Starting a Company in 2020

What it takes to be a pre-seed founder, why investing at this stage matters and what is “venture fundable”

You might have noticed a few additions to our team — starting with Sarah, and more to come. Superstars, all of them. This note is different because the prompt for it is my departure from the Unshackled team to head to Harvard Business School. After two years doing pre-seed (and a total of four in venture), I noticed a few things particular to Unshackled that I wanted to highlight.

If this reads like a love letter to the work we’ve been doing, great — I’m telling you upfront and a bit shamelessly. But if this reads as something useful to you as a founder, even better.

How to start a company in 2020

Now, let’s say you just decided to start a company. Congratulations: you’re in for one of the hardest journeys of your life. Don’t waste time with anything else: just make it real ASAP. Get started, talk to customers, iterate. Be the change you want to see, build the product that solves your problem. Dream big and tackle huge challenges. Innovate and press forward. We’ll be here with the rest of the VC community to help you and catalyze your growth.

Ok, you‘ve already heard all the platitudes and encouraging, but empty, advice. Let’s get a bit into the weeds here. Because while the work of founders and employees is what moves startups, VCs still hold the key for much of the access and resources people need to succeed. And too many average VCs talk in broad statements with little concern for reality. If I can just pull back the curtain a little bit on how we at Unshackled think about things, it might help you.

There are four problems with venture today: venture-backability, problem-founder fit, differentiation, and access.

The problem with venture in 2020: what is ‘venture backable’

The textbook answer for being ‘venture backable’ is being designed to scale:

  • Go for the $1B+ market size: make sure you’re building something a lot of people or a lot of companies would want to pay for;
  • Make sure you have software margins: 50%+ gross margin in producing, selling and distributing (before overhead);
  • Defensibility: your position is protected in case you are successful — patents, brand, IP, tech.

Ok, great. But consider the following companies:

All of these companies raised ample capital. All of them break one or more rules above. And the more familiar you are with the tech scene, the more you have explanations as to why VCs decided to break their framework. But some of these still make me scratch my head because these and many similar companies (1) don’t have software margins, (2) don’t have inherent defensibility, and (3) were tackling apparently minuscule markets.
The only possible explanation is that venture-backability is a judgment call. Remember this the next time a VC passes on your company because it’s not venture backable.

To help you understand how people like us make that call, think about the following frameworks:

The “no one was ever fired for buying an IBM” thought process also applies to VC. Your typical seed VC thinks of the world in ‘buckets’ and will immediately put your company into one of these buckets as they look through your deck. Some buckets are perceived as being venture backable; some are not. That’s it. Sometimes it’s not even correlated with being profitable or tackling large markets.

Often, if they like you and your company, they may ignore these rules completely and simply invest. Most generalist VCs don’t have a rubric. For some, the decision-making process is frequently downright irrational. Perhaps due to the fatigue that comes with talking to hundreds of founders working on the same problem, to the fact that many LPs don’t care about enforcing good investing practices, or simply, as is sadly the case, because they can.

On the other side of the spectrum, you have ‘specialized capital’:

Investors here tend to be deep and specific. They often have non-general advice to give and non-general networks for you to access. Key here is: if you are a deep tech founder, if you’re doing biotech or building a CAPEx heavy business, talk to these funds directly. The bull run in tech between 2010 and late 2019 created a lot of specialized funds: it’s worth checking if your industry has one.

Now, we at Unshackled tend to see this a bit differently: and we’re not the only ones. In a way, we’re emulating many of the great investors we know. We know there is nuance to each company: each new company operates in uncharted territory. Until we understand how a business works, we can’t judge whether it’s venture backable (i.e., a good investment) or not. And even when we pass on this basis, know that it’s just our opinion. We’re wrong a lot of the time.

Many VCs use unreliable heuristics to judge companies; what is venture-backable to one today may not be venture backable to another tomorrow.

None of this is news for experienced founders, but rather something I think every new founder should know. The best you can do is to design a narrative that conveys the scale and embrace the fact that it’s a judgment call. Let people put you in the buckets they want — do take the time to understand how investors are describing your company, but don’t waste time trying to fit into their narrative. The best investors will see through the noise and understand the fundamentals. We try our best to see through it. Sometimes they (and you, and us) will be wrong, but that’s fine: the point is trying.

Am I the right person to build this? The myth of ‘problem-founder fit’

“We invest in great teams” is not a very helpful statement. For some investors, that means a set of brands in your resumé. For others, it’s about investing founders who are communicative, analytical, driven, well-connected, or second-time founders.

Once again, you see judgment calls and unreliable heuristics. If you dig under the surface, there is a chasm of difference between how more experienced GPs think about this versus the average investor.

The bottom line is more straightforward, more unfair, and less pleasing: founders who are deemed “great” are simply founders VCs like. “Investing in people” is complex by nature and often, at least in its current iteration, an inefficient and biased way to do early-stage investing.

My collected evidence from talking to hundreds of founders suggests that the ones rated as “high quality” by us often:

  • Knew how to design the product from the get-go (expertise);
  • Personally knew, or were, power users/early customers for their concept (access).

What I think many people forget is (1) expertise and access can be built over time, and (2) if your company is growing fast, people are quick to ignore where you came from and what you did previously.

So many founders who would not be deemed as “great” today could start great companies given time. As long as they have a bit of skill and passion for the subject, they can build expertise and gain access. In our experience, immigrants are especially good at muscling their way into compelling networks. And the internet has made both expertise and access so much more attainable. Gone are the days where VCs could play an insider-only game and still win.

Conversely, nothing beats traction. If your company is growing fast, people care less about where you came from or what you did previously. With growth, all of these frameworks for a team go out of the window. Many of the most successful companies today were started by founders who did not have credentials, who were not as communicative, analytical, driven, or well-connected as VCs would like, or who had no previous success.

The whole problem-founder fit framework is a myth because there are so many exceptions to that rule. Startups are 85% hustle. You don’t have to be the best person to build something; you just need to become the best. And I love to think many times we invested in people right before they did so.

Make sure to pick what to ‘differentiate’ on

‘Differentiation’ is now a buzzword, but it boils down to simple concept: that you and your company stand out. Here’s the catch: early on, you’re in full control of how to stand out.

There are generally good things to stand out on early, and good things to stand out on later. For instance:

  • You stand out when your product is fundamental to a person or a business (they actually can’t live without you, and they’re willing to pay accordingly);
  • You stand out when you introduce new technology or new workflows people are willing to integrate and pay for;
  • You stand out when you enable people or companies to do things they simply couldn’t do before;
  • You might be able to stand out when you’re tapping in an unseen macro trend.

These are all excellent things to differentiate earlier in your journey. Make sure to pick one or more of these when you’re deciding what product to build. And many of these are not comparative by default because great new companies often create entirely new categories.

But this is what I see most of the time:

  • “We differentiate because we have the best UI/UX in the market, and our experience is just better”;
  • “We differentiate because our model runs cheaper, and we’ll be more profitable”;
  • “We differentiate because our price is lower, and people tend to choose the cheaper product if they have the same level of quality”;
  • “We differentiate because our performance is simply better”;
  • “We have ‘data.’”

All of these may work, just later. These come into play around your Series A. Earlier than that: good UI/UX is needed, but never enough; cost and performance don’t make a difference unless it’s 10x+ better; pricing is a continually changing marketing decision; and don’t even get me started on “data.”

Here’s something we tell companies in our portfolio frequently: carefully choose how you want to stand out. The best way to know what to differentiate on is by researching your market. You would be surprised to see how few entrepreneurs do that. Please, figure out how the economics of your space work. Talk to people who evaluate markets at 10k feet before you start building your product: analysts, investors, researchers. Try your competitor’s product before you start designing yours. Articulate how your product compares even before you start. The time to choose not to compete is now.

The issue with access

Finally, let me get into a bit of social justice mixed with self-congratulatory plugs.

At its core, venture capital is opaque. If you don’t have the network to understand VC or to find a way in, it’s confusing, gruesome, and frustrating. Many people would instead not do it altogether. Systemic bias is a real thing. Getting ‘warm intros’ is exclusionary and time-consuming. Investors are publicly decrying credentialism on Twitter but then use credentials to make decisions all the time.

Tech culture is (still) at its height, and there are a lot more people out there starting companies, especially from diverse backgrounds. And yet, not only has the profile of who gets funded not changed that much, but fundraising continues to feel opaque and arbitrary. Of course, we have joke Twitter accounts digging on VCs: there are too many conflicting elements for VCs to be 100% honest. It’s a relationship game, we get it — but a fundamentally unfair one.

Our answer to that is this form. It’s open to everyone all of the time, and it’s the most critical thing in our process. After you submit your application, your materials get shared with the rest of the team. At least three people on our team review everything you provided, answer by answer. All of our follow-up conversations come from that analysis — no exception.

Our review happens on Monday; we get back to everyone by Thursday. It does not matter if you got introduced to us by Elon Musk, by a college student, or if you sent us a cold email: we spend the same amount of time and apply the same level of scrutiny in any of these cases. It does not matter your ethnicity, age, or location — we will review your deck equally. We cannot give specific feedback to everyone, but we get back to everyone within a week. And if you’re one of the founders who’s gotten a pass email from us before, know this: it’s not an automated email. Someone in our team wrote that message. Even though it may not be customized, it’s for you.

We hold ourselves accountable. I know our process is by no means perfect — there’s much still to improve. And I can speak here about how we are a fund that invests in diverse founders by default, or that a higher than average % of founders in our portfolio identify as female — all of that is good, but for me, nothing beats this form. We’re open. It’s not a side-channel for ‘lower priority’ founders — this is where everyone goes through, no exceptions. It doesn’t solve the access problem in venture, but I hope you have a better experience with us because of it.

So that’s why I think Unshackled is special. We try to think about what ‘venture backable’ means differently. We invest in people as they are becoming the best person to build a business. We believe differentiation is something you choose and build for. And the way we operate is an exercise in access. I think this will take this team far beyond our work in immigration.

I’m going off to HBS and other new adventures but will continue working with startups. Thank you, thank you, thank you to the entire Unshackled team, but especially to the founders who let us in on their journey. They were the best part. By far.

And if any of you want to chat, reach out to me on LinkedIn or Twitter anytime — DMs open.

Lucas Rocha

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