The challenge of a hedging model

by Giff on April 23, 2015

A couple days ago, I wrote about entrepreneurship and some level of partial hedging.

Actually solving that challenge is, of course, enormously difficult. So much so, that I think it might only really be doable when companies are just starting out, and the equity is worthless.

I can see it working in a startup studio that creates its own companies from scratch, like Betaworks or Science. I think it would be very hard to do with random startups. Theoretically one could create a fund, and multiple founders could join the fund, taking a piece of ownership by contributing a piece of ownership. However, I haven’t thought through tax implications, and there are obvious and big information inefficiencies that would cause trouble (trust, quality of teams, quality of ideas, etc) and it would be non-trivial to solve for dilution.

If anyone has brainstormed on a structure, it would be fun to look at. Maybe one day when I am less busy, I’ll ponder it more.

The Stupidity of Entrepreneurs

by Giff on April 21, 2015

I was hanging out tonight with a bright young man who said, “A great entrepreneur always bets on themselves.”

Context: we were talking about hedging. I asked the question: what if founders could hedge themselves against other startups so that if your company failed, you still had a chance for upside?

He disagreed. He felt that a great founder would always choose equity in their own company rather than equity elsewhere.

I get the perspective, and agree that the bulk of a founder’s equity should be in their own company. I certainly understand the emotional turmoil of giving up some equity in your own company, where you have perfect information, for equity in others, where you have highly imperfect information.


That mentality is why entrepreneurs are the dumb money. The LPs and VCs are the smart money. They take a portfolio approach. They know that only a few companies will make the fund and that most will fail, no matter how awesome things seem at the start.

All entrepreneurs have to believe that they will be the ones to beat the odds. Yes, that is true. And necessary.


If you live in the SF Bay area long enough you realize this fact: on your left is founder A, and on your right is founder B. Both insanely smart. Both worked hard. Both had big visions. Both recruited great talent. And yet one is quite wealthy, and one still needs a paycheck.

Why? All other things being equal (and high quality), luck and timing still play a huge part.

It’s not cool to say. It smacks of weakness. But it’s true.

Now of course, all things are not equal. Startups differ by team and execution effectiveness, by vision and strategy, by funding prowess and more. But an awful lot of the time, good people and good teams fail. That’s the game we play. We try to get just ahead of the market (win!) but not too far ahead (dead!).

I stand by my line that founders are too often the dumb money. Believe me, I include myself among them. Entrepreneurship is *not* a rational endeavor. Even in heady times like today, there are far more failures than there are successes. (thankfully there are also a lot more successes than in the dotcom bubble because the markets are finally big enough)

It’s the mythology that bothers me. It blinds us.

My belief: if you exclude the frothiest of times, most entrepreneurs don’t start companies because of the money. Sure we dream of riches, but we start companies because we need to change the world in a particular way, we feel a need to build something new, and because we are kind of broken for normal jobs. The upside excites us and motivates us, and the downside scares us, but neither defines us.

So where does this concept come from that entrepreneurs need to have their entire life’s worth tied up in a single high-risk venture? Is this concept not helping fuel some self-destructive behavior among founders? Is that really what we think drives the best of us? I veer more towards Dan Pink’s view of what drives creatives.

I think entrepreneurial motivations, once the initial “foolish dreamer” stage is past, are more closely tied to a deep drive to succeed, competitiveness, team camaraderie (not to be underestimated), sheer determination, and sometimes just a damn anger to prove the naysayers wrong.

All this said, there aren’t very many ways for founders to hedge today. Not in a way that ensures relatively equal levels of quality in terms of ideas, teams, and execution. It would take a lot of trust in the vetting team, but it should be doable.

Finally, I spent this morning getting advice from an experienced startup lawyer and successful angel investor. The secret to angel investing, they said, was keeping at it through good times and bad. You build a portfolio, and you keep building a portfolio, and some things will hit.

I think it’s a shame that great entrepreneurs can’t benefit from that thinking a bit more.

(this post originally appeared on the Neo blog)

Andy Weissman of Union Square Ventures wrote a piece the other day on chaos theory and startups. His conclusion was that making decisions, and deciding how you make decisions, is of the utmost importance.

There are many approaches to making decisions. My current thinking can roughly be described as “lead with vision, but reality check with experiments.” I use frameworks such as jobs-to-be-done, design thinking and lean startup to help ground me. But that is not the only way.

Regardless of method, the need to make smart, fast decisions is universal.

This fact applies to new products as well as new companies.

I was speaking to an executive at a well-known company about team structure for an innovation group. The question was whether you could have one team validate an idea, and then shift the work over to a “production” team to implement and ship.

I argued that you should have at least *some* of the initial team remain with the product, especially the product manager/leader. When you emerge from an initial vetting phase for a product, the decisions are just beginning, not ending. If you have not spoken to customers directly, if you have not seen the results of your experiments, and if you have not experienced the nuances of your value tests, how can you make good decisions? How would you know what was important, what to cut or compromise, what to keep, and where the big risks remain that need further learning? Splitting the teams sounds like a sure-fire way to get bloat in your production work.

When I say bloat, I am talking about costs as well as features. This is true even if the people on your production team are cheaper. I’d rather have a small, elite team punch out something focused and valuable, than hand a fledgling product over to a confused group. Confusion — the inability to make fast, well-informed decisions — leads to wasteful time delays, feature expansion, maintenance headaches and ultimately a customer who is as confused as the team itself. Or more likely, a non-customer.

Lastly, an important part of Andy’s message is about speed, not just about the quality of decisions. You need both. So the key is to find decisive women and men who are comfortable balancing intuition, data and the wisdom of their team. Then you need to keep them involved in the entire lifecycle of getting something off the ground.

Do Market Sizing Early, Before You Jump Into “Lean”

February 11, 2015

Powerful new ideas often start with a spark insight: “Carpooling sucks! How can we fix it?” Or “Wow, these new smartphones might allow me to disrupt the entire taxi industry in a way never before possible!” Lean is great, but before you jump ahead with customer development, experiments and MVPs, it is worth taking two […]

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Custdev – Everyone Does It. Full Stop.

February 10, 2015

I see a lot of product teams try out customer development at the beginning of their product journey. But quickly the team gets so busy shipping features and they outsource customer learning to customer support, research or usability specialists, or the sales force. Those are all valuable touch points, but custdev is not a task […]

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The Value Behind Faster Horses

February 5, 2015

David Bland has a funny, and painful, graphic called the Product Death Cycle. It clearly illustrates one of the more dangerous parts of customer development: taking customer ideas literally. The famous line attributed to Henry Ford goes, “If I had asked my customers what they wanted, they would have asked for a faster horse.” Some […]

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Lean Startup Doesn’t Need Tools

January 29, 2015

In 2012, we were testing a bunch of new business ideas for Amex and I thought, “what if we had a tool that let us capture our assumptions, our experiments, and our progress?” So over a couple weeks, we hacked something out and tried it out on a few projects. It was a complete waste […]

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Death to Clickbait

January 28, 2015

I’ve decided I’ve had it with blogger clickbait, in particular the tendency to toss a highly controversial title in front of a non-controversial post. The ones I fall for usually claim that something I believe is wrong (or “dead”). Then they proceed to explain how the idea was right after all, albeit in need of […]

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Making Innovation Unsexy

January 21, 2015

(This post was originally posted on the Neo blog) “None of my inventions came by accident. I see a worthwhile need to be met and I make trial after trial until it comes. What it boils down to is one per cent inspiration and ninety-nine per cent perspiration.” – Thomas Edison, 1929 Many years ago, […]

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Startups: Don’t Wait to Build Exit Relationships

January 12, 2015

Paul Graham’s latest essay warns of losing time and focus to “corporate development” staffers out there sniffing for companies to buy. I agree with him on the corp dev side. But I wouldn’t want people to think that you should ignore potential buyers until “you want to sell your company right now.” It’s a question […]

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