Highlights

Did you cross the Rubicon?

Ashot Arzumanyan
Jul 17, 2020
7 min read

Hero House in Yerevan, Armenia

The kingdom of heaven is like a merchant searching for fine pearls. When he finds a pearl of great price, he goes and sells all that he has and buys it.

Mathew 12:45-46

Thoughts about investing in teams and the importance of passion and focus

On April 10, 2018, we were having an AMA session for very early-stage founders with Al Eisaian of IntelinAir. One of our friends asked a question about how a founder should combine working on their startup with a full-time job. "The person who believes in their startup and is not fully committed should really examine their real intentions. There is no glory without guts! Your kids value not the luxury vacation, but the time they spend with you. If you have a car - sell it - you do not need one in Yerevan. Whatever happens - you will never die of hunger with your profession. You have to believe in your mission for others to follow you",- Al said… Every second person in the hall had a full-time job, but to my great pleasure, the audience was mature to take the message.

We are pre-seed investors, and entrepreneurs frequently ask us about our investment criteria. Here I put together some thoughts about teams, founder mentality, and full commitment in the light of investing in startups.

It takes a capable, unstoppable, and unbreakable team to win

CBinsights summarizes the top 20 reasons why startups fail. We see three main groups here:  

  • Market: is it a big market, or is it a small but growing market?  
  • Environment: investors, advisors, accessible customers, etc.  
  • Core team: the founders who drive the company.  

The team’s factor, however, is 4x more critical than the market and 5x more critical than the environment. In fact, most of the failures are either about the teams' internal composition and dynamics, or their ability to execute.

The cat will never fall on its back. Likewise, a strong team will always find a solution.

So what does it take to be a great team? In 2017 when we were putting together SmartGateVC, we tried to define the persona of a founding team - a team that we would trust, back, and work with. There we came up with the motto of our fund: “Fund for superhero teams: capable, unstoppable, unbreakable”. The 3 consequent years further reinforced our faith in teams. So let me try to briefly elaborate on the concept.

Capable = expert + fast-growing + agile

“Startup = Growth” Paul Graham

It is as trivial as it can be. The goals can be accomplished by people who are capable of doing it.

It is obvious, especially in deep tech, that one will have a very hard time to build a great company without solid domain expertise. It’s practically impossible for one to build a computer vision, network infrastructure, devops automation, robotics, therapeutics, etc. company without a deep understanding of that domain.

1.01^365 = 37.8 | 0.99^365 = 0.03

However, exponential growth makes the most impossible things possible. If you somehow succeed in folding a thin sheet of paper 42 times, you will reach the moon (do the math: 2^42).

Likewise, in the case of founders, the starting position is important, however, the pace of the growth will eventually determine the winner. How would one check if they are growing? From my experience, the best way to do it is to have a look at the traction. If you see solid growth with each next meeting, you are most probably meeting the right people to run a successful venture. By the way, similarly, if you see growth in your investor each next meeting, you probably meet a right investor.

Finally, agility of the mind is critical for healthy growth. Agility will allow one to see own drawbacks and gaps, hear the feedback, and tap the opportunities. Sometimes we have to break walls with our heads, but we still need to be wise enough not to break our head on the wall. The border between the two is very thin. How do you see if someone is agile? Here is a story for you. One will rarely find an entrepreneur as tough and tenacious as Alex Saroyan, co-founder and CEO of Netris. But Netris is the new name of the company which is well known in our circles with its previous name: XCloud Networks. How come that XCloud transformed to Netris, with a radically different value proposition and brand? This happened after a game-changing meeting of Alex with Mike Dvorkin of Cisco and Ben Cherian of Red Hat. For those who don't know about Dvorkin, Scott Raynovich says it very well: "Anybody who’s anybody in the cloud infrastructure and networking markets knows Mike Dvorkin, who is currently a Distinguished Engineer at Cisco. Dvorkin is not only considered a world-class engineer, but he has a rich history and network in Silicon Valley startups." Mike and Ben gave some harsh but cogent feedback on XCloud. Two months later we met the new company: Netris. Same vision but radically different go-to-market and value proposition. I believe Mike and Ben were impressed (so was I). There is more to this story that I can’t share now, but I am confident that Alex will find his way to disrupting the network infrastructure business.

Unstoppable = passionate + focused + persistent

“I'm convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance. It is so hard. You put so much of your life into this thing. There are such rough moments in time that I think most people give up... Unless you have a lot of passion about this, you're not going to survive." Steve Jobs

Passion keeps one focused, and persistence reinforces the passion in hard days. Therefore, the combination of passion, focus, and persistence makes a team unstoppable.

The system cracks when there is no 100% obsession with the mission, e.g. there are side activities that require considerable efforts or take a significant part of the founder’s passion. The troubles will do come and the question is what thoughts make the nights sleepless then. There is always a way out, but it takes a persistent, passionate, and focused team to find it.

Unbreakable

"My model for business is the Beatles: They were four guys that kept each other's negative tendencies in check; they balanced each other. And the total was greater than the sum of the parts." Steve Jobs

Having the right co-founders can make or break a startup. A survey of 10,000 founders by Harvard University professor Noam Wasserman found that 65% of startups fail because of conflicts between co-founders. The conflicts usually emerge when there is an unhealthy role distribution or significant differences in vision. So here are the key questions: how the founders distribute the roles and how they handle the differences in opinions? Successful teams usually have a long-run and efficient formula for this.

Will a co-founder break-up kill a startup? It’s commonly accepted that a chain is only as strong as its weakest link. In fact, though, I believe that in the case of startups it’s the opposite. The chain is as strong as its strongest link. Co-founder break-ups may happen, they will weaken the team, but the power to survive is dependent on the inner willpower of the remaining founders.

Data shows that on average successful startups (assuming exit is a success) have roughly 2 co-founders (see, e.g., here and here)*. 5 of the top 10 recent SaaS/Cloud IPOs had solo founders (see here). In our portfolio (currently 18 companies and growing) 50% of companies have 2 founders. We also have married co-founders and brother co-founders. We have also seen 2 co-founder break-ups (none had a fatal impact on the company as of this date). Over time we’ll have more of our own statistics, but for now, one thing is clear: efficient role distribution and a similar level of stamina preserve the harmony in the teams. We are gratified with the entrepreneurs we backed.

The distribution of SmartGateVC portfolio by the number of co-founders

If you don’t believe in your startup, why should others do?

"Death, unanticipated, is death; death, anticipated, is immortality". The words of the medieval hero can probably be translated to modern-day startup wording as “Challenge, feared, is a failure, challenge, accepted, is a monopoly”. Monopoly in how Peter Thiel would interpret it.

As investors, we "control" the investment decision with the market due diligence and vision of future, we share the responsibility for the environment (after all it is partially our duty to ensure that the best resources are available for a portfolio company), as advisors we even share responsibility for the internal dynamics of the team, but there is nothing we can do if the founders have other priorities in life or there is an escape route in the back of the mind.

If you believe you found the pearl, why don't you give up everything else? If you don't, why should investors do?

Practical implications of the above are the following rules of thumb for investors (and we seek to follow those):

  • Invest in full-time founders and do not invest in founders who continue running (directly or indirectly) other businesses;  
  • Invest in founders with a true passion;  
  • Invest in founders who have the guts to pass through the valley of death.  

It’s not always easy to follow these rules, since sometimes you may have the feeling of losing a decent investment opportunity.

Only one miracle

“Most successful startups depend on one miracle only. For Airbnb, it was getting people to let strangers into their spare bedrooms and weekend cottages. This was a user-behavior miracle. For Google, it was creating an exponentially better search service than anything that had existed to date. This was a technical miracle. ... For Slack, it was getting people to work like they formerly chatted with their girlfriends. This is a business-workflow miracle. The classic sign of a shitty startup idea is that it requires at least two (or more!) miracles to succeed.” Chaos Monkeys, Antonio Garcia Martinez.

No more than 1 miracle | code

Founders should always minimize the number of miracles necessary for their startup’s success. If there is no true passion, full focus, and absolute dedication, they add up another miracle, and that makes their startup “shitty”. It’s very hard to build a solid building on fragile ground.

Every rule may have an exception, though. I know one entrepreneur (only one) in whose success I truly believe and who is a co-founder in 2 companies. That said, I believe that only one of his companies will succeed at a time.

Heroes of our days

In Armenia, we run Hero House - a hub of heroes of our days - people who build companies that claim to take part in shaping the future of Armenia and the world. Hero House in Glendale, California is on its way. Why are they heroes? They crossed the Rubicon, they are capable, there is nothing that can stop them and their teams are unbreakable. We at SmartGateVC truly believe in them and are humbly proud to back and serve those great people.

Will you join our family?

*Although in his 2006 essay Paul Graham considered a single founder as the number one killer of a startup, single founder company exits seem to account for a major portion of cases.