The Tribe of Insurgents: Lessons from Dinner #1
“All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” — Arthur Schopenhauer
Who are The Tribe of Insurgents?
The Tribe of Insurgents is a peer mentoring group of founders and CEOs of rapidly growing startups. It is invitation-only, membership is private and our only agenda is to help each other create massively profitable companies.
The idea to create The Tribe came to me after speaking with, Laura Bilazarian, CEO and founder of Teamable. We are both tenants in Jason Lemkin’s SaaStr CoSelling Space in San Francisco. Laura is a fantastic CEO. She told me how she raised $4 million at a time when our companies had similar traction — and I was having trouble raising far less money at less than one-half of her valuation. She pitched 3 VCs and got 2 term sheets. “Wow! How’d you do it?” I asked. “My network introduced me.” She replied. “It was really easy because my group are all scaling startups who are already funded by the same VCs.”
Boom. I need that!
On my flight back to San Diego I started my own group to do the same thing: Help each other become companies that investors seek… so they come to us rather than we go to them.
First we must find the right founders — CEOs who absolutely love living in San Diego and want to be the “winner that takes all.” Then we need help each other win.
The only thing that matters in a startup is to create a category. The missing element in San Diego is finding people who know about how to create and sustain hyper-growth. No surprise consider San Diego has never produced a software unicorn. The Bay Area has more than 90 unicorns (see complete list).
[Note: Contrary to local mythology, San Diego is not a high-tech town. The largest employer is the government, followed by government contractors. It only has only one high-tech F500, Qualcomm (QCOM). It went public in 1991 long before they met the “unicorn” criteria of $1 billion valuation as a private, venture-backed company. Although a few companies such as Active Networks and WebSense have come close to unicorn status, Qualcomm remains the biggest success story in San Diego by far. The others left San Diego taking thousands of jobs with them. We remain because this is an awesome town to live in… and yes, it’s easy to retain talent here… if you can find it.]
Criteria to join the Tribe
The Tribe is invite-only. We have twelve members. Many of us were incubated at the EvoNexus accelerator in San Diego.
All of us meet the following:
- Software and SaaS only. We focus on solving problems that are unique to scaling and growing high-tech.
- Executing on plans to exceed $100 million in revenue in less than 5 years. We each seek to become category creators where we are the “winner that takes all.” Yes, we are highly competitive. And aggressive.
- Rapidly growing revenue, reaching at least $1M run-rate in first year of product launch. Most of us are growing faster than 20% per month. As of now, my company, LeadCrunch[ai], is growing at 26% per month at a $2.4 million annualized run-rate in our 10th month of production product launch.
- Each of us has raised more than $1 million in the past 2 years from outside sources. Most have raised more than $2 million in seed financing. Several members have raised more than $10 million.
There are no rules in the Tribe. CEOs of fast growing companies do not want or need to be told what to do.
Our Tribe meets whenever we feel like organizing a dinner. We eat rich food. We get loud. And we invite someone interesting to suffer through our inquisition. Our guests are either VCs or CEOs who’ve had recent big exits (more than $400 million). We do NOT pitch our guests — although anyone is free to do so. Again, no rules. Our explicit intent is to gather intelligence to make ourselves better.
Our first meeting was in April. Our next meeting is soon. Stay tuned… the next guest is world famous.
Our First Guest: Anu Pathria, Correlation Ventures
For our first meeting, we invited Anu Pathria, partner at Correlation Ventures. Anu worked with my chief scientist, Steve Biafore, and board member Krishna Gopinathan at the HNC Software (which sold to FICO for $820 million).
Anu is a brilliant mathematician. Prior to joining Correlation, Anu worked on the FICO score and many other predictive models that are used in healthcare, insurance and fraud detection. Correlation does not lead investments. They follow quickly and typically fill out a financing round.
Anu’s job is to identify and invest in high-growth, early stage companies. He does this with an algorithmic approach where he models 36 or so attributes of a startup to determine if an investment will generate extraordinary returns. Correlation Ventures has one of the most complete and comprehensive data sets on startups, investors and outcomes.
The following are my interpretations of our dinner conversation. In no way am I quoting Anu or other guests.
“Talent hits a target no one else can hit; Genius hits a target no one else can see.” — Arthur Schopenhauer
Big ideas are precious and rare.
Startups are a game of hits. Stunning few will deliver extraordinary returns to an early stage investor. Less than 1% will become unicorns within 10 years (the typical lifecycle for a venture fund). 70% will either die or become self-sustaining. For an investor, having no liquidity in a sustaining business is the same as losing all your money. The first sign of a loser startup is they are not thinking about “how to conquer the world.” Unambitious thinking might explain wny only 0.05% of all new businesses will get venture financing. The best venture capital investors realize this and taking risks to generate acceptable returns.
Success comes from embracing personality faults.
Being a founder of a high-tech startup is a personality fault. There are countless ways to make more predictable returns with less risk. Gallup on 2,500 high-growth startup founders supports this. They identified 10 traits that rarely occur together, but when they do… big things happen. Here’s the list of traits that Gallup identifies (with my interpretation of a few case examples):
- Confidence: You don’t give a shit what others think of you. (Travis Kalanick at Uber… also led to his personal downfall).
- Delegator: You empower your co-founders and managers to do their jobs (Larry Page and Sergey Brin at Google).
- Determination: You never give up. (Elon Musk’s string of failures).
- Disruptor: You hate the establishment (Steve Jobs’ Stanford commencement speech).
- Independent: You get things done with or without outside help.
- Knowledge: You are intellectually curious.
- Profitability: You want to make money.
- Relationship: You build relationships help your company.
- Risk: You are good at identifying and managing risks.
- Selling: People want to buy your product from you. Now.
Notably missing from this list is being highly competitive. Almost half the Tribe are former professional or national-class athletes. Winning is fun.
Bay Area startups are more valuable than in San Diego.
Bay Area startups are typically valued more than 2x higher than those located in San Diego and other secondary markets. Yet, the return on investment in Bay Area startups is higher than any other area. This finding confirms the advice from Jason Lemkin that all early-stage SaaS companies need to have a Bay Area presence.
It’s counter intuitive that in the age of global, instant and free communications that wealth and returns on investment are unevenly distributed. Yet they are.
The reasons for superior Bay Area returns boil down to three factors:
- Capital is local. Last year, Drew Lanza, former general partner of Morgenthaler Ventures, told me: “All capital is local. I never invest in a company more than 30 miles from my house because I need to drop in at moment’s notice to help solve problems.” Drew went on give the single best summary of VC investing I’ve ever heard: VCs limiting factor is time, not deals. This means they seek board positions which minimize their time commitment. Traveling out of area adds a lot of time to every meeting. VCs can only serve on 5 to 6 boards and funds typically have a 10-year lifecycle. This means one new board seat for the first five years then reinvesting in these same companies as they grow. The need to be in the Bay Area diminishes as companies grow. Two of the Tribe are above $10 million in annual revenue. They are large enough that VCs are willing to jump on a plane to meet them.
- The best talent lives in the Bay Area. Growing a company with revenues above $200K per month at 30% per month rarely happens. It requires the right team and investors who believe it can be done. For example, Slack got from $1M to $100M revenue less than 3 years. Their path is unique. It is hard to imagine how they sustained such spectacular growth without the lessons founder Stewart Butterfield learned at Flickr and the wise counsel of his VCs at Accel Partners who had experience growing Facebook, Spotify, and DropBox. I met with an analyst at Accel who told me the story of refusing to take money back from Butterfield when Slack’s first business model failed (an online game). Instead, Accel encouraged Slack to take their messaging platform to market. It worked because Slack could draw upon the talent who had previously growth other unicorns.
- Competition among VCs pushes more money into a few startups giving them unfair advantages. Venture capitalists, like all people, are herd animals. They all want to be a part of the next hot thing. It’s called FOMO or “fear of missing out.” FOMO is the only reason anyone has ever invested in a startup. The more FOMO, the more money a startup can raise. Yet, all startups begin as ideas that are not worthy of investment. As Mark Zuckerberg famously said in his Harvard commencement speech, “great ideas are not born fully formed.” They evolve. Every startup sucks at some point in their early life. When VCs have FOMO on an early company they give that company the ability to evolve. The extra capital allows these startups go through “pivots” where they make radical changes to their business model, market focus and product. This is how shitty startups become great startups. Yet, most angel investors are justifiably fearful of pivots. They want to come in after the startup has figured out product-market fit. Yeah… everyone wants that. But I’ve found that the only investors who understand pivots are the ones who have wealth from early-stage investments in successful moonshots. I’ve never met one of these investors outside of the Bay Area, New York, Boulder, Austin or Boston. [
Note: LeadCrunch failed to raise money in San Diego but succeeded in raising from investors in the Bay Area and New York who have collectively more than $20 billion in exits from more than 40 companies, not including Tesla which skews the numbers.]
Founders die without believers.
All the of The Tribe told stories about getting a key investor just when they were about to fail. Most of us went through this more than once. The most established member of the Tribe had to go through this without any support whatsoever from the community back in 2007.
I’m proud that the Tribe is helping each other. Since our dinner, we have made introductions amongst ourselves that results in more than $500,000 of new investments into the group — mostly from investors who we see as strategic in helping to raise the next round of capital.
If you are an early-stage founder who is running out of capital, then you are “normal.” Failure is also normal. My best advice is to wake up and meditate on three simple ideas:
- “Today I will do something very hard.”
- “Today I will have fun.”
- “Today I will win.”
I guarantee you will feel a lot better about your startup and yourself by the end of the day.
Footnote: Validating The Tribe (aka calling out “small mindedness”)
I knew it was a great idea to start The Tribe of Insurgents when Mike Krenn, President of San Diego Venture Group, called me on a Sunday morning to tell me the group was a bad idea. He didn’t want us taking attention away from his group of 90+ startup CEOs. I’m not sure why Mike thought it was a good idea to tell a self-described “insurgent” to not do something. Especially when the group exists solely for the purpose of helping each other — not hurting others. If anything, we exist to help build an amazing group of companies that will attract Bay Area investors to San Diego.
But he did. And we did it anyway. Now he gets to read about it. Because I am an Insurgent.