way can easily get under your skin if you haven't already thought about them attacking you. Sometimes you'll just have to walk away and if you really want their support that can be really hard to do.
- CalChris 10y ago
  Yes. This is like debating a rational knowledgeable opponent as opposed to debating an irrational unknowledgeable opponent. You really need to be prepared for both. The one is more like vetting. The other is more like selling. I think investors especially want an answer to the irrational because frankly, the rational knowledgable argument is hard to understand. That gets worse the deeper into a bubble we get. Did I just say that investors are not rational? Yes, I just said that investors are not rational. I'm not a believer in the Efficient Market Hypothesis: https://en.wikipedia.org/wiki/Efficient-market_hypothesis https://en.wikipedia.org/wiki/Efficient-market_hypothesis
  - barry-cotter 10y ago
    You misunderstand the EMH. It doesn't say that the average investor is rational. In its weak form it says that it's very, very hard to beat the market. Imagine you are an average VC. You lose money. You lose money because the market means Sequoia and other top tier firms get first refusal on all the best deals. Also you are overwhelmingly likely to be a fairly useless investor. If you are a great investor you can set up a top tier VC fund based on your own investing history. See Andreesen Horowitz. Likewise in the stock market, bond market, every market but the process happens faster the more open, transparent and liquid it is. If you can achieve a 30% year on year return people will happily lend you money or invest with you. Most people are just lucky or their advantage disappears at some point. But some people really are just that good and they either reach a size where they can't get above average returns any more because their strategy doesn't work at that scale, Apple, Berkshire Hathaway or they deliberately stay smaller than they could be to keep their money spigot working, Renaissance, Citadel.
Nomentatus 10y ago
"Execution skills" - yup, nearly everyone thinks they're above average but do note that in business those supposed "execution skills" very frequently turn out to be trade secrets instead - that is, intellectual property that's confidential and invisible. If anyone uses the phrase "execution skills" (even if just in internal dialogue) and isn't referring to specific trade secrets, they're probably just pumping out hot air, with extra jazz hands.
CalChris 10y ago
> If you need more capital to keep the company alive but don't have a clear plan for using that money then you're probably not ready for your next major round of financing. That's a polite way of hinting that you really should consider shutting down.
- lpolovets 10y ago
  (I'm the author.) Kind of :). But this is also what bridge/extension rounds are for. Perhaps you raised a $1.5m seed round and your goal was to validate 4 key hypotheses with that capital. If you validated all 4, then that's usually a great segue into raising a Series A. If you validated 0-1, that probably means your company isn't viable. If you validated 3 out of 4, or maybe even 2 out of 4, there's evidence that you might be on the right track, and you can often raise another $1m or $2m extension from investors who believe that you will validate the remaining hypotheses if you have a little more runway.

215 points by lpolovets 10y ago

this is great

Just in case you got trapped, this is mostly a boilerplate which goal is not to help you but the author to get the appropriate image that would allow him to invest in companies that are doing well. > How do competitors view you? Think about your 2-3 closest competitors. If you asked their CEOs to truthfully describe your company's strengths and vulnerabilities Well, your 6 months old startup has no "strengths and vulnerabilities". It should also not have direct competitors. Only big companies have this kind of things. You have code, users and growth. > Are you ready for a Series A? > Imagine that instead of being the founder of your company, you're an investor You already ask yourself these questions. > The debate from hell This one is decent and I'm nice. You already did this with your cofounder most of the time. > Was your MVP truly minimal? Who cares, you've survived. > Stomach-churning churn numbers You will stress automatically about churn. > The missing key Don't hire "key role". Only big companies do that. > Laughed out of the room Decent and I'm nice. > Unexpectedly large market By the way, only investors say market when talking about startups. While this has sense, it's kinda a concept for big companies again. Your startup has early users and say pool / niche of those. > Unexpectedly small market You rarely have an unexpectedly small market. Most of the time you have no market at all: you have built something people don't want. > How does the trajectory of the world over the next 5-10 years align (or misalign) with what you're doing? If you're growing, you're "aligned". And on and on. The intention is not really to help you here I believe.

dang 10y ago
This sort of dismissal based on platitudes ("Most of the time you have no market at all") is the sort of comment we don't want on Hacker News. Anything can be dismissed this way, and anyone can do it. It feels good, gets upvotes, and generates more of the same—and thus the discourse clogs up up with more and more of this. That's bad. And what does your apparent critique boil down to? "The intention is not really to help you here I believe"—in other words, (a) you read minds and (b) you assume your conclusion. For higher-quality discussion, we should apply the Principle of Charity: that is, assume the strongest plausible interpretation of an article and respond to that. Poking holes in a weak one may be fun but it is not substantive.
- shurcooL 10y ago
  > gets upvotes Why would it get upvotes if it's not helpful? Just trying to understand.
  - dang 10y ago
    Sadly, the upvote system reacts eagerly to many things that are bad for HN, e.g. indignation, snark, cynicism, sensationalism. One can speculate about why—my theory is that it plugs into reflexive neural circuits, rather than the slower, reflective ones that make for more thoughtful reactions—but the fact itself is painfully well-established.
    - pcmaffey 10y ago
      Really interesting counterposition of the terms "reflex" and "reflect". Both share the same etymological root and core meaning, but through application have mirrored distinctions that make them perfectly beautiful opposites, in the way you're using them.
      - Nomentatus 10y ago
        It's common for etymological roots to branch to opposites, or simply invert. And then maybe revert again. Almost too common to note, really. A byproduct of how core association is to our minds it would seem.
      - dang 10y ago
        I couldn't agree more. It's the best way I've found to explain the difference between what we do and don't want in HN comments: https://hn.algolia.com/?sort=byDate&prefix=false&page=0&dateRange=all&type=comment&query=by:dang%20reflexive%20reflective https://hn.algolia.com/?sort=byDate&prefix=false&page=0&date...
    - DenisM 10y ago
      You theory lends itself to validation. One aspect is timing - upvotes produced later after reading will be more thoughtful. The other aspect is effort - if upvote required certain effort over a length of time, that upvote too would be more meaningful. On the other hand, a short burst of heroic effort points to a reflexive reaction. If we could somehow inject effort into the voting we would get some really meaningful weights for each vote. This could be calibrated with manual review of sample comments. We could also use this knowledge to calm people down - confronting a person with a lengthy task might give them time to rethink their position. So... how is that for an idea: having voted on something you get an option to return and double-down your vote, but no sooner than five minutes later. To try more things we could also show the user his recent upvotes, and mix in some comments he did not vote on, so that the user had to stop and think.
mjevans 10y ago
I think you're dismissing the competitors too early. It can be viewed more broadly as well. You are not just competing with similar businesses, but also the potential that customers literally 'do nothing'. In addition to that, there could also be legacy solutions or alternative ways of avoiding the issue that your company seeks to solve. Another important spin on this might be if you /should/ have had competition but they no longer exist. That's something that the search here can turn up and provide further input for the other thought points.
- greglindahl 10y ago
  A great way to look like an idiot is to get up in front of VCs and say there's no competition. The points that you bring up are all much better things to talk about than a flat "we have no competition" claim.

jeffdavis 10y ago

"during first meetings, most investors are looking for "reasons to say no" Is that true? There's always a reason to say "no" to a startup. I would think that they are looking for reasons to say "yes", and then getting more skeptical as they get interested.

mrkurt 10y ago
I think it's worded funny. Most investors are already saying "no" in their head, and looking for reasons to justify it. The trick is to get them to trying to justify a "yes". This was always the power of a crazy revenue graph — impressive revenue growth immediately flips people around.
lpolovets 10y ago
(I'm the author.) It's not exactly true but it's a decent approximation. Because the investment rate is so low (~1%), and because professional VCs often see 1000+ pitches per year, red flags are a quick way to allocate time more efficiently. If I see 1000 pitches, 100 might be very strong right off the bat, 200 have promise, and 700 have a number of aspects that would make me reluctant to invest. I will pass on the 700 quickly so that I can focus more on the other 300. If my investment rate were higher -- say 15% -- then I might drill into some of those 700, too. But because it's 1% and there are only so many hours in a year for meetings, if I see a red flag or a few yellow flags in a first meeting, I'll use that as justification to give a quick pass. I think most VCs are similar.
- CalChris 10y ago
  Same with resumes.
  - lpolovets 10y ago
    Exactly! That's a great analogy.
- randall 10y ago
  This is why YC is such a breath of fresh air for entrepreneurs. VCs aren't bad for this behavior, it's completely rational, but if the big winners look like red flag city initially, a higher investment rate of smaller capital allocations can net better outcomes. (Airbnb / Pebble for the up and downsides) YC's scaling over the last few years w/ sam + pb (and now michael) is a feature that some see as a bug of dilution. 200 companies a year now get extra access to angel money at a minimum, some percentage of which (mine!) likely wouldn't have normal access b/c of red flags.

ChuckMcM 10y ago

I really resonate for planning with the 'debate from hell' and while its fun to posit a world class debater on the other side, sometimes it helps to imagine a clueless idiot as well. Founders are clearly founders because they really like their idea, and people "just don't get it" and are spewing irrational arguments at it in an offensive way can easily get under your skin if you haven't already thought about them attacking you. Sometimes you'll just have to walk away and if you really want their support that can be really hard to do.

CalChris 10y ago
Yes. This is like debating a rational knowledgeable opponent as opposed to debating an irrational unknowledgeable opponent. You really need to be prepared for both. The one is more like vetting. The other is more like selling. I think investors especially want an answer to the irrational because frankly, the rational knowledgable argument is hard to understand. That gets worse the deeper into a bubble we get. Did I just say that investors are not rational? Yes, I just said that investors are not rational. I'm not a believer in the Efficient Market Hypothesis: https://en.wikipedia.org/wiki/Efficient-market_hypothesis https://en.wikipedia.org/wiki/Efficient-market_hypothesis
- barry-cotter 10y ago
  You misunderstand the EMH. It doesn't say that the average investor is rational. In its weak form it says that it's very, very hard to beat the market. Imagine you are an average VC. You lose money. You lose money because the market means Sequoia and other top tier firms get first refusal on all the best deals. Also you are overwhelmingly likely to be a fairly useless investor. If you are a great investor you can set up a top tier VC fund based on your own investing history. See Andreesen Horowitz. Likewise in the stock market, bond market, every market but the process happens faster the more open, transparent and liquid it is. If you can achieve a 30% year on year return people will happily lend you money or invest with you. Most people are just lucky or their advantage disappears at some point. But some people really are just that good and they either reach a size where they can't get above average returns any more because their strategy doesn't work at that scale, Apple, Berkshire Hathaway or they deliberately stay smaller than they could be to keep their money spigot working, Renaissance, Citadel.

Nomentatus 10y ago

"Execution skills" - yup, nearly everyone thinks they're above average but do note that in business those supposed "execution skills" very frequently turn out to be trade secrets instead - that is, intellectual property that's confidential and invisible. If anyone uses the phrase "execution skills" (even if just in internal dialogue) and isn't referring to specific trade secrets, they're probably just pumping out hot air, with extra jazz hands.

CalChris 10y ago

> If you need more capital to keep the company alive but don't have a clear plan for using that money then you're probably not ready for your next major round of financing. That's a polite way of hinting that you really should consider shutting down.

lpolovets 10y ago
(I'm the author.) Kind of :). But this is also what bridge/extension rounds are for. Perhaps you raised a $1.5m seed round and your goal was to validate 4 key hypotheses with that capital. If you validated all 4, then that's usually a great segue into raising a Series A. If you validated 0-1, that probably means your company isn't viable. If you validated 3 out of 4, or maybe even 2 out of 4, there's evidence that you might be on the right track, and you can often raise another $1m or $2m extension from investors who believe that you will validate the remaining hypotheses if you have a little more runway.