As he describes the planning process Andy sums up his essential point with this eloquent nugget of wisdom: “I have seen far too many people who upon recognising today’s gap try very hard to determine what action has to be taken to close it. But today’s gap represents a failure of planning sometime in the past.” Hopefully, the value of this insight is not lost on the young reader. If you only understand one thing about building products, you must understand that energy put in at the beginning of the process pays off tenfold and energy put in at the end of the program pays off negative tenfold.

• Growth is the biggest driver of value. Once revenues are established, then maintaining some level of growth is hugely important. If you’re not growing investors will assume that’s because you can’t grow.
• If you have venture scale ambitions in your first year but have less than 20% month on month growth, picking up the pace should be the priority.
• Once there’s enough growth to hit the milestones needed for the next round then you have the luxury of diverting resources to learning.
• In a high growth scenario, tell-tale signs like falling conversion, worsening engagement and increasing churn are signs that the trade off between growth and learning is too skewed towards growth.

It’s more common to see founders insufficiently focused on growth than it is to see them insufficiently focused on learning, but we definitely see both.

I just read an old post by Nir Eyal about The psychology of sports: How sports affect your brain. Nir makes the point that our obsession with sports is weird. Writing at the time of the 2012 London Olympics he said:

“This week, fans packed stadiums in London wearing their nation’s colors like rebels ready for battle in Mel Gibson’s army. They screamed with excitement and anguished in defeat. Many paid thousands of dollars to travel around the globe to be there.

Among those who did not attend, 90% of people with access to a television tuned-in during past Olympics. In 2008, that was 2 out of every 3 people on the planet.

What the hell is going on here? How do sports engage, delight, and motivate people to put their lives on hold and become totally engrossed in watching other people play games?”

I’m sure you can think of plenty of other examples of sports fandom producing highly unusual behaviour too. The one that leaps immediately to mind for me is the tens of thousands of Chelsea FC fans who descend on London’s Fulham Road for every home game, wearing team colours and singing songs that we wouldn’t dream of singing anywhere else (I have a Chelsea season ticket).

Why do people do this?

Nir says it’s because the combination of hope and variable rewards is a dizzyingly powerful cocktail for the brain. We all know that hope sells and is a powerful motivator, and as Nir has been saying for some years variable rewards are addictive because they kick the brain’s dopamine system into high gear. That’s why people play slot and fruit machines for so long.

Entrepreneurship is the same.

Except 10x.

The hope is much greater. The promise of changing the world and making millions of dollars is way more exciting than winning a football game. And the variation in rewards is much greater too. I’ve felt the highs and lows of football fandom, waking up the morning after a game instantly excited or groaning depending on what happened the day before, but that’s nothing compared to the euphoria that comes when a startup is doing well or the gut wrenching stress when it isn’t.

This psychology also explains why it’s so important for entrepreneurs to remain positive. If the hope goes, the motivation goes too, and then it’s a downward spiral. When things don’t go according to plan, balancing the need for positivity with the need for realism is one of the most difficult tasks founders face.

I read two great posts advising founders on fundraising this morning. The first was a deck with pointers on fundraising from Jason Friedman of LionBird, which made two points I want to pick out and expand on (the rest of the deck is great too, and well worth a full read):

• 60% of fundraisings take three months or more (slide 2). “How long should I leave to raise my round?” is a question founders ask us all the time and we always answer 3-6 months. Sometimes we get pushback from people who have had success raising in shorter times than that in the past, and the data shows that 40% of companies don’t need three months. However, it’s advisable to hope for the best but plan for the worst and give yourself three months or more. A couple of quick additional points: people with strong investor relationships need less time to raise; the data in the slide is for the US where fundraising times are shorter than in the UK.
• Few companies have the luxury of holding off on meaningful monetisation (slide 40). This is another one that comes up a lot. Investors like to see evidence that the revenue strategy works because it removes a major risk in the business (that nobody will pay) and because it improves capital efficiency and hence investor returns. There are, of course, a number of highly successful startups which put off monetisation for years, but they are a tiny minority of venture backed companies characterised by extremely rapid growth in huge potential markets. We all believe passionately in our companies, but unless they can genuinely be the next Facebook, Twitter or Google, early monetisation is advisable.

The second post was on evolving fundraising milestones for SaaS companies from Ash Fontana and Mark Gorenberg of Zetta Ventures. Again, lots of solid advice and well worth a full read. I’m going to pull out the point they made about partnerships:

Partnerships are a distraction before the seed stage [defined as a $2-5m raise]. However, companies can leverage a few key marketing partnerships with complementary product companies to get enough traction to raise a Series A.

It’s super common for founders to spend time pursuing partnerships very early in the life of their companies and super rare for them to make any difference to revenues. Ash and Mark are spot on to advise ignoring partnerships before Seed and to then only focus on targeted partnerships until after Series A. This point hasn’t been spoken about enough and I’d advise all founders to consider it carefully to avoid misallocating their time.

In November 2013 I saw the headline Five cognitive distortions of people who get stuff done, and thought “wow – all the cognitive biases I know get in the way of rational thought and are unhelpful”. My surprise at finding that irrational thought could be useful prompted this post at the time.

Since then I’ve been on a (slow) journey to understand the interplay between intuition and rational thought, particularly helped by Daniel Kahneman’s Thinking Fast and Slow and Richard Haidt’s The Righteous Mind. I wrote a number of other blog posts too, most notably Thinking fast and slow at a VC fund, Debating with intuition as well as logic, and How our rational brains justify our intuitive decisions.

The more recent posts are mostly about recognising the role intuition plays in our decision making and how to counter it when appropriate. My understanding of the importance of intuitive thinking was limited to the fact that it helps when decisions need to be faster.

Then this morning I read How Our Delusions Keep Us Sane: The Psychology of Our Essential Self-Enhancement Bias on brainpickings. It took me right back to the November 2013 ‘aha moment’ that in the right places and right doses irrational thought makes us happier and more successful. The article opens with the following paragraph:

“Optimism is the faith that leads to achievement; nothing can be done without hope,” Helen Keller wrote in her 1903 treatise on optimism. But a positive outlook, it turns out, isn’t merely an intellectual disposition we don — it’s a deep-seated component of our evolutionary wiring and the product of powerful, necessary delusions our mind is working around-the-clock to maintain. At the root of that mental machinery lies what psychologists have termed the self-enhancement bias — our systematic tendency to forgo rational evaluation of our own merits and abilities in favor of unrealistic attitudes that keep our ego properly inflated as to avoid sinking into the depths of despair [and keep us motivated when times are good].

There are two points of interest here. Firstly we are wired to be irrationally optimistic about our own abilities. Early primates who kept believing when times were hard survived and mated more often than their more pessimistic brethren. Hence being rational is hard. Secondly, being irrationally optimistic is useful – at least sometimes. Puncturing the bubble with rational analysis might result in a loss of motivation with no discernible gain.

When I think about this in the context of business activities it seems to me we need a switch. The vast majority of our opinions and hence decision making should be rational, but allowing a dose of unconscious irrational optimism helps us motivate ourselves and others. It’s how we achieve the seemingly impossible. However, we need the switch when that irrational optimism stops serving us well. When I was at Reuters Venture Capital, for example, we worked like crazy to raise our second fund in the tech nuclear winter of 2001-2003 and kept believing, but there came a point when we flipped the switch and gave up. That was painful, but it was the right thing to do. To keep trying would have been like banging our heads against a brick wall.

The challenging thing for teams is that different people have different levels of optimism, and it gets really hard when one person wants to flip the switch and others want to keep believing. That’s where the leader needs to carry her organisation (and make sure her switch is in the right place). The example I gave above was literally life and death for us, but the same dynamic plays out all the time at much smaller levels. In VC firms it often relates to whether investments will get made, in startups it often relates to whether partnerships will deliver, sales will be made, and key metrics will move. Establishing clear parameters in advance that will lead to the switch being flipped takes discipline, but is one useful trick.

Fascinating stuff.

If you have a few minutes I heartily recommend you read the full brainpickings article.

I’m sure you’ve heard about how unless we’re careful we very often make our minds up about things in just a few seconds – decisions on candidates in job interviews is a well known example. Here’s how that happens.

1. We make an intuitive, largely subconscious, decision based on what we’ve seen and learned over the years, a decision that will often display all of our prejudices and biases.
2. The rational side of our brain seeks justifications for our decision
3. As soon as it finds a justification the search stops. The case is closed and we move on to thinking about the next thing.
4. We become resistant to opening up the debate again.

You might have spotted the flaw in this process already. The rational side of our brain doesn’t make a balanced assessment of the evidence it only looks for one piece of evidence to prove the case. There are pros and cons in every complex decision so we are always able to find something to justify our position, even if the weight of the evidence is wholly in the other direction.

If more rational decision making is the goal, and in a business context it generally should be, then the first step is to be aware that we all have this tendency. If you are hit by a wave of irritation when someone presents you with data that suggests you should change your mind try to take that as a signal that your rational brain might be losing out to a faulty piece of intuition.

None of us can get over this problem entirely, and rapid intuitive thinking is often appropriate.

We see a lot of startups that fail, it’s the nature of the beast in an environment that is so incredibly fast moving and competitive. These are some of the more common and avoidable mistakes that we work hard alongside our partner companies to help them avoid.

This post was inspired by John Zeratsky’s post Eight common dysfunctions of design teams. Design is at the heart of a lot of the early important work at a startup, hence the overlap.

1. Starting with solutions – founders start by having an idea and then most check it’s feasibility by visualising a solution. That’s the right thing to do. However, having established that there’s one potential good solution the best next step is to go back to building a deeper understanding of the problem space and customer to check if there’s a better solution. This applies to everything – product features, visual identity, copy, UX, tech stack and go to market strategy. To avoid this mistake spend time with customers and establish goals and metrics before creating solutions.
2. Groupthink – these days companies and their products and brands need to be remarkable to win. In Zeratsky’s words: “Groups are no good at making decisions—at least not the way we normally do it. We want everyone to be happy, so we talk and talk until we’ve reached consensus on a decision. And we let social dynamics get in the way: power relationships, seniority, loud mouths, etc. This all leads to decisions that nobody is excited about—decisions that don’t reflect a unique, opinionated perspective.Solution: Use voting to capture everyone’s opinions, then lean on the decider to make the call.”
3. Polishing a brick – as Zeratsky says, we spend far to long polishing and perfecting unproven solutions. These days a minimum level of quality and design is required before people will take notice of a new solution, but understand what that is and ship as soon as you’ve reached it. If you find yourself believing that your product will only work if it’s fully featured and highly polished you should go back and double check whether your core proposition is strong enough. To avoid this mistake give yourself deadlines that you can’t get out of. Being clear on what you have to achieve by when to get your next round of funding and breaking that down into monthly targets is a great discipline.
4.  Shaky foundation – every startup is built on a foundation of assumptions about the customer, the product, and the world. Too often founders let those assumptions go untested, even unstated. In The Path Forward we advocate first making sure that the company’s idea is valid – and that requires listing out the assumptions and testing them to know that the fundamentals of the business are strong, that there is a need for the product and that the company has the right skills to prosecute the opportunity. Many companies move too quickly to focus on the product or even on scaling the business, but if the foundations aren’t strong growth will always be more challenging and will eventually falter. Solution: Follow The Path Forward to validate your idea and lay strong foundations that will allow you to build a valuable business.