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Repeat Founders and the Risk of a False Positive
A number of blog posts recently have mentioned this, but we seem to be experiencing a rise in repeat founders starting new businesses and raising seed capital. We’re also seeing a wave of folks who were not founders, but were star players among the first 25 folks at a unicorn company also starting new companies.
As a founder with that kind of experience, you are likely to find that a lot of the typical advice for startups on the internet isn’t quite applicable. You are probably able to raise a fairly large round pre-launch. You are unlikely to raise a small pre-seed, and are probably going to jump straight to a multi-million-dollar institutional seed or small A round. Early capital will be much easier for you to raise because there will be a number of seed or series A funds that will want to buy the opportunity to work with you, even if your idea isn’t fully baked.
These seem like good things, but could lead you to a place where you have been trapped by a string of early false-positives. What may seem like a high-class problem can end up being a bit of a nightmare as you find yourself stuck with an ok, not great idea and the burden of a company that you aren’t that excited about. This happens for a few reasons.
1. Great ideas often get refined by struggle
But jumping straight to a large round out of the gate, you miss out on some of the refining fire that you probably experienced in your first company. You probably struggled to get co-founders or early team members to join you because you had limited credibility. Investors needed to see real points of proof before they got interested. You needed to find the most scrappy and cost efficient way to get a product out, and in the process learned tons about the market and customer you are trying to serve. Being more experienced allows you to skip some of the steps above, but in the process, you may lose out on much of the learning and evolution that those steps would bring.
2. Your own conviction and dedication to the idea gets solidified in these early days too
When things are tough early on, you are forced to ask yourself whether you really believe in this business and can’t help but dedicate your energies behind this problem. The hard struggles test your own conviction and vigor at a time when the cost of starting over are relatively low. As much as you may be your own worst critic, there is nothing like getting slapped in the face by the market to really test your grit for the road ahead.
3. Repeat founders are likely to execute at a much higher level early on
Their early hires are probably much stronger too, which allows for better execution as well. These seem like good things, but again may be a false-positive trap. With a crappy product and mediocre execution, getting any signs of customer love becomes a stronger signal of PMF. But if you are able to build beautiful products, get great PR coverage, and execute flawlessly on optimizing your marketing funnel, you are more likely to show some positive signs that things are sort-of working. Great execution may allow a “nice-to-have” product to gain early traction. This may seem great at first, but may lead you to start building the rest of the business on a pretty weak foundation.
These challenges put founders in a precarious position because they all contribute to a serious loss of agility. And I’d argue that agility is one of the most important attributes that one should be optimizing for at the earliest stages. You lose agility because you probably have brought on a larger team than you otherwise would have as a first time founder. It’s harder for a larger team to change course, and you don’t want to de-motivate these great people with shifting strategies or a change in vision.
You also lose agility because you are more likely to find yourself in a gray zone of good-not-great traction. Because of strong execution and relatively more capital, you are able to generate some positive data from sheer force of good execution. With lesser resources and a lesser team, you’d only get positive data if you really hit on a painful problem with a powerful solution. But because of the experience and skill of the team, it ironically is harder to know if you’re really onto something great.
And, because you have taken capital from investors that are more likely than not to be your cheerleader, keeping high spirits can be tough. They are excited to be investors in your company, and don’t want to risk their future ability to invest in follow-on rounds of your company. So they are hesitant to raise concerns for fear of upsetting you and making it seem like they’ve lost faith. They are most likely to encourage you to keep going, and that metrics will only improve if you keep plugging away. It’s a lot easier for the investor to tell their partners “things are headed in the right direction, it just takes time” vs “things aren’t working, they are going to start over”. These forces create more inertia to keep you going in your initial direction, even if it’s the wrong one.
The final compounding issue is that although you were able to raise a larger round earlier and with greater ease, you will be judged on more or less the same standard as every other company at the series A. You are likely raising your next round on traction and demonstrable PMF, and the bar is going to be pretty high. Other companies that you are competing with for those series A dollars may actually be 2–3 years older than yours and have really honed in on their customers and product. You’ll have to get to the same level of traction in half or a third of the time, from a standing start. Not the easiest place to be.
So, what does one do as a repeat founder? Here are a couple ideas.
First, even if you raised a large seed out of the gate, be super conservative with your burn until you are sure of PMF.
Hire the kind of people that are a fit for this stage, which usually means individual contributors (not executives), and generalists vs. specialists. I’d also try to hire people who you believe would be useful and committed even if you needed to make a massive pivot. I’ll steal a phrase from Josh Kopelman and say that you want to build a team that is a heat seeking missile and is particularly good at quickly and ruthlessly testing opportunities.
Second, you want to have a really high bar for what PMF looks like.
Be aware of the risk of being stuck in a gray zone. Know that the quality of your execution should be better, so it’s a given that your outcomes will look better, even if you are on the wrong track. Also, it’s likely that the bar for traction is higher today than when you started your last company. Be very aware of what the the market looks like today. You will be evaluated based on how your business looks relative to what success looks like today, not based on what success looked like 5 years ago.
Third, you want to work with investors that are along for the twists and turns.
Some investors are really great after PMF, but are not great before PMF, even if they work at early stage funds. Try to be diligent about figuring out how often these investors have worked with founders pre-launch, and how often they’ve been involved with companies that have had to iterate multiple times in the early days of the business.
Finally, be willing to pull the plug early.
It’s so hard to do, but life is too short to invest your energies into something that you don’t believe in. You can offer your investors their money back, or allow them to roll-it into another business if you have an idea you want to pursue. There is obviously a balance here, as you probably got to where you are because you are a run-through-walls kind of entrepreneur. But if you haven’t burned that much capital yet, starting over may be the best thing to do.