This article is the follow-on Part 2: Elon Musk Thinks Your Company Should Fail. Prove Him Wrong!
A few weeks ago, I asked: why are you still hearing from the mouths of investors “No” and “You’re too early”? Why does it seem to take hundreds of calls with investors? How can I reduce the number of meetings needed to find the right investor?
Why do I feel like I’m lost in the woods of raising capital, with no clear path? Why do I feel it’s an endless climb or a marathon?
Why do most innovative startups and scale-ups fail to raise any capital at all? How can I beat the odds?
I said at the time, “The answer may scare you at first, but provides a path out of the dark dark woods and into a clearing where your future lies.”
All worthwhile discoveries scare you at first.
The first question was answered in that blog. But Elon has some (unconventional) advice.
To sum up what I said:
- The main barrier to funding is bias.
- As an innovator, you suffer from multiple kinds of bias, such as:
- You think you’re way better than average.
- Investors think you’re exaggerating, delusional or deceptive.
- If you’re not white/male/hetero/young, there’s additional bias.
- Because of all this bias against you, they don’t trust you.
- The result is FAR too many meetings with investors.
- So, you’ll miss your window.
Not a pretty picture. So what can you do about it?
What you can’t do is try harder to sell your product or service. Remember, they don’t trust you. If they don’t trust you, how is further over-selling going to help you? It won’t. Selling harder just makes it worse.
The more you sell your product or service, the less chance of funding.
Why can’t I convince you of this? Admittedly it’s counter-intuitive. Don’t investors want great products to invest in?
NO NO NO!!!
We want great companies to invest in.
If you doubt this, just take a quick look through crunchbase.com, angellist.com or kickstarter.com. You’ll find thousands and thousands of really great products. It’s a huge pack of products. No human being can even read through all of these products let alone invest in them. There’s NO WAY you can sell hard enough to stand out in this pack.
It’s like expecting to win the marathon by running fast. You have no chance to win, that way.
Remember your typical dedicated investor sees hundreds sometimes thousands of pitches a year and maybe invests in a handful a year. You really do seem like “lost in the pack” to each investor you pitch.
So What’s the Answer?
Begin by remembering that “If you think like most entrepreneurs, you’re going to get the same results as most entrepreneurs raising capital, which is zip, nada, nothing.”
- So stop trying to sell your product better.
- Stop trying to sell how great your vision is.
- Stop using the standard pitch deck.
So what’s the alternative?
Here’s a clue I didn’t give before: Ask yourself how fast is the world-changing right now? I’m talking about technology, the economy, the way business is done, the way people live and work, the kinds of businesses that win and lose? Faster and faster, right?
Can you predict the products and services that will dominate five years from now? Can you predict the kinds of businesses that will be successful and acquired five years from now? No way. You can’t do it. Maybe in general yes, but not in particular. We probably can’t even predict these things three years from now. So how can an investor hope to pull off this handy trick? They can’t and they know it.
Even if you could predict what products and services will be in demand five years from now, how can you predict which ones will be profitable? Being profitable means that it costs a lot less to make, market, sell and support the product than people are willing to pay. Marketing is a bitch. It almost ALWAYS takes a lot more money to market a product than anyone thinks, not only because you have to convince people to change their ways, but you have to do it better than everyone else in your niche.
So even if you could predict what products or services will be in demand and profitable five years from now, how do you predict which competitor in these niches will be most successful? You claim it’s you of course, but how can you KNOW?
Your investor has to be confident that your product or service will be in demand, will be profitable, and will beat the competition for at least the next five years if not longer, given the constant change in every aspect of the technology, market, and economy. And that’s without the constant change going on in your personal life and that of your co-founders. There’s simply no way you can make your investor confidence in the profitability of your product or service five years from now. No way. Yet that’s exactly what everyone does.
So back to the marathon analogy, even if your product/service could stand out from the pack early on, how do you prove that it will stay there and win in the end? You can’t.
It’s a fool’s errand, and everyone in the investment business knows it. So if you try, you look like a fool. The fact that you don’t know this, or if you do, don’t respect the investor’s knowledge, makes you look worse than a fool, makes you look like a scammer or naive dreamer.
These words may seem a little harsh, and I can see why. I apologize if I’ve offended you. But ask yourself, why then is it so hard to even get a second meeting with investors? Maybe there is some truth to what I’m saying here. Let’s assume for a moment that I’m possibly telling the truth. Your job is to stand out from the pack and doing more of what the pack is doing doesn’t do the job.
Fortunately, there are clues to how to escape from the pack.
Begin by remembering that “If you think like most entrepreneurs, you’re going to get the same results as most entrepreneurs raising capital, which is zip, nada, nothing.”
So what would be different if you were running a marathon?
- Take a shorter route.
- Tag-team with multiple runners.
- Stand out from the crowd, so you don’t have to win to be a winner.
Let’s look at these three solutions as analogous to unconventional ways of breaking through with investors (both angels and VCs).
Take a different (shorter) route
What’s comparable in fundraising is to find an investor “champion” and to create a viral message for the champion to use, to spread the word for you. This is a shorter route because once this is done, there’s very little work for you to do. I’ve seen this work several times, and in fact, most of the companies I’ve been involved with as investors have a lead champion investor who rounded up most of the money and they have messaging that the champion can use easily.
The first step is to get your messaging right, a message that a champion can remember and repeat easily and effectively.
The next key step is finding the champion. This is best done with a warm introduction by someone trusted by investors.
A case in point is one of my first angel investments. It was brought to me by the head of Tech Coast Angels at the time, someone I trusted. He said to me “How would you like to save 10,000 beagle puppies a year?” The company had a unique way of testing pharmaceuticals without using animals and beagles are commonly used for this purpose. I was “in” like a blind dog in a meat market. I couldn’t help myself. Then it was like the dog that caught the bus. I didn’t know what to do next. Later I met the founders and got to know them well. The company is doing well 10 years later.
Tag team with multiple runners
This is obviously not allowed in a marathon race, but is allowed and is essential in business. What I mean in business is to make sure that your team (including your Board of Directors and Board of Advisors) is stacked with the talent to help you make major decisions and to carry the load of execution. This is particularly valuable when a pivot is necessary, and a major pivot is almost always necessary while every young business is growing.
Doing so requires of you as Vision Master to abandon some of your arrogance, admit you can’t do everything and don’t know enough even if you had the time, and ask for (and accept) the help of trusted colleagues. What’s most important is to make sure you have a trusted Execution Master on your founding team as early as possible. I don’t mean your technical co-founder. I mean a business execution master, usually with a marketing/sales background and strong management skills. Think Gwynne Shotwell who as President of SpaceX carries the ball for Elon Musk in running the company day-to-day.
I’ve outlined what is needed to get the help of an Execution Master in my eBook Born to Star, which you can obtain (at this time, free of charge) here. Everyone seems to enjoy reading this book which is full of entertaining stories about what you don’t know about famous founders and how they chose their Execution Masters.
Stand out from the crowd
This is the big one I was thinking about in the last blog “Elon Musk thinks your company will fail. Let’s prove him wrong.”
A clue lies in Elon Musk’s interview on 60 Minutes:
Scott Pelley: How did you figure you were going to start a car company and be successful at it?
Elon Musk: Well, I didn’t really think Tesla would be successful. I thought we would most likely fail…
The same goes for Elon Musk’s founding of SpaceX:
“I always thought we would fail,” Musk said of founding SpaceX during a press conference with NASA in March 2019 at the Kennedy Space Center in Florida. “So, this is … it’s all upside.”
“I thought maybe we had a 10% chance of reaching orbit starting out,” he said.
Those around Musk were skeptical too. “When we started SpaceX, they said, ‘Oh, you are going to fail.’ And I said, ‘Well, I agree. I think we probably will fail,’” Musk said.
What has this “expectation of failure” got to do with raising capital?
You’re more likely to succeed if you expect failure.
Everyone else goes around expounding on how great their new company is, how different it is from all the others. No one seems to want to admit that the likelihood of success (of a startup) is around 10%. Or more to the point, no one wants to admit that the likelihood of success of THEIR venture is 10%. Somehow, you’re; smarter, better, more ingenious. You’re going to beat the odds.
The problem with expecting success is that this expectation prevents you from taking all the necessary steps to reduce the many causes of failure. If you expect success (irrationally):
- You avoid thinking about what can go wrong.
- You try to serve every market segment at the same time.
- You avoid planning for unexpected costs.
- You avoid planning for a longer-than-hoped ramp-up period.
- You avoid thinking about competition.
- You avoid preparing for much-larger marketing costs than you expect.
- You avoid thinking about black swans.
- You avoid thinking about your own mortality.
- You don’t build a team with a bench of backups.
The right way to think about business is the way Elon Musk thinks about it. No surprise there. He’s succeeded in almost every business he started. But what is that way of thinking?
“It’s likely to fail. But I can reduce the chances of failure by thinking about all the ways it can fail, and, one by one, addressing each one of those possible disasters.”
So how does this actually look?
- Make a list of the main ways your business could fail.
- Design a strategy to mitigate (reduce the chances of and the damage of) each failure mode.
- Take initial steps to implement each strategy BEFORE meeting with investors.
- Include implementation of each mitigation strategy in your use-of-funds statement.
- Compute pre-money valuation based on the assumption that you will use investment capital to mitigate each failure mode.
- Include this plan in your pitch
For example, suppose one of your failure modes is you (as founder) or your co-founder(s) dying or becoming incapable of managing the business. Use investment funds to purchase key-person insurance to replace the missing talent or to pay back investors if that isn’t possible.
Suppose one of your failure modes is unexpected lawsuits from companies claiming you violate their patents. Use investment funds to pay legal fees for “freedom-to-operate” research and negotiations.
Suppose a failure mode is decision-making errors by you as CEO and you don’t have an Execution Master on your team. Use investment funds to pay for an Execution Master as co-founder AND to cover the costs of a qualified Board of Advisors.
Probably the most common cause of business failure is over-estimation of demand and underestimating the cost of marketing to create enough demand. As a result, your company runs out of money to support your go-to-market plan. Allocate investment funds for market research and market testing.
A similar failure mode is, unexpected competition eating into your market share, making scaling slower and far more expensive. Allocate investment funds for additional R&D (even though you have an MVP) to get your product far ahead of the possible competition and to create IP that will serve as a barrier to entry.
This is just a start to get you thinking. If you really take this seriously, you’ll find that you need a larger seed or Series A investment to significantly mitigate the major failure modes. The good news is that you should be able to persuade the right investors that doing so improves your valuation more than enough to make up for the extra funds needed.
The key unconventional idea here is that you can earn a higher pre-money valuation by committing to use investment capital for failure-mitigation actions that you carry out upon receiving the funds.
Credit goes to my friend Mark Cofano who suggested this approach.
And feel free to set up an appointment with me to discuss the details of your failure-mode mitigation strategy and how you compute your pre-money valuation based on this strategy. My calendar is here.
Key take-aways:
- You think you’re way better than average.
- Investors think you’re delusional or unrealistic. They don’t trust you.
- You’re lost in the pack of similar unrealistic entrepreneurs
- The result is FAR too many meetings with investors.
- This takes up most of your time and your chance of missing your window.
- Correct the bias against you by “cheating the marathon”:
a) Find an investor champion to introduce you to other investors and tell your story,
b) Surround yourself with Execution Masters and a solid Board of Directors and Board of Advisors who you trust.
c) Assume your business will probably fail. Create a plan to mitigate each failure mode using new investment capital. - Use THIS plan to improve your pre-money valuation.
Key action items:
- Think of all the ways your business can fail.
- Imagine a mitigation strategy for each failure mode.
- Make an appointment with me (see for my calendar.)
- Pay attention to the next blog for more.