CHRIS DIXON IS AN entrepreneur, programmer, and investor. He is a general partner at Andreessen Horowitz, before which he cofounded Founder Collective, a seed-stage venture capital fund. He is a polymath who writes clearly and thoughtfully about technology and business. Dixon cofounded SiteAdvisor (now WebAdvisor), a security startup purchased by McAfee, and Hunch, where he was CEO for a time. He has also worked for eBay and as a programmer at a hedge fund specializing in high-frequency trading. He has invested in companies like Airware, BuzzFeed, Coinbase, Comma.ai, Dispatch.ai, Envoy, iCracked, Improbable, Keybase, Nootrobox, Oculus, OpenBazaar, Ringly, Shapeways, Skydio, Soylent, Stack Overflow, and Wit.ai. Dixon earned a BA and an MA in philosophy from Columbia University and an MBA from Harvard Business School. He has also been an active angel investor, making personal investments in technology companies including Behance, Foursquare, Kickstarter, OMGPop, Pinterest, Stripe, Warby Parker, and others.
1. “If everyone loves your idea, I might be worried that it’s not forward thinking enough.”
The best opportunities for startups tend to be in areas that are overlooked and less well known by others. What Dixon is saying is that if everyone loves your idea, it may be a “tell” that there will not be opportunities for extraordinary profit. Dixon also believes “you shouldn’t keep your startup idea secret.” He identifies a range of positive benefits that flow from sharing ideas and getting feedback and points out that “there are at best a handful of people in the world who might drop everything and copy your idea.”
2. “How do you develop a good idea that looks like a bad idea? You need to know a secret in the Peter Thiel sense: something you believe that most other people don’t find. How do you develop a secret? (a) Know the tools better than anyone else; (b) know the problems better than anyone else; and (c) draw from unique life experience.”
Founders have to choose a market long before they have any idea whether they will reach product–market fit. In my opinion, the best predictor of success is whether there is what David Lee calls “founder–market fit.” Founder–market fit means the founders have a deep understanding of the market they are entering, and are people who personify their product, business, and ultimately their company.
Dixon is saying that the people most likely to know a “secret” about a business opportunity are individuals with deep domain expertise. In other words, it is not nearly as likely that someone without deep domain expertise will be successful, as they will not have a solid understanding of the technology, the best methods to create the product, the best ways to bring products to market, or the needs of the customer. People who work for a startup who have in-depth domain knowledge are a likely source of convexity. When a team working on a startup has what Dixon and Thiel call “secrets” as a result of deep domain expertise, their ability to adapt and innovate gives the investment greater convexity.
3. “The business of seed investing, and frankly, early-stage entrepreneurship, is so much about getting useful information. And almost all of that information, unfortunately, is not published.”
Great venture capitalists are always trying to find great sources of information, particularly unpublished information. If information about a business is hard to obtain, that is a great thing for a startup since that information can help create a mispriced opportunity. In other words, uncertainty and ignorance in the early stages of a startup are friends of the entrepreneur. As the team pushes forward to reduce technology and market risk, find product–market fit, and discover methods to scale the business, it has an opportunity to retire uncertainty and ignorance and create value. One part a great venture capitalist’s job is to provide entrepreneurs with an entry into networks that will allow them to quickly and cost-effectively find the private information that will help them achieve their goals.
4. “Ideas matter, just not in the narrow sense in which startup ideas are popularly defined. Good startup ideas are well developed, multiyear plans that contemplate many possible paths according to how the world changes.”
Characteristics of the best ideas: (a) Powerful people dismiss them as toys; (b) They unbundle functions done by others; (c) They often start off as hobbies; and (d) They often challenge social norms.
The best ideas come from direct experience. When you differentiate your direct experience from conventional wisdom, that’s where the best startup ideas come from.
What Dixon is talking about here is perhaps best explained by an example. I spent much of my career working for Craig McCaw, who is a savant when it comes to developing ideas into great businesses. In the very early days of what is now referred to as the mobile industry, the cellphone offered enough value to be a commercial success for only a minuscule number of users. McCaw was an avid user of the product and had deep domain expertise. The consumer device was so big that it required a suitcase or a car installation to be useful. Real estate agents and construction workers were among the most avid users, but costs were high. Eventually, genuinely portable mobile phones appeared, but they were still quite cumbersome and expensive—and they were still analog. During that period, McKinsey famously predicted that no one would ever use a mobile phone if a landline phone were available. McKinsey placed little or no value on what McCaw called the ability of people to be “nomadic.” But McCaw appreciated the freedom of working out of his “mobile office,” meaning in a car, plane, or yachts and was therefore a natural enthusiast for the product. When the time came to sell his cable TV business to double-down on the mobile phone market, the choice was made easier by his love of being nomadic.
5. “There is a widespread myth that the most important part of building a great company is coming up with a great idea.”
A great way to show you can build stuff is to build a prototype of the product for which you are raising money. That’s why so many VCs tell entrepreneurs to “come back when you have a demo.” They don’t wonder whether your product can be built—they wonder whether you can build it.
The ability of a team to execute is more important than a bright idea. Most everyone has said more than once “I thought of that idea first” when they see a new business. The best idea in the world will not amount to a hill of beans without a team with the will to make it happen. Dixon is saying that one of the best pieces of evidence a team can execute on a plan is a successful demo. The best proof that you are able to create fully functional software, for example, is a software demo.
6. “What the smartest people do on the weekend is what everyone else will do during the week in ten years.”
Hobbies are what the most intelligent people spend their time on when near-term financial goals don’t constrain them.
Dixon is not referring to smart people who play ping-pong in their garage or fantasy baseball in their dorm rooms on weekends. He is talking about the sort of people who founded the Homebrew Computer Club, an early hobbyist group in Silicon Valley that had it first meeting on March 5, 1975. The critical element Dixon seeks is an advanced technology that is useful to very smart hobbyists but does not yet have clear financial returns associated with its use. Over time, the cost and performance of such a hobby often rise to a point that enables the hobby to become a thriving business.
7. “In this era of technology, it seems that the core theme is about moving beyond bits to atoms. Meaning technology that affects the real world, transportation and housing and health care and all these other things, as opposed to just moving bits around. And those areas tend to be more heavily regulated. This issue is only beginning to be significant and will probably be the defining issue of the next decade in technology.”
The intersection of technology and regulation is certainly going to be a challenge in the future. Dixon is making a statement about where future opportunity may exist. Too many venture capitalists are camp followers who move into a trend when others have long since moved on to other opportunities. Deviating from a consensus view for its own sake is suicidal, but doing it occasionally and being very right in doing so is what makes a great venture capitalist like Dixon.
8. “Anyone who has pitched VCs knows they are obsessed with market size.”
If you can’t make the case that you’re addressing a possible billion-dollar market, you’ll have difficulty getting VCs to invest.
If you are arguing market size with a VC using a spreadsheet, you’ve already lost the debate.
For early-stage companies, you should never rely on quantitative analysis to estimate market size. Venture-style startups are bets on broad, secular trends. Good VCs understand this.
Startups that fill white spaces aren’t usually world-changing companies, but they often have stable exits. They force incumbents to see an application they had missed, and those incumbents often respond with an acquisition.
It is impossible to make a silk purse out of a pig’s ear. For a startup to generate the necessary grand-slam financial return for a venture capitalist, the potential market for the product must be massive. The entrepreneur who pulls out a spreadsheet and tries to make the case that the market is large enough based on fake assumptions and guesses does little but destroy his or her credibility. Venture capitalists hate to see hockey stick–shaped distribution curves based on unrealistic assumptions that do not map to reality. Yes, they want to see as many facts as possible that support the narrative. No, they do not want to hear wild, optimistic guesses presented as facts.
9. “There are two kinds of investors: the Ron Conways who try to create value by finding good people and helping them build something great, and others, who want a piece of someone else’s things. The builders and the extractors. Avoid the extractors.”
Founders too often view raising capital as a transaction, when it is a very deep relationship. They think of money as money, when there is smart money, dumb money, high-integrity money, and low-integrity money.
A startup’s success is increasingly being determined by its access to networks of people and resources. If a startup has a choice between (1) just money and (2) money plus access to these networks, why not choose the latter? Perhaps some founders are made less fearful by a venture capitalist who is mostly a cheerleader, but the smartest entrepreneurs want someone who can directly help with tasks like fundraising, recruiting, pricing, and distribution.
10. “VCs have a portfolio and they want to have big wins. They’d rather have a few more lottery tickets, while for the entrepreneurs it’s their whole life. Let’s say you raised $5 million and you have a $50 million offer. The entrepreneurs are saying, ‘Look, I can get paid millions of dollars. I’ll be able to start another company.’ Usually that is where the tension comes.”
Dixon has been both a founder and a venture capitalist, so he has empathy for both on this set of issues. He is most certainly correct that this type of situation creates tension. The question is, what is the best way to resolve the tension in ways that are mutually beneficial? The answer is complex and involves some give and take. The wisest outcome on founder and employee liquidity issues will depend on the facts and circumstances of each case. In other words, there is no connect-the-dots formula that works for all situations. Fred Wilson points out that there is an incentive to create some liquidity: “Providing some founder liquidity, at the appropriate time, will incentivize the founders to have a longer-term focus, and that will result in exits at much larger valuations because, contrary to popular belief, the founders drive the timing of exit way more than VCs do.” Of course, it is one thing to concentrate your investments if you have a net worth measured in millions of dollars and quite another if you have just a small financial cushion if the business fails. The important point Dixon raises is that a significant conflict can exist between founders and venture capitalists, and it can create tension if not dealt with intelligently.
11. “If you aren’t getting rejected on a daily basis, your goals are not ambitious enough. The most valuable lesson I had starting out in my career was when I was trying to break into the tech world, and I applied to jobs at big companies, startups, and VC firms. I got rejected everywhere. I had sort of an unusual background. I was a philosophy major, a self-taught programmer. It turned out to be the most valuable experience of my career because I eventually developed such thick skin that I just didn’t care anymore about getting rejected. And, in fact, I turned it around and started embracing it. Eventually that rejection emboldened me. Through those sort of bolder tactics, I eventually landed a job that got my first startup funded. So every day to this day I try to make sure I get rejected.”
The ability of some salespeople to handle nearly constant rejection is something that has always fascinated me. Why can some people knock on door after door and suffer rejection after rejection and still maintain a positive attitude long enough to generate an eventual sale? For some people, a single rejection turns them into a nervous wreck, whereas others power through to close the sale. Perhaps this resilience can be explained by a combination of innate personality and learned skill. In any event, starting a business, and building a successful career, involve way more selling than most people imagine. Entrepreneurs are always selling themselves, their business, and their products to potential employees, suppliers, distributors, investors, and customers. If you cannot or do not want to sell, starting a business is probably an unwise decision for you.
12. “Before I started my first company, an experienced entrepreneur I know said, ‘Get ready to feel sick to your stomach for the next five years.’ And I was, ‘Eh, whatever.’ Then later, I was, ‘Shoot, I should listen to the guy.’ ”
You’ve either started a company, or you haven’t. “Started” doesn’t mean joining as an early employee, or investing or advising or helping out. It means starting with no money, no help, no one who believes in you (except perhaps your closest friends and family), and building an organization from a borrowed cubicle with credit card debt and nowhere to sleep except the office. It almost invariably means being dismissed by arrogant investors who show up a half-hour late, totally unprepared, and then instead of saying no give you noncommittal rejections like “We invest in later-stage companies.” It means looking prospective employees in the eyes and convincing them to leave secure jobs, quit everything, and throw their lot in with you. It means having pundits in the press and blogs who’ve never built anything criticize you and armchair quarterback your every mistake. It means lying awake at night worrying about running out of cash and having a constant knot in your stomach during the day fearing you’ll disappoint the few people who believed in you and validate your smug doubters.
Illustrating this point is best done with another example. I was the fourth employee of a business founded by Craig McCaw and Bill Gates known as Teledesic. At one point, the company raised funds at a valuation of $3 billion, which made it a triple unicorn. Although I wasn’t a founder of the business, it was nevertheless a life-changing experience. I decided to take the job because I believed the business had a compelling mission. Unlike the situation described by Dixon, we were not short of cash to keep the lights on, but we needed to raise and spend $9 billion before we generated any revenue. The need to raise that much capital and make other scary decisions at Teledesic made me feel sick to my stomach plenty of times. It was a frightening but thrilling roller-coaster ride.