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Incentives really do matter.
“Show me the incentives and I will show you the outcome” is arguably Charlie Munger’s most famous quote. When it comes to picking who you work with in the earliest days, few things matter more than the ways in which those people are incentivized.
If you want to achieve great things, strive to surround yourself with people who share that ambition. That means they really need to have their own selfish reasons to help you turn your dream into reality.
“I got an offer to join this accelerator/incubator; it’s great because it’s free, they don’t charge any cash or equity.”
First, it’s very unlikely that it actually is free. You just don’t see the cost. Incubators and accelerators that operate without charging any fees or taking equity stakes are usually backed by universities, corporations, or public institutions, like municipalities or ministries.
The people running those structures aren’t tasked with maximising revenue or equity value, but they are being evaluated on some set of objectives. And unfortunately, the odds that those objectives are aligned with yours are fairly low. Often those goals involve photo ops or mandatory events. Sometimes the programs are a way for corporations to keep tabs on innovation in their market.
So while “free” might sound tempting, it often comes at the expense of something just as valuable as whatever little cash you may have available in the early days: your time and focus.
“A corporation offered to participate in my seed round; it seems like they could bring a ton of value.”
We tend to recommend against having corporate players in your cap table until Series B or C. There are several reasons for this.
Turnover is usually higher in corporate investment teams than it is in venture capital fund partnerships. That means the person “championing” your deal could very likely not be there for your next round. Since corporate investment arms are often not structured as funds, it may be that no one in the new team has an incentive to continue working on their investment in your company.
Turning $1M into $50M is not a huge deal for a company making hundreds of millions or more in revenue. The $49M are almost “pure profit”, but they are still insignificant at the scale of the organisation, meaning that relatively few resources will be mobilised in the effort. The corporate venture arm isn’t a priority in any corporation; that’s often why the best ones end up being spun off.
And since corporates are often focused on investing within their industry, you’ll end up being tied to them or their competitors in one way or another: as a client, a supplier, a distributor, an acquirer. Having them in the cap table can add a whole lot of complexity to each of those relationships.
“I’m sticking to self-funding and family & friends to avoid external investor pressure.”
There are substantial challenges that come with financing the business independently or even with the help of relatives.
First, in spite of all their flaws, professional investors have the added benefit of seeking a financial return. The discipline that comes with this external accountability is very valuable. It provides you with someone who has an outsider’s view on your business, as well as a selfish motivation for you to succeed, challenging the decisions you make when need be.
Second, professional & experienced venture investors know that losing money is, in their case, the cost of making money. If you are aiming to build something great, you’ll likely be faced with risky bets. Having all your personal wealth, and that of your relatives, tied to that gamble makes it harder to ignore the downside risks. It’s a lot scarier to lose your family or your friends’ money and to have to explain that to them than it is to lose a VC’s money.
What are The Family’s incentives?
We’re very committed to keeping our incentives as aligned as possible with those of our portfolio founders. We join their journey as long-term, minority shareholders. We hold common stock, just like them. We have a form of vesting, just like them. The equity value of our business is entirely tied to the equity value of the businesses we work with. We only win if our founders win.
The one small misalignment comes from the fact that we are invested in dozens of ventures each year, whereas founders tend to have it all riding on one. That means that if there’s a risky bet that we think could change the outcome by several orders of magnitude, we’ll likely weigh towards taking it. But still, it’s always your decision - and for the hungriest founders, it’s always a good thing to be in a community biased towards ambition.
The Family’s next startup batch will happen remotely starting in January! If you’re an entrepreneur willing to grow your startup in the best conditions, apply here. Get ready for an intense 6-week program: getting smart advice, accessing top operators and fundraising with the best investors.