3 ways homogeneous VCs & founders incentivize capital inefficiency

Many venture-backed startups are capital inefficient, and while some of this is required for the model, the more homogeneous it is at the top (👨👋🏻), the higher the risk...

Here are three ways I saw this play out working across operations & marketing in startups from 2013-21:

1) Over-focus on revenue at the expense of real, sustainable, and specific customer/user acquisition

If you're paying any attention at all, one of the first lessons working in a startup is that revenue is a byproduct of growth, and growth means nothing if it's not segmented.

In many cases, the pressure of creating constant, impressive growth leads to up-and-to-the-right syndrome, where investors and founders essentially spend all their time figuring out how to corner the market & outmaneuver competitors rather than learning from and creating repeatable growth within specific segments.

This is also why you see product launches and funding round announcements for things that aren't tested or that quickly flare out while creating massive risks for the public & employees.

This is worsened with homogeneous founders because their networks tend to operate on social status within small circles that recycle and increase overconfidence, aka "saw you raised! you're crushing it bro!" when cash burn & lack of focus indicates the opposite.

Qs both investors and job seekers can ask:

- What's working/not working within your top 3 segments?

- What are your top 5 experiments for new niches right now? Which ones are most promising, and why?

- How much of your MRR is repeatable, and what data do you have to support that?

- What kinds of things are fully operationalized (the flat/horizontal part of the stairs) vs. need to be fleshed out (the vertical/up part of the stairs)

2) Reckless/careless hiring

If you've been reading the headlines & statements from Big Tech, you've probably heard a lot of "whoops, we over-hired," which in some cases is true and in some is an excuse for poor management (more on that some other time).

One of the reasons I advise job seekers always to ask, "what's your next milestone" when considering a role is that, in a startup, everything revolves around the answer to this.

When there is a funding round, a startup's bank account is refilled & hiring increases. This isn't automatically a bad thing, it's part of the model...but everything has to map back to that milestone, which is often ~12-18 months out.

The more homogeneous it is at the top, the more likely it is for that overconfidence and narrow field of view I mentioned earlier to appear in hiring.

In other words, there's a lot of "hire some people who feel like a culture fit and figure it out" at the founder, executive, and director level and not a lot of mapping back to the milestone.

As cash burn increases, user/customer growth goes up, problem #1 mentioned above comes into play, and things get chaotic and inefficient. A corollary is that the further you are away from homogeneous leadership in areas like skin color, gender/gender identity, etc., the more stress and risk you experience.

Qs both investors and job seekers can ask:

- Why are you hiring for this role/team right now?

- How far out is the next company/org milestone, and what are 2-3 metrics this team will drive to contribute to that?

- What things is this role/team dependent on from internal partners, and what resources are in place in those areas so far?

3) Reduced attention to market research & design thinking

A bunch of years ago, I heard someone say, "the most important differentiator isn't what you know or what your product does, but what you know about your customer."

That stuck with me, and not just because it reflected the (sometimes useful, often clumsy & harmful) attempts at personalization and customization that accelerated from 2010-20.

The more homogeneous LPs, GPs, and founders are, the less likely they are to think critically, problem-solve, practice/test assumptions, and develop *enough* models to listen to and consider what customers actually want.

As a side note, this is also why you see a lot of pitch decks & presentations with single data points like "78% of pigeons say they are dissatisfied with bread crumbs... and that's why we're building uber for gourmet bird food because that's what pigeons want."

Pigeon jokes aside, this is also backed by decades of science/research that show the more homogeneous a group of decision-makers are, the less cognitive elaboration (aka creativity) they engage in.

And that leads to wasting money, time, and energy, all things I saw firsthand while working in startups.

Qs both investors and job seekers can ask:

- What's your normal process for doing market research & positioning for new features, products or services?

- How do you stress test ideas for bias and narrow thinking?

- What strategy, tactics, and data collection do you have in place to incorporate insights from across your organization?

*Note: as with all due diligence, if you are a job seeker or investor, all of the questions above are aimed at returning specifics. If a hiring manager or founder can't or won't be specific in their response, it usually means a) they haven't thought about that question and/or b) it's not a priority.