Tell Me What You Know You Don’t Know

By Orson Stadler

“Look at the charts I’m on top right now” — Cassidy

As an early-stage investor, I regularly encounter pitch-decks littered with start-up platitudes about disruption and agility that provide limited if any insight into the business itself. This is often epitomised by the forward-looking ‘bottom-left-to-top-right’ chart, that at an early-stage usually represents an intrinsically artificial trajectory to a wishful destination while providing no granularity on the business model.

It’s a rocky road to the ‘top-right’ and that’s OK

Clearly, these charts are a useful tool to express an entrepreneur’s ambition, however, I’m more interested in exploring the journey (and the roadmap) than the destination. Therefore, I would encourage founders to also focus on answering the following questions, not only to increase the likelihood of getting funded but as these questions simply encourage good business practice:

  1. What are the unknowns that exist within your model that underpin the success or failure of your business?
  2. How will you test your theory for each of these unknowns and what will success look like?

“Sell my secrets and get top dollar” — Drake

These questions look to examine what structural bets the founders are making, ensuring that these are conscious, rational and premeditated ‘hypotheses’. This is not to completely discount the ‘indicator metrics’ (i.e. DAU or MRR), but rather accept these as an output of the underlying ‘hypotheses’.

These ‘hypotheses’ will eventually form the basis of the ‘secrets’ that Peter Thiel identified in ‘Zero to One’ as the foundation of great companies embodied through the iconic question:

What important truth do very few people agree with you on?

These secrets do not necessarily need to be paradigm shifting and ‘technical’ in the ilk of Musk’s Tesla, SpaceX, SolarCity or Hyperloop (but obviously it would be great if they were!).

Rather consider AirBnB’s success was built on an identification that consumers had no alternative but to pay high prices for hotel rooms, and property owners had few options through which to safely and efficiently rent out short-term space. These open secrets were in themselves underpinned by the hypothesis that users (on both sides of the marketplace) would trust the platform, which AirBnB was able to make ‘true’ through a combination of insurance and professional photographers in 2011/12 (alongside countless other product innovations over the prior and following years). In this sense the AirBnB founders did not view the testing of a hypothesis as a purely passive experiment, but also an exploration of how they could make their theory ‘true’.

However, not all hypotheses are created equal…

“Reintroduce them to honesty, show ’em that they need more” — J.Cole

As well as helping founders to identify and validate the underlying ‘secrets’ of their business, the ‘test’ framework has three further benefits including:

  1. Focus on Measurement
    The concept of a ‘test’ enforces a structure of specific target setting, which in turn encourages a definitive and quantitative recognition of ‘success’ and ‘failure’. This structure ensures measurement becomes a core tenant of the company’s process of establishing Product-Market-Fit (PMF). This ex-ante expectation setting also reduces the emotional difficulty of being wrong and the associated biases, which facilitates ‘better’ decision making and thereby helps to build a stronger business.
  2. Alignment of Targets
    The ‘honesty’ of the ‘test’ pays further dividends post-investment as it enables alignment of expectations with investors, ensuring that everyone is working towards the same definition of success, thereby helping to limit friction at crucial company inflexion points (in particular follow-on funding rounds). Early-stage investors (should) understand the high-risk nature of funding start-ups and therefore respect founders’ recognition of the unknown variables far more than a hard-sell on a ‘vision’.
  3. Improved Investor Communication
    The ‘test’ framework adjusts the dynamic of ‘pitch’ meetings from confrontational to collaborative, as it encourages promotion-focused debate and collaboration (“How do these unit economics evolve at 10x the current scale?”) around the underlying ‘hypotheses’, as opposed to prevention-focused questioning of the ‘indicator metrics’ (“How many Daily and Monthly Active users do you have?”).

“Everyone has a plan ‘till they get punched in the mouth” — Mike Tyson

The process of building a start-up should be a constant cycle of ‘test and learn’ as founders iterate on their initial launch hypotheses. However, this should not be confused with the banalities of ‘failing fast’ and ‘pivoting’, as many founders have not put in place structures that enable them to determine why or how they are ‘failing’ (let alone doing it quickly) or what they are ‘pivoting’ towards (or away from).

Therefore, I encourage founders (and investors) to accept and communicate the unknowns of going to market (a process that can often be likened to being ‘punched in the mouth’). This honesty will encourage the development of systems and processes that are able to identify and accept the outcomes of the ‘tests’, which in turn facilitates the implementation of real ‘strategy’ on the basis of quantitative outcomes.


Special thanks to Gareth Jefferies (Northzone) for his continued support of my questionable music choices.