The unicorn movement in Silicon Valley has been a great run, with startups plowing mountains of willing capital into audacious products that are changing the world.

[ Click to Tweet (can edit before sending): https://ctt.ac/eWeJG ]

Airbnb, Uber and Slack have revolutionized travel, transportation and work forever. It took tens of billions of capital, but I predict each of these companies will become worth 10x their current market caps in the next decade or two.

However, a new species has taken flight in Silicon Valley, and we’ve been lucky enough to have invested in four of the six we’ve encountered. This new species is called a Pegasus.

A Pegasus startup is one that is so profitable that it is able to use its profits to soar so high, that it skips multiple rounds of funding.

Unicorns are Still Fine

Now don’t get me wrong, unicorns are just fine. Any company that can hit $100m in revenue and a billion dollar valuation is a great bet for early investors and employees.

If the dead money in bonds and bank accounts want to get to work making huge bets, I’m all for it. Folks betting $5-$10b to get a startup to 100 million addicted paying customers are making a wise bet.

It’s a fine use of capital if those 100 million users return $5 a month in profits for years to come (see Facebook, Google, Amazon, etc), and if they inspire hundreds of millions of more users to try the product.

I get that deploying billions of dollars makes most civilians confused, and it sure terrifies the old guard and public markets at times, but anyone familiar with high-stakes poker and investing with a decade-long time horizon — like I and other startup investors — is unfazed.

So Why the Pegasus?

I don’t know exactly why we’ve seen four exceptional startups in our portfolio take this route, Dyn.com, Calm.com, Superhuman and Fitbod, but as the kids say, “I’m here for it.”

We put $378,000 into Calm.com back in April 2014 and we own around 5% of the company (after selling a small percentage of our position in “idiot insurance”). Calm had $10,000 a month in revenue when we invested and have reported revenue of $7m in 2016, $20m in 2017, $80m in 2018 and an estimate of $150m in 2019.

What people don’t know is what happened between 2014 and 2018, which is that the founders put their heads down and didn’t raise any significant capital. They just poured profits into their growth, team and product — and it worked.

Their first round with venture investors was at ~$250m valuation and the second was at $1b.

No Seed Extension, No Series A, No Series B … straight to what most would consider a Series C financing.

Dyn.com, My First Pegasus

Back in 2012 I was contacted by Kyle York of Dyn.com in New Hampshire to join their board. They were fans of the podcast and wanted marketing support from a hustler, so they pinged me (Kyle wrote a blog post about it: https://dyn.com/blog/true-board-story-the-email-that-landed-jason-calacanis/).

I did a double take when they told me they were ramping from $4m to $35m in revenue, with a massive profit margin, but had not yet raised a round of funding. I joined the board and in 2016 they sold to Oracle.

Again, the skipped multiple, dilutive rounds of funding.

The team had built a simple product, charged a fair price, were frugal as f@#$k — and poured every penny back into the product.

Since the company was in New Hampshire, it was outside of the venture-industrial complex, and it grew wings and soared to massive heights because, well, it had to.

I never thought I would ever see another company like that again, but I have.

Superhuman is a bit quiet about its fundraising and revenue performance, but since you’ve likely heard about the magic of the product and only read about its last round of financing with my pal David Ulevitch at a16z, you can be sure it took the Pegasus route.

Fitbod came to our accelerator with $3,000 a month of revenue, and we’ve invested $399,000 into it over two investments, putting us at around ~7% ownership … but they haven’t raised since!

At LAUNCH Festival Sydney, they disclosed they had hit $800k+ a month in revenue — and they haven’t raised a penny since.

My pal Brian Alvey, who coached me on the book [ https://www.angelthebook.com/] and edited this piece with me, reminded me that Kickstarter raised a $10m round back in 2009 and has never raised from VCs again — perhaps making it the first Peagsus (anyone else got examples?).

[ Oh yeah, follow Brian on the Twitter, he’s the got the best quips: http://twitter.com/brianalvey ]

How to Be a Pegasus

It’s fairly simple if you want to be a Pegasus, I can describe it in five tight bullet points:

1. Have a modestly paid, small team that produces an extraordinary product (easy!).
2. Charge from day one and pour those profits into growth.
3. Focus on four things: team, product, customer feedback and growth.
4. Triple revenue year-over-year.
5. Ignore any ovation from an investor who doesn’t have the twitter handle @jason

It’s really that simple.

Step five is optionally mandatory, so if you are building a Pegasus I’m here to help, and by help I mean having you on the podcast, keynoting our events and cooking you a 14-hour brisket when you stay in the “Travis Kalanick Suite” at our place when you’re in town.

Just email me at jason@calacanis.com and let’s put $500,000 into your bank account and then start the process of ignoring all other investors until we hit $10m in revenue.

The Value of Being a Pegasus

This is going to be fairly obvious to anyone in the industry, but to state it explicitly for new founders and civilians, there are two major benefits:

1. For every round of financing you skip, you save 10-20% dilution. If you skip 2-3 rounds of financing this could double your ownership at an exit.
2. You never have to stop working on your product to do a fundraising tour.

If you’re an elite founder with an elite team, and you have the ability to focus, I highly recommend this strategy. If you come up against rabid competitors, sure, take the big money and go to war — just try and do it after you hit $5-10m in yearly revenue.

Epilogue: Beware the Dark Pegasus

It’s been reported, in a spectacular scoop by my pal Amir at the awesome The Information (not fake news), that a company called Toptal raised $1.5m on a convertible note and then never converted that note into equity because it was a Pegasus with a whisper number of $200m in revenue.

The founder, Taso Du Val, also allegedly screwed his employees and co-founder out of their equity by never converting his LLC into a C corp and creating stock.

This is a huge violation of the explicit covenant of startups: “we all lose a decade of our lives trying, or we get fabulously rich together.”

Toptal is the Dark Pegasus, the worst of all animals … a creature so evil and filled with greed that not only do they want to preserve their cap table, they want to do so by screwing everyone they can — including their own family (aka, investors, employees).

I spoke with Amir (http://y2u.be/2SyGZfObj2E) about Toptal, as well as with an employee who got screwed out of $2-$10m in my estimate (http://bit.ly/2m2bY0I) and I blew a fuse in the middle of the episode (sorry, I don’t do that often … in public).

So, welcome to the magical land of startups … filled with packs of Unicorns, which we call a “blessing,” and now a half-dozen Pegasi flying above.

Best
@jason

PS – LAUNCH SCALE, October 7-8 in SF, is free for founders; $500 if you want to come to lunch with me and the team or if you work for a bigger company, law firm, etc. It’s a killer event designed to help founders grow their startups. http://launchscale.net/tickets

PPS – We are looking for a host city for LAUNCH Festival in 2020 through 2023 (four-year deal). The event has been in Sydney for the last two years and we’ve loved it, and might stay another four years but we agreed to open up the process. It’s $500,000 a year to underwrite the entire event, which has thousands of founders attending for free. We do this at breakeven in order to help founders grow their startups. If you’re interested (Berlin? Tokyo? Spain? Brazil? Rome? Austin? Miami? Nashville?), fill out this form and let’s have coffee. [https://host.launchfestival.com] In Sydney we ended up investing in five startups over two years, so we poured $500,000 back into the ecosystem (win! win!).

Some great Podcast Episodes you might have missed:

E967: Jeff from Twilio back on pod for the 3rd time. https://youtu.be/2Q86UjKU4uI
E962: Finally got Sophia from Girlboss.com on the pod. https://youtu.be/pg0Ifx1TFAw
E963: My Greek brother from Cameo.com, which is on fire, was on. https://youtu.be/ldxf2QiVlwc
E939: Unicorn founder Melanie Perkins of Canva.
https://youtu.be/8TBSg79Gf0M
E901: SendGrid.com CEO Sameer Dholakia on the podcast after selling to Twilio. https://youtu.be/PcWs4WnWFvU

Also, I gave a talk at Mark Suster’s Upfront Summit to discuss thesyndicate.com, which has invested $40.8m in 103 deals — including our first deal: Calm.com. https://youtu.be/YQa6vD9KG9Q

It’s time for founders and venture capitalists to say “not yet” to Saudi Arabia’s sovereign wealth fund — commonly referred to as Masa’s Vision Fund in tech — due to the deteriorating state of human rights in the Kingdom.

[ Disclaimer: at least one of my 200+ investments has taken money from Masa’s Vision Fund — which as I said is majority-powered by Saudi Arabia — so I’ve benefited from their presence in tech. As an angel investor, I wasn’t involved in the decision. ]

For the past decade I’ve struggled with the question of whether it’s better to isolate or engage with the kings and queens, and often dictators and despots, of nation states that can’t reach the baseline of human rights we take for granted here in the West: freedom of speech, freedom to be who you are (gay, trans, Christian, Jewish, atheist, woman, etc.) and a justice system that doesn’t rely on cruelty, corruption and torture.

[ Click to Tweet (can edit before sending): https://ctt.ac/TReaL ]

We’re not perfect here in the United States, with the waterboarding-adoring presidents Bush and Trump, or the progressive-gentleman Obama who couldn’t figure out how to close Gitmo after eight years (we never did get a straight answer on that one, did we?).

However, when you pull out the Universal Declaration of Human Rights, we’re on the right side of history despite our weakest moments that drive us to embrace the death penalty, or our capitalism-gone-wild experiment with paid prisons. Not to mention a justice system that statistically treats people differently based on their skin color.

Another factor we should be proud of is that we live in a country where debating, investigating and fixing these systems occurs out in the open — and without the arrest of those pushing the resolution of these difficult issues (as just happened).

Engagement or Isolation?

In the engagement camp, it’s easy to point to that fact that we’ve avoided a massive military conflict with China thanks to our intertwined economies, while disagreeing on basic human rights.

Perhaps that’s why Sergey at Google is embracing a censored Google for China (Dragon, how clever :eyeroll:), or maybe Brin’s getting run over by his own company — hard to know what Googlers think since they’ve mastered the art of obscuring the decision-making process through deliberate levels of management and shell companies.

[ Side note: Where have you gone, Sergey Brin?! Speak up kid, your silence is brutally deafening, and what’s the point of making tens of billions of dollars if you can’t speak for what’s right in your own company? ]

On the side of isolation, or perhaps a polite “not yet” as I’m advocating here, is Saudi Arabia, which went through a great “we’re changing!” tour with their partner, Masayoshi Son of SoftBank — a true gentleman and visionary leader.

That was before they brutally dismembered a journalists for lightly criticizing them, in a coordinated hit that included a bone saw, and in Friday’s breaking news that nine intellectuals, journalist, activists — and their families (!!!) — have been jailed.

Two of the women round up are dual citizens of the United States and Saudi Arabia, and one of them is pregnant, according to reports.

Are they being tortured?

Have they been dismembered like Khashoggi?

Is the baby still alive?

It’s a sick, demented question to ask, but it’s sicker that we have to ask it.

It’s clear that in the case of the Kingdom, even with Masa Son’s vision, we’ve sent the wrong message to the world.

Silicon Valley is where massive fortunes are made, and we’ve taken the easiest cash double-up in the world — the IPO — and we’ve given it to the Saudis.

Why?

Because it’s easier to take their money than to deal with the headaches of going public?!

Because they are willing to pay next year’s, or the year after’s, price for our shares?!

Really?!

Are we that desperate for a quick markup that we’re willing to sell out the system that generated the value to begin with?

Founders should turn down Masa’s Vision Fund until they disengage from Saudi Arabia’s sovereign wealth fund.

If you’ve already taken the money, you should be respectfully vocal about your displeasure with the Kingdom’s human rights issue.

Respectful, so that it’s easier for them to change and not dig into their position.

If you’re an investor, you shouldn’t go to Saudi Arabia for their conferences and you shouldn’t allow them to be an LP in your funds.

We should take our companies public instead of doing insane late-stage rounds, because it’s healthier for everyone — founders, investors, Americans and people suffering under dictatorships — to give the IPO business to our retirement funds, endowments and retail investors.

I’m not saying we shouldn’t engage, but it’s time for us to go back to showing the world the better path — as opposed to taking the quick buck.

What’s the point of being rich and powerful Americans if we can’t tell people who behave in a way that’s so fundamentally un-American, “Thanks for the offer but that’s not how we do it here in the USA.”

Best,
Jason

PS – Like anyone who has invested for a decade in tech I’ve got many conflicts, so many that I don’t even know them all! Some of my closest collaborators probably have Saudi funds, and I’m sure many of my portfolio companies who are talking to Masayoshi Son will read this and — in the short term — not be pleased with me for potentially screwing up a deal or two. If that’s the case, let’s talk it out and figure out how to get you funded without compromising who we are.

Early-stage valuations for startups are hard to understand because typically there is very little traction or data to go on in the first year or two of a startup.

[ Click to Tweet (can edit before sending): https://ctt.ac/fPF9l ]

Startup valuations are not science, but they’re not magic either. It’s a bit of alchemy, combined with bizarre marketplace dynamics like famous founders getting 3x the price for half the traction, or Y Combinator hosting a gigantic demo day in order to create FOMO with novice investors who are explicitly told not to think things through and just cut a big check (literally, that’s their bad advice to investors).

The chart above, a work in progress, is called “The Valuation vs. Traction Matrix” and it pivots on two variables: traction (aka “stage”) vs. valuation.

I started the valuation at the basic valuation we tend to see in technology startups, which is $1-2m and go up to the eye-popping $12m (which is actually not the peak, just the highest end of normal).

When you have just an idea or mockup, you are likely to do a “friends and family” round in the $1m range.

If you have an MVP or unpaid pilots, you might get some angels or seed funds involved.

When you get to paid pilots or revenue, then you are most likely to get seed funds and syndicates involved, after which the VCs start buzzing around. VCs invest, on average, when you have $2-3m in revenue these days (they might engage you in discussions a lot earlier, obviously).

Above the green line tends to be less value and below the line is more value.

As you can see, I try to operate just below the line with two of my investment vehicles, the LAUNCH Accelerator and TheSyndicate.com. We do this by finding startups that are not in Silicon Valley AND that have customers paying them.

The green line in this chart approximates the average startup. I would say that most startups in the United States would go along this trajectory unless one of four things happens:

1. You have a famous and successful founder, which gets you 3x the valuation for 90% less work.
2. You create a marketplace where many investors are competing for an allocation, which is the double-edged sword that the demo day FOMO device is designed to create.
3. Your engagement or product is otherworldly.
4. You find the dumb money which doesn’t understand that you can invest in two or three startups — with the exact same traction — for the price of one overpriced startup.

We see number four all the time when a founder tells you not to worry about the valuation of $18m because it will all work out when they’re a unicorn, which is true, but this assumes you don’t have better deals you can prioritize.

In our case, we typically have so many opportunities that we can place three $6m bets in startups that are just as good (or better) than the founder demanding $18m.

The Danger for Founders

This is the danger of founders overoptimizing for valuation early, which is, they drive away the smart money and open up the floor for dumb money. The other well-known phenomenon is that a founder who succeeds at getting a massively high-valuation early on might raise too little money in a “party round.”

In this scenario, a founder might raise $1m at a $20m valuation, only diluting 5%. If they are burning $75,000 a month they then have about a year to build a company worth $20m. To be worth $20m for a SaaS or consumer subscription product, that would be around $100-200,000 a month in revenue.

It’s possible for a founder to do this, but it’s not probable. What happens if they don’t get to $150,000 a month in revenue to justify the previous $20m cap? One of three things:

1. They lower the valuation and do a down round.
2. They get bridge funding from their existing investors.
3. They shut down or sell the company.    

If the same founder raised $1m at a $5m valuation, they would only need to hit $25-50k in monthly revenue to get a round done at ~$10m.

Accelerators

When a founder goes to an accelerator like LAUNCH, Techstars or YC they have a ~$2m valuation, which is a function of accelerators getting half their equity for cash ($100-150k) and the other half for running a program. Accelerators are a great deal for investors, but they require massive work. You need to have a large, full-time staff, space and a massive interview process to run an at-scale accelerator, which I think costs most programs ~$25-100k per startup.

If you add the operational cost back, an accelerator is likely investing on a $3-4m valuation. Still a good deal, but it’s 100x the work of a solo angel investor and 50x the work of a seed fund.

I suggest new angel investors and seed funds do their first 25 deals in the space to the right of unpaid pilots, in the area in the green box below. In this box you can pay above or below the line, knowing that you’ve eliminated the founders who can’t get to some basic level of product/market fit because it’s very hard to fake paying customers.

You should absolutely avoid Investing in the red box, where founders are looking for really high valuations for their ideas, mockups or MVPs. If you’re going to take on the risk in the idea and pre-traction phase, the yellow box, you at least want to get three or four swings at bat for the price of startups in the product/market fit phase.

So, if you invested $100k for a $10m startup with $750k in yearly revenue in the green box, I could see you investing $25,000 into four ~$2-3M startups.

Angel University

We will be discussing this important topic and more at the Angel.University tour, which is making the following stops:

• April 19: Washington, DC (hosted by Riverbend Capital)
• April 23: Boston, MA
• April 24: New York City (supported by EquityZen)
• April 26: Columbus, OH (hosted by WillowWorks)
• April 29: Miami, FL
• June 17: Sydney, Australia
• July 15: San Francisco

The AU course is four hours followed by a dinner. Look forward to seeing you at this highly interactive course, which is worth attending if you’ve done zero or over 100 investments.  

We’re looking for an analyst to work at LAUNCH to help us sort through the dozens of applications that come in a day for Founder.University, LAUNCH Accelerator, Jason’s Syndicate and our events (SCALE, LAUNCH Festival, Angel Summit).

The analyst position a venture firm is considered the best way to break into investing, but that’s not true. The best ways to break into investing — in order — are:

1. Make a huge amount of money and start your own firm (see Chamath)
2. Be part of taking a company public (or selling it) for a huge return, which will result in you being invited to join a major venture capital firm (see Roelof Botha of PayPal or Alfred Lin of Zappos, both recruited to Sequoia Capital).
3. Be the growth person at a top startup (see Josh Elman of Greylock)
4. Go to Stanford or HBS (in the old days)
5. Be a world-class journalist (OM, MG)

An analyst is a very hard gig to get, but they do come up once and a while.

Since I came into the game and made my own lane, I’m looking for someone like me: a writer.

Why a writer?

Because writers spend every day trying to cut through the bullshit that is thrown at them by CEOs and PR firms, to give their readers the truth (or at least that’s what journalists used to do). 

Also, I’m planning on having this writer not only send me coverage of 20 startups a week, I want them to publish one overview a day to the launchticker.com. 

If you’re interested in this gig, here’s the link to apply. We are looking for someone for our Toronto or San Francisco office but would consider a remote team member if they were exceptional. 

 

 

I’m on a mission to teach 10,000 accredited investors how to angel invest and share their deals.

[ Click to Tweet (can edit before sending): https://ctt.ac/G8gYc]

As many of you know, I wrote the book ANGEL, created a companion podcast and now I’m hosting a half-day course called Angel University.

Here are the upcoming dates for our Angel University courses:

• April 19: Washington, DC (hosted by Riverbend Capital)
• April 23: Boston, MA
• April 24: New York City (supported by EquityZen)
• April 26: Columbus, OH (hosted by WillowWorks)
• April 29: Miami, FL
• June 17: Sydney, Australia
• July 15: San Francisco

The Angel University curriculum is designed for everyone, from angels who haven’t done a deal yet to seasoned angels who have done over 100. We cover five key topics: sourcing deals, evaluating startups, negotiating deals, portfolio and bankroll management, and post-deal efforts. It’s a ton of fun.

The tour workshops are four hours and are followed by dinner. Seating is limited to 50.

Join me: http://angel.university/tour.

PS – Thanks to Riverbend Capital for hosting us in DC, WillowWorks for hosting us in Columbus, and EquityZen for supporting us in NYC. If your company or local trade organization wants to host us in Boston, New York or Miami (or another city!), please email angelu[at]launch.co and let’s talk.

I threw out a tweet over the weekend titled “reasons people don’t get wealthy,” and I listed nine reasons and asked folks to add their 10th, 11th and 12th.  

[ Click to Tweet (can edit before sending): https://ctt.ac/ck49t ]

I didn’t put any thought into the order of the list, since I wrote it in a stream of consciousness style, but I made sure to include factors that people don’t have any control over, such as, what time and the country they were born in because, obviously, if you were born in North Korea today or were Irish (like my ancestors) at the turn of the 19th century, you probably had zero to little chance of changing your station in life.

Right now I’m very interested in bringing up the topic of wealth, success and achievement in America because a vocal minority of youngsters (I’m old now!) are embracing socialism while advocating for the banning the billionaires.

I get their frustration with their Boomer and Gen-X parents and, obviously, they have many valid points — even if I disagree with their anti-capitalism stance (this will be another blog post).

This embracing of socialism, of course, is leading the crazy right to trigger their individual-freedom loving Americans, in order to deride that generation for wanting to be part of the socialist-communist system found in China, Russia, and Venezuela, as opposed to the Nordic Model (whether that’s actually socialist is debatable).

Putting that aside, I think young people should still aspire to get wealthy — which is different than rich — and be proud of that. Wealthy is a loaded word, and while some careless folks would define it as dollars, the truth is that wealth encompasses so much more, including options, health, happiness and the pursuit of one’s vision of what the world should be.

Striving to be wealthy, by society’s or one’s personal definition, is what we should all be doing in this life. We should strive to create abundance through innovative products and services, be that creating Khan Academy or Uber/Airbnb or even a lifestyle business. Entrepreneurship has created the greatest gains in our standard of living to date, even if it’s hard to grasp the wild polarization of wealth in society. I don’t see capitalism’s lock on the best operating system for society changing any time soon — the most driven humans drive humanity forward, it’s that simple.

Conversely, if we pursue free services and money we will drive more power into the hands of a larger and larger incompetent government, and I think we know where that will end up — and it won’t be great for anyone.

The socialism vs. capitalism debate is just getting started and I’m looking forward to debating it passionately and intelligently with y’all. Comments are open.

My original list is below:

Reasons people don’t get wealthy (a partial list):

1. A lack of skills

2. Lack of taking risks

3. Not building a network

4. Poor work ethic

5. Not reading books

6. Giving up after getting beat down

7. Fear

8. Being born at the wrong time

9. Being born in the wrong country

… and some great responses from Twitter.

Exterior, San Francisco’s SOMA district, two nerds, walking briskly. Tents, traffic, and garbage — everywhere.

[ Click to Tweet (can edit before sending): https://ctt.ac/w91C_ ]

Founder, excited: “JCal, I just got some advice from an advisor that I should call my first round of funding a ‘pre-seed’ round so that the optics are clean when I go for my Seed Round and Series A…”

Angel: “Hmmm…”

Founder, more excited: “you know… in case I don’t have product-market fit and investors think we’re a zombie startup… trapped between our Seed and Series A funding.“

Angel: “It’s irrelevant, all of it.”

Founder, confused: “My startup? The Pre-Seed Round? The advice? My life?”  

Angel: “All that matters, is the chart.”

—————-

Founders get too much free advice these days, most of it from folks who have never built or invested in a billion dollar company. Any advice you get from someone who has not been involved in a unicorn startup is largely irrelevant if you are trying to build a unicorn startup.

Candidly, most of what I thought I knew before investing in seven unicorns was wrong or unimportant. If you want to understand what it’s like to climb El Capitan you can interview people who have done it, and as a journalist, conference impresario and podcast host, I did my share of asking questions.

But what journalists, talk show hosts, and directors know about hanging off the side of a rock is vastly different than what Alex Honnold knows.

If you want to raise capital for your startup, there are countless books and blog posts for you to read, but you must sort those words into two buckets: folks who have built or invested in unicorns and folks who haven’t.

After introducing the 200+ founders I’ve invested in to thousands of other investors, here is the number one thing that has lead to them to (a) getting a meeting and (b) getting multiple term sheets: a chart that doubles every three to six months.

If you have a revenue chart that doubles every six months or less, like Uber, Calm, Thumbtack, Robinhood, Trello, Fitbod and LeadIQ, you will be tripping over all the venture money on your doorstep.

Are there other reasons than “the chart” that VCs invest? Yes!

Can you have “the chart” and have VCs pass on investing? Yes!

Can you use unsustainable growth techniques and fake “the chart?” Yes! (but I don’t advise it)

Is having a chart that doubles your best chance at raising capital? Yes!

Best,
Jason

PS – The scene above is 100% true, except it’s a composite of three different conversations I had this week that I bundled together and took liberties with.

PPS – If you have $5,000 to $50,000 in revenue a month and want to 100x it and build a unicorn, email your story and chart to 100@launch.co

There is a lot of misconception around the moniker “lifestyle business,” with many founders thinking it’s an insult, which is understandable since said moniker usually comes from an investor with a pile of money and who is giving a “hard no” to a founder who just spent the time to pitch them — in rejection, comes reaction.

[ Click to Tweet (can edit before sending): https://ctt.ac/4EXd3 ]

When people in Silicon Valley call a startup a lifestyle business, they are actually implying that it’s a GREAT lifestyle for the founders, perhaps with a certainty of pulling out a million or two in profits a year, as opposed to the 5-10% chance of waiting a decade to have a greater return.

VCs tend to be impressed with these lifestyle businesses and their advice is given because it’s in everyone’s best interest — it’s certainly not to diminish founders.

As I mentioned above, the timing of the lifestyle business assessment is a key issue here. The founders getting this designation from investors want VCs to invest in their businesses, and have poured their hearts out in pitch decks and partner meetings — they believe that they deserve to clear market and they haven’t.

Many investors don’t have great bedside manners and don’t unpack their choice enough not to invest, based on my experience as a founder, investor and in running an accelerator with almost 100 graduates.

At LAUNCH, we like to walk founders through our “declining to invest AT THIS MOMENT,” with a lot of details. This acts as a great moment for us to codify our decision-making in a transparent way with the founder and gives the founder the ability to remind us of how stupid we were years later.

A simple email like this can take the edge off the “no”:

“Jane & John,

We really enjoyed hearing your vision for Acme Incorporated. We are going to pass on investing at this time because we are unsure if this can be venture scale. Venture scale today means having a realistic chance of hitting $100M in revenue in under 10 years, with great margins. If we’re missing something, please let us know because we often get it wrong.

Also, “at this time” is the key phrase in this email, we often invest years after first meeting a founder, so we would love to stay in touch with you. You can send your monthly updates for investors/non-investors to updates@launch.co. We read them all and we respond to many.

Best, Jason”

If I think it’s a lifestyle business, I will often say to the founder:

“Most VCs are not going to consider this venture scale in my opinion, because it’s based on low margin service revenue. I wonder if you’ve considered optimizing your business to throw off two million dollars a year for the next ten years.

If you do that, you will make $20M and still own a great services business you can sell for 2-5x EBIDA at the end of that decade if you want. That will give you $20M in earnings and a final $4-10M sale at the end, if you do sell.

Most founders never make $25M+ from their startups, so you might want to avoid VC money and go for the sure(r) bet.”

This tweet was super instructive in regards to how much misconception there is about the lifestyle business designation.

Venture capitalists are not trying to offend or make founders feel bad by saying they have a lifestyle business. That’s a naive reading of the situation. If a venture capitalist tells you that your business isn’t venture scale, they likely believe it, and are telling you so that you don’t get yourself into a dysfunctional situation, and so you’ll have a better outcome.

No venture capitalist wants to be on a dysfunctional board with an unhappy founder — that’s literally the worst scenario an investor can be in. They avoid it at all costs.

Best,
Jason

PS – Do you know an awesome lifestyle business that is throwing off $1M in profits and wants to try and 100x it? Email 100@launch.co

Nobody can predict the future.

Everybody can tell you what’s possible.

The art is in knowing what’s probable.

I’ve spent the last 10 years investing in startups, half that time as a hobby and half that time as a career, and in that time I’ve learned that most people are scared, little aliens.

[ Click to Tweet (can edit before sending): https://ctt.ac/uzlFV ]

All day long I ask people what they want to happen in the future and what their plan is to make that vision materialize, and the bold and true of heart answer these questions without pause. They have studied their market, talking to customers and doing competitive intelligence on incumbents. They have timelines they’ve built, tests they want to run and a plan B and C in case they run out, or get offered a bucketload, of money.

However, the majority of tourists I meet in startup land freeze like fragile snowflakes landing on a hardened lake, suddenly paralyzed by the realization that they’re a commodity, both in how they think and who they are.

They recite the codas of cowards with confidence: “well, nobody can predict the future” and “I guess it’s possible.”

What a profound realization! “It’s possible” and “no one knows the future,” that’s amazing! How did you come to this realization, and does anyone remember the quick key for the facepalm emoji?

As a writer, I hate wasted words, and as a (hu)man of action I hate cowardice and telling comrades that which they already know is their height of cowardice.

The job of elite investors and founders is to look at what’s inevitable and build a plan that accelerates that timeline and capture the value from that compression.

Self-driving cars are inevitable? It’s possible that humans will not die from car crashes in our lifetime!? That’s obvious, so let’s focus on building a product road map with all the milestones that need to be solved to get us there, that takes into account getting massive funding — from revenue and investors — that allows us to go 10x faster than anyone thought possible, crushing all cowards in our path.

It’s possible that robots will replace back-breaking manual labor? Fantastic, let’s make a list of the 100 things that haven’t been automated and figure out which ones are most probable to solve now (Roomba for cleaning floors and Cafe X for making coffee), and which ones are most probable after that’s done (drones to clean windows?).

When I look at an investment I don’t focus on what’s possible, I focus on what’s probable.

Five years ago I didn’t ask, is it possible the world will embrace meditation and mindfulness, I asked if it was probable that a large number of people would embrace it. It was clear to everyone that smartphones and subscriptions would enable it, and it was clear that a passionate minority were already embracing mindfulness on varying levels, but with tremendous results across the board.

The fact that it was so probable made it so much easier to make that bet.

If you catch yourself, or a partner, saying “it’s possible,” that’s an opportunity for y’all to dig in and do the hard work of asking if it’s probable.

On the podcast, I always ask folks to “set a line” for when we will have some amazing outcome, be it flying cars or general AI, and the resistance I face from intelligent people is just extraordinary.

Take a moment to “set a line” or put a percentage on your claims and watch how much better you get at this game called “startups.”

Got a lot of feedback on my post on “How to find a co-founder” yesterday, including founders asking me how they can resolve conflicts with their co-founders.

[ Click to Tweet (can edit before sending): https://ctt.ac/Gzath ]

This is one of the hardest questions for me to answer because conflicts are so situational, often personal and if they are hard to resolve they are often complex with multiple resolution paths.

Before we talk about the conflict at hand, we need to look at the founders themselves and ask, are these emotionally mature founders who are self-aware? Most of the founders I work with are highly-driven, highly-skilled, persuasive and passionate individuals, but often they are young and emotionally inexperienced. Sometimes they are older but not very self-aware.

Most conflicts I see are a subset of all startup conflicts: the problems co-founders can’t resolve and they bring to a trusted 3rd party, in this case, an investor.

These conflicts are often not as hard to resolve as they seem, and are driven by the co-founders being under massive pressure and having not done the work to connect deeply with each other.

Let’s create a scenario. Two founders are debating if they should fire their director of sales, Joe. Joe is a great culture fit and is super positive, but his performance is below average. He misses targets and after two PiPs (performance improvement plans), he hasn’t improved.

Co-founder John, the product visionary, believes that since they have money in the bank and since Joe is loved by everyone, they should keep working with him. Perhaps there is another role in the company, and Joe was their first hire. Joe recruited three of the best people in the company and he hosts the weekly happy hour. It would be a shock to lose him.

Co-founder Joanne, the CEO, and operations killer, believes that Joe had his shot, had two PiPs over nine months, and since Joanne has to manage Joe, it’s her call and she believes it’s a waste of time to keep average people around. Besides, Joe can’t even come in on time and is the first to leave, with his jacket on at 5:29 PM. With a gentle transition out — for example, a three-month consulting agreement — we can manage the culture issues.

Things have devolved to the point at which I’ve been brought in as the angel investor. This is what I would do:

1. “Joanne and John, let’s take a walk and have lunch.”
2. “Why don’t you each explain to me your positions?”
3. “I think I understand the situation… it feels like there are many solutions to this problem. Why do you think it’s come to a head? Are there other uncomfortable issues we need to put out on the table now since we’re hashing everything out so that we can get back to work?”

In these situations, what I’ve seen is that the issue at hand is almost never the actual issue. All kinds of issues can come pouring out during these sessions, and that’s a good thing. The more you talk about the issues, the less power they have over you.

I set up this scenario as a coin toss on purpose.

Was your initial reaction to try to solve the problem?

Did your mind immediately take John or Joanne’s side?

In this situation, if the company were Slack or Uber, you could obviously do a coin toss and the company would do just fine taking Joanne or John’s side. What matters here is that the two co-founders take the time to hear each other out and have the emotional maturity — and agility — to say to each other, “this is a coin toss, I trust you and I’m fine with whatever decision we make; let’s just agree to monitor the situation and stay focused on what matters: our customers.”

If only life were this simple. I’ve seen founders who are dealing with children or serious mental issues (anxiety, depression, bipolar, etc.), as well as founders who simply lacked any self-awareness. Sometimes folks have substance problems, other times their marriages are breaking down or their parent is dying of cancer.   

Business is very personal, despite what they say in the movies, and co-founder conflicts often require taking that long walk or having that long family-style meal. It might also require calling your investor and admitting that you can’t resolve this conflict, or that the conflict is the smoke and that the fire is a highly personal issue.

If you have a great investor, they’ve seen it all and they will help you. That’s why we’re here, to help you when things are hard to resolve… send the text, set up the walk and talk and don’t let things fester.