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.

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AI will change (not replace) the creative process

One of the misconceptions about AI is that it will completely replace any kind of creative process — a more likely outcome is that it will aid/accelerate them, and here's an example:

Over the last 10 years, I've worked in/around content & design marketplace startups. I also hired hundreds of creatives via freelance, agency, and platform models as a marketer. 

While Canva and similar tools have and probably will continue to dominate the market's low and low to mid-end, there will always be a need for differentiation. 

If you don't believe me, pause for a second, and imagine your 10 favorite brands and influencers all sharing nearly identical TikTok videos based on the same script and visuals. 

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The hockey stick growth slide is broken (here's a better one)

Without question, the most popular slide in a startup pitch deck is the one showing hockey stick growth.

When you find product/market fit and start seeing rapid customer acquisition, the theory goes, your basic X/Y axis of time and revenue will show exponential jumps. Your monthly revenue goes from $7,000 > $70,000 > $700,000, hence the hockey stick graphic.

Obviously, this is an extremely attractive slide to put in your pitch deck or financials. And while it’s clearly oriented toward venture capital investors, over the last decade hockey stick growth thinking has made its way into private equity and the broader marketplace as others learned from and emulated the growth of Facebook, Google, etc.

The slide does have value, but investors, companies, and founders still frequently mistake the hockey stick as a model for growth, rather than the consequence of it.

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What adding value looks like

One of the first pieces of startup jargon you’ll hear when creating a company is the importance of focusing on pain points, and adding value.

It’s a simple idea: talk to potential customers, find out what’s not working, create an experiment that addresses that pain point, and see what happens.

In lean startup language this is often called a MVP (minimum viable product) but it’s been around since the scientific method was invented, and maybe even longer.

For the most part, big data sets aren’t necessary at this stage. If you listen to your customers, look at their habits with respect to your product vs. what they do otherwise, you’ll find out quickly if you’re adding value to their life and/or work.

But adding value can work in a lot of ways, not all of them are real and/or sustainable on even a medium range much less long-term. Lyft and Uber used claims of revolutionizing transportation to create artificial growth and “solve” a pain point for consumers. Yet, both companies have heavily subsidized the cost for a majority of riders, and lost billions of dollars each year.

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A startup is just a series of prioritizations

In the early going, before there is a product or service, all you are doing is looking at a relationship between people, and maybe the market at large. 

The goal is to answer one question: can we create something that is useful, interesting, meaningful, inspirational, valuable, and/or helpful to a specific person? 

If you can, and they share with you why it has meaning or value, then you can build a community around it. 

This is what every "visionary" pays lip service to, but experienced founders know: an early stage company or project is just an exercise in building community.

If you focus on growth alone, you may occasionally stumble across value, but you're likely to miss many of the non-transactional reasons people relate to a company or organization - why they are loyal and choose to stick with something, or why they choose to try something new. 

Your job is to keep a list of 10, 20, 50, or even hundreds of priorities that reflect the values of your community...and constantly re-prioritize the list based on what is possible, and what can be imagined.

If the list is all imagination, you'll miss the opportunity to deliver meaningful value. If it's all value here and now, you'll miss the chance to build a community with vision.