NFX’s James Currier: Where unicorn ideas come from and why founders ‘have to keep pivoting’

Are you a seed-stage founder who’s building a unicorn?

NFX Founding Partner James Currier would like to save you some time: Startups that grow into billion-dollar companies have three basic forms of defensibility.

  • Network effects: Your product becomes more valuable as more people use it.
  • Embedding: Integrate your services so deeply, customers “cannot rip them out.”
  • Data loops: Gather, process and act on real-time data.

“This is really only talking about world-changing, big-ass businesses with a lot of impact that could be a billion dollars or more in value,” he said at TechCrunch Early Stage last month. “That’s what we’re investing in. And what I’m talking about today is only for the people who want to build those types of businesses.”

After giving a presentation he’d previously shared at Harvard Business School, Stanford and MIT, Currier outlined the mental models unicorn founders adopt and offered candid advice for early-stage entrepreneurs.

“Don’t take market risk — find things that people want and just do a better job at it. That is the most common way to get to a unicorn company.” James Currier, founding partner, NFX

“This idea that it’s 99% perspiration and 1% idea is not correct, because the right idea has power in it,” he said. “The right idea at the right time will attract you the right talent, it will attract you the capital — OK, it’ll attract you the press that will then attract you more talent, more capital.”

Pop culture and tech journalism lionize founders who shoot for the moon, “so most people think of having ideas,” said Currier, noting that unicorns like Lyft, Meta and Alphabet simply “copied” existing companies. In doing so, they swapped market risk for execution risk, which is much easier to manage.

“Don’t take market risk — find things that people want and just do a better job at it. That is the most common way to get to a unicorn company.”

According to Currier, who was an angel investor in Lyft, DoorDash and Patreon, NFX reviews about 8,000 deals each year, but only invests in around 30. “Sixty-five percent of the ideas we see are in what we call sort of the ‘dead zone’ — this area will waste your life’s energies if you pursue the bad ideas.”

NFX’s James Currier: Where unicorn ideas come from and why founders ‘have to keep pivoting’ by Walter Thompson originally published on TechCrunch

Sequoia’s Jess Lee explains how VCs think about their deals

Jess Lee, a partner at Sequoia Capital, has sat on both sides of the table. The Hong Kong native, Stanford graduate, and former Googler ran and sold the venture-backed outfit Polyvore before being recruited into the world of venture capital, where she’s spent the last six years.

Because she herself pitched many investors (and, she said, was rejected many times), she understands the mindset of CEOs in fundraising mode and the perspective of investors who are being pitched many companies every week. At a recent TechCrunch Early Stage event in San Francisco, she shared some of those insights to help founders in the audience achieve more success when they pitch investors. (She purposely avoided a lot of the content that’s already widely available to founders, including how to run an auction process and how to write a perfect pitch deck.)

For our larger audience, here are some of the things she suggested that founders keep in mind when it comes to the VCs they’re approaching:

  • Some decisions are reversible. A startup investment? Not so much. “It’s almost impossible to kick someone off your cap table,” she noted, so while people liken partner-founder relationships to a marriage, it’s worth pointing out that divorce is often easier.
  • Find an investor who “gets you” and knows your gaps so they can either fill those holes or help you find someone who will. If that investor also shares your values, can help you with your biggest unknowns (like, say, how to secure FDA clearance), and understands your space and your customers and your core thesis, all the better — though that’s a very tall order. “It’s actually really hard to find someone who has all five of these things,” said Lee. “I’m not recommending that. I would just say find at least one dimension of really good fit with investors.”
  • Know your audience. On this front, she suggested, it’s critical to understand how VCs think. We found this part of her talk the most interesting because it’s very easy to assume that all VCs have a similar mindset — and also that their lives are relatively stress-free — when that’s far from the case.

She started first with a broad scenario, noting that a 28- to 50-year-old partner at a venture firm might make 15 to 25 investments over the next 10 years of their career. The VC, said Lee, knows that venture capital has a power law distribution, meaning a third of their investments will probably go to zero, a third will break even, and the last third needs to make up for everything else if they want to stay in business.

VCs are not in the business of downside minimization. We don’t want a portfolio of 10 sort-of-OK outcomes. Jess Lee

“It’s not like stock picking, where most of the stocks don’t ever go to zero,” Lee noted.

Much can vary depending on where a VC is in their career, Lee noted. Veteran VCs have more experience and can be hugely helpful; they can also be very busy, have a lot of board seats, and, in some cases, “be very lazy because they’ve already made a bunch of money.”

GV’s Frederique Dame on product-market fit: ‘You have one chance at a good experience’

Fundraising is often presented as the most important step on a founder’s journey, but that is placing the cart before the horse.

Until a company builds a growing base of customers who are deeply engaged with its products, asking investors for money is a largely egotistical exercise. After a startup reaches product-market fit, however, savvy investors might compete for a chance to participate.

Achieving product-market fit is not a linear process, which means each company must find its own way, according to Frederique Dame, an investing partner with GV who previously led product and engineering teams at companies like Uber, Smugmug, and Yahoo. In her capacity as partner, she offers portfolio companies’ founders a range of services that includes advising them on recruiting, marketing and comms, and product development.

In a fireside chat at TechCrunch Early Stage, we discussed her experience validating product ideas, gathering actionable customer data, creating user-centric work cultures, and handling some of the unique challenges that come with scaling teams from a few dozen people to several thousand employees.

At Uber, Dame led strategic programs that helped the company grow from 80 employees to 7,000, which included transitioning from spreadsheets to systems that created transparency and accountability. Early-stage employees are accustomed to using ad hoc processes to get their work done as they sprint for growth, so I asked how she approached the work from a cultural perspective.

Set aside your ego and listen closely to customers

Trust me with what you don’t know or what’s not working, because once we invest, we’re going to have to work on this stuff anyway. Frederique Dame

“I think that the first thing you need to do is hire people who have low ego and have low ego yourself,” she said. After Uber launched, early customers frequently encountered surge pricing because the platform wasn’t onboarding drivers quickly enough. In response, Dame directed members of the company’s separate rider and driver teams to focus on a single problem.

“We realized that there were multiple products that were conflicting … between onboarding drivers, internal systems, and [including] driver directions within the app,” Dame said. “It’s important to have driving directions, but if you have surge pricing every time you get into an Uber or if you cannot get an Uber, there is no point of having Uber.”

After doing driver outreach, it became clear that they hadn’t been listening closely to customers: In 2011, most drivers used flip phones with rudimentary web browsing capabilities. To sign up, many visited internet cafes that were not running the latest versions of Internet Explorer, Firefox, and Chrome.

“They were looking at an error page, and they were failing. Understanding the user journey of your customers and what you’re doing with your product is really, really important,” Dame said. “Be obsessive and talk to customers as much as you can.”

Test as many ideas as you can (without asking engineering for help)

To reach product-market fit, teams must iterate rapidly and repeatedly to gather customer data, but there’s an inexorable tension between the need to test new ideas and the desire to make sure that road maps shared with investors remain aligned with actual product pipelines.

How to get into Y Combinator, according to YC’s Dalton Caldwell

Y Combinator’s batches are getting bigger and bigger. Its first batch back in 2005 was made up of just a handful of companies — this latest batch came in at over 400. But that’s out of over 17,000 that applied!

What gets one team in where another is turned away? If anyone can answer that, it’s Dalton Caldwell, managing director and group partner for YC. He’s been with YC for its last 19 batches, with much of that time spent overseeing admissions. He puts his tally for the number of applications he’s reviewed in the “tens of thousands.”

Caldwell recently joined us at our TechCrunch Early Stage event, where he shared many of his insights on the application process — what works on an application, what doesn’t and the right ways to stand out.

Caldwell’s session was made up of two parts: a 20-minute presentation on how he thinks about YC applications, followed by an audience Q&A. Below are some of my notes on his presentation, along with some highlights from the Q&A.

The team

“The first thing I look at when I read an application is the team. What I’m looking for is technical excellence on the team,” Caldwell said.

What that means can vary a bit from company to company. For a SaaS startup, that might mean a programmer who’s proven they can build and ship; for a biotech company, perhaps it’s less about coding and more about field expertise. But most of the time, he wants the team to have someone who can actually build the thing.

Our teams that rely on trying to hire outsourced engineers or consultants or whatever to build their product tend to move much slower than folks with a technical founder. They tend to get ripped off. Dalton Caldwell

“I like to see some kind of founder/market fit for what the idea is,” he clarified. “If you’re building a developer infrastructure type of thing … if you’ve built related tools in the past, or your prior job is related to it, that’s great to see. Even if you’ve contributed to an open source project that’s related to the thing you’re working on, that’s great to see!”

“I always get questions about this — why do we care so much about having a technical founder on the team? Our teams that rely on trying to hire outsourced engineers or consultants or whatever to build their product tend to move much slower than folks with a technical founder. They tend to get ripped off. It’s not great, and I would really encourage you to try to have a technical co-founder on the team”

And generally, Caldwell suggested that technical founders shouldn’t be doing it alone.

“Ideally there is more than one co-founder. It’s much harder to be a single founder. This is something people always ask questions about, and I’m sure we’ll get questions today. But look: We have the odds. Even the folks that we do fund that are single founders, they have a very hard time. The fact is that startups are ultimately a battle against yourself. It’s an emotional battle and a battle of wills. Doing that by yourself is really hard.”

The application

“What else do I look at in an application? I look for something that is clear and well written. I don’t like buzzwords. Conciseness. Clarity. Bluntness. Those are all things we look for in a well-written application.”

It’s a message that held true throughout Caldwell’s talk: Put yourself in his shoes. He’s looking at thousands of applications; when you’re one among thousands, words are your currency.

Raising a Series A in a market of mixed messages

The market for tech companies has shifted, as shown by a weak IPO market, a focus on profitability, and pivots galore. Yet, despite the market’s ongoing re-correction, venture capital is a booming asset class. Last year, per CB Insights data, venture investment reached $621 billion, which is up 111% from 2020 levels. This year, while valuations are seeing some pullbacks, investors say expensive term sheets show that there’s still hope for founders.

Indeed, it’s a market of mixed messages. For startups graduating past the seed stage and thinking about landing that coveted Series A, what’s the best way to navigate these times? Stellation Capital founder Peter Boyce II joined us at TechCrunch Early Stage to answer this question, along with many more, in his Series A-focused chat.

Boyce, who left General Catalyst to raise his own $40 million fund, spoke from the perspective of a solo GP who helps portfolio companies design their next fundraise. We talked about a rare power-shift dynamic for founders to employ and why 20% fluctuations in your valuation don’t matter when you’re young.

A not-so-common practice

When a founder raises a Series A round, it’s often the first time that they’re establishing a board in a formal way. As a result, Boyce recommends founders perform reverse due diligence and interview not just the firm, but the person that will be seated on your board for potentially over a decade to come. It’s important to get right.

The investor said that founders should consider a number of factors when choosing a board member, such as work style, expertise in a specific domain, access to follow-on capital, and broader resources. Interview portfolio companies, look for mutual connections, and, better yet, don’t be subtle about your investigation. Reverse due diligence, Boyce said, can show an investor that you’re “super serious” about your business.

“I’m actually really quite surprised that this isn’t a kind of more common practice,” he said. “The reason I love it for founders is that it totally changes the power dynamic once you’ve started doing your own homework on the investor … like all of a sudden you put them in a totally different interface and relationship with you.”

Sapphire Ventures’ Cathy Gao on how VCs can help early-stage startups weather volatility

When we talk about early-stage startups, we tend to focus on the internals — and understandably so. It’s easiest to home in on the things you can control: developing products, building a team, finding the right investors.

All are important and foundational to developing a startup, of course. But as much as we’d like to believe that the right product developed by the right team is enough to ensure a firm’s success, things in this world are never that simple.

When Cathy Gao closed out our Early Stage event last week, she had one big word on her mind: volatility. The Sapphire Ventures partner has plenty of experience on both sides of the fence. In addition to working as a VC, she currently sits on a number of startup boards, including SafeGraph, and Medable.

Prior to her time at Sapphire, Gao ran finance, strategy and product at Gusto during the fintech’s Series B round. We tend to have a short memory when it comes to things like volatility and instability — especially now that we’re well into year two of a pandemic. But Gao is quick to point out that the world was grappling with both before COVID gained a foothold. When she worked at Gusto 2016, there was already plenty of uncertainty.

“Donald Trump was elected president of the United States,” she noted. “Brexit happened, the price of oil plunged, and the world was battling a Zika virus. All in all, 2016 was a very volatile year for the markets. … Because of all the market volatility that year, and a lot of alarmist news headlines internally in the finance team, we were saying, ‘Winter is coming,’ and we got prepared against market volatility. Ultimately, winter never came.”

How to know when it’s time for your startup to stop DIY-ing legal work

From the outside looking in, the world of startups can feel informal: You meet your co-founder at a happy hour, your lead investor over Twitter DMs and focus more on launching a minimum viable product than buttoning up onboarding processes.

But that’s not where the story stops. When founders take the formal leap into entrepreneurship, there’s a whole host of (sometimes tedious) work that needs to be done — legally and professionally. And startup lawyers, specializing in the niche documents and processes behind startup-building, can be useful resources.

At TechCrunch Early Stage earlier this month, attorney Lindsey Mignano spoke about the specific work she does as a co-owner of a San Francisco-based women- and minority-owned corporate law firm for startups. The firm, Smith Shapourian Mignano PC, largely represents early-stage startups and microfunds, which means she can detail the timeline for when founders should think about startup law — and their costliest mistakes.

Legal fees are expensive, and no good lawyer will tell you otherwise. For startups, this creates tension: A founder can either hire a professional or turn to online websites or legal tech companies for a more affordable option. The latter may be more realistic for founders, especially in the early days, when every dollar matters.

Sequoia’s Mike Vernal outlines how to design feedback loops in the search for product-market fit

Sequoia’s Mike Vernal has worn many hats. He was VP of product and engineering at Facebook for eight years before getting into investment. His portfolio includes Houseparty, Threads, Canvas, Citizen, PicsArt and more, and he continues to invest in companies across a broad spectrum of stages and verticals, including consumer, enterprise, marketplaces, fintech and more.

Vernal joined us at TechCrunch Early Stage: Marketing and Fundraising earlier this month to discuss how founders should think about product-market fit, with a specific focus on tempo. He covered how to organize around the pace of iteration, how to design with customer feedback loops in mind and how Sequoia evaluates companies with regard to tempo.

Be explicit and be greedy at every single step along the way about getting feedback.

What is tempo?

Vernal breaks down tempo into two separate ingredients: speed and consistency.

It’s not just about going fast (which can often lead to some recklessness). It’s about setting a pace and staying consistent with that pace.

One of the very best compliments an angel can bestow on a founding team and include in an introduction to us is, “They’re just really fast,” or “She’s a machine.” What does that mean? It doesn’t mean fast in the kind of uncontrolled, reckless, crashing sense. It means fast in a sort of consistent, maniacal, get-a-little-bit-better-each-day kind of way. And it’s actually one of the top things that we look for, at least when evaluating a team: how consistently fast they move. (Timestamp: 2:26)

Vernal went on to say that tempo is directly correlated to goals and objectives and key results (OKRs). Building a feedback loop into those OKRs and determining the tempo with which to attack them is critical, especially during the process of finding product-market fit.

Finding product-market fit is not a deterministic process. Most of the time, it requires iteration. It requires constant adaptation. My mental model is that it’s actually just a turn-based game with an unknown number of steps, and sometimes either the clock or the money or both run out before you get to finish the game. It’s kind of like a game of chess. So what is your optimal strategy? (Timestamp: 4:25)

Feedback is your friend

As Vernal explained, finding product-market fit is all about feedback, and that must be an ongoing, built-in part of the process. He outlined how founders can go about designing with that in mind.

SOSV partners explain how deep tech startups can fundraise successfully

Startups developing so-called deep tech often find it challenging to raise capital for various reasons. At TechCrunch Early Stage: Marketing and Fundraising, two experienced investors spoke on the subject and advised startups facing a challenging fundraising path.

Pae Wu and Garrett Winther are both partners at SOSV and run the fund’s programs around biotech and hardware. SOSV doesn’t shy away from startups building complex technology, and because of this, Wu and Winther are well placed to advise on fundraising. They presented three key points targeting startups fundraising for deep tech applications, but the points are applicable to startups of any variety.

Before giving advice, the two acknowledged the nuances across the deep tech ecosystem and each industry. Their presentation is focused on general guidance applicable to nearly every startup.

Finding the right investor

The first point on Wu and Winther’s presentation sounds a bit self-serving but is based on solid advice. When building a deep tech startup, find the right investor, they said. This is general advice for startups, but according to these two, it’s even more important when building a company that might take longer for the investor to see a return.

In deep tech, it’s essential to think about founder-investor fit. And what we mean by this is understanding why an investor is even in VC in the first place. And what it is that’s driving you, the founder, to do what you do.

And so we look at this fit as a Venn diagram between founders who have a near maniacal devotion to wanting to solve a core systemic problem and investors that thrive on the unique risk profile that comes in deep tech. Because with deep tech, we’re talking about both technical risk, where maybe that insight that is core to the company merely proves that we’re no longer having to break any laws of physics to do whatever it is you’re trying to do. So there’s a big technical risk. (Timestamp: 6:09)

We, as investors, love to see methodical founders who can see the first step that will converge at the right moment of technical and business milestones.

Set obtainable goals

Breakthrough technology hardly came from sudden breakthroughs. As explained in this presentation, it’s critical to set obtainable goals that lead to the desired outcome.

Susan Su on how to approach growth as your startup raises each round

Your startup might rely on clever growth tactics to get off the ground, but you need more than spreadsheets if you want to turn viral spikes into a real business. You need a qualitative growth model to guide the strategy that you can use to tell your story to your team and investors.

Growth marketing expert Susan Su sat down with us at TechCrunch Early Stage: Marketing and Fundraising this month to share pointers for young companies that are trying to raise money after initial market traction. In the presentation below, she maps out a growth strategy from seed through Series A and B rounds and details how your milestones, budgets, investor updates and other measures change as you advance.

The not-so-secret secret here is that the key to great retention is really simple. It is building a product that solves a real and especially persistent problem for people.

Throughout the process, “a qualitative model tells the story of growth that you can use at early stages and really all throughout your company life cycle,” she explains.A quantitative model or quantitative growth accounting charts the numerical course for how you actually deliver against that narrative and becomes more relevant at later stages when you actually have real numbers.

Formerly a strategic growth adviser to companies at Sound Ventures, a growth marketing lead focused on startups at Stripe, and the first hire and head of growth at Reforge, Su just became a partner investing in climate tech for early-stage fund Toba Capital. She also writes a popular newsletter on climate investing and runs a six-week course for other investors on the topic.

Here’s more about growth, and how to talk about it with investors, from her presentation:

So here’s a sample qualitative growth model that I built for one of our portfolio companies with some modifications for anonymity. At the bottom, we have our linear inputs that form the foundation of awareness — in other words, traffic or leads that feed into our growth machine.

Once those leads come in, we have our acquisition loops, working to turn that non-repeatable spiky linear traffic (aka TechCrunch traffic, if you get so lucky as to be written up in TechCrunch) into scalable, repeatable acquisition. You cannot repeat the TechCrunch effect.

For this sample business, I happened to spec out five different acquisition loops — I was really ambitious. Many companies will struggle to identify this many. But the key to being able to scale is to have multiple viable acquisition loops, not just one single thing that works.