Venture Building: Lessons Learned About Entrepreneurship and Venture Investing
Marc Andreessen recently wrote “it’s time to build”. In the same breath, he also utters that “building isn’t easy”. This is an understatement.
I spent two and a half years at a venture builder, which via an internal team intends to reduce time to market, find product-market fit more quickly, and launch a portfolio of business, ultimately with the aim of increasing returns to investors. This entrepreneurship-on-steroids approach differs in certain key ways which emphasize the fundamental philosophical, motivational and incentive-based questions around the marathonic process of building and scaling new companies, being widely applicable to venture investing and entrepreneurs themselves. This article explores these.
Requirements of Leadership: Visionary & Missionary
As goes the saying: don’t start a business to become rich, but because you want to change the world, or “put a dent in the universe”, as Steve Jobs muttered. There probably isn’t a better recent example than Elon Musk:
“I didn’t go into the rocket business, the car business or the solar business thinking this is a great opportunity.
I just thought, in order to make a difference, something needed to be done. I wanted to have an impact. I wanted to create something substantially better than what came before.” — Elon Musk
This is evidenced in the mission statements of his companies:
- Tesla: “accelerate the world’s transition to sustainable energy”
- SpaceX: “making humanity multiplanetary”
On that basis, the assertion is that an entrepreneur needs to be:
- visionary: seeing a different world and a route to get there (aka the product)
- missionary: being able to convince others that it’s worth it (aka the sale).
Naval Ravikant frames it as such:
“Learn to sell, learn to build. If you can do both, you will be unstoppable.”
Tying this back to Musk, he is a self-described engineer and designer, leading this at SpaceX and heavily involved at Tesla. He has also showed himself adept at marketing, with one of the original Tesla Roadsters whizzing around in space, or the ability to generate billions in presales of the company’s cars. Few other companies have shown themselves capable of this kind of pre-product sales traction. Whilst a vision and a mission are a necessary, but not sufficient, condition for having success, it goes a way to explaining why Tesla is now the most valuable automaker globally, whilst SpaceX is the first ever private space company to take astronauts to the Space Station.
Andreesseen Horowitz has a slightly different description, discussing founding (visionaries) vs professional (operational) CEOs:
“Professional CEOs are effective at maximizing, but not finding, product cycles. Conversely, founding CEOs are excellent at finding, but not maximizing, product cycles. Our experience shows — and the data supports — that teaching a founding CEO how to maximize the product cycle is easier than teaching the professional CEO how to find the new product cycle.”
So vision and mission are important in the genesis stage (seed & VC), whilst when the company has reached product-market fit and looks to scale an operational hand (late VC and PE onward) becomes more useful.
Using these 3 definitions (visionary, missionary, and operational), in our case the CEO of the builder was largely the latter (skilled in operations). For me, this was a key oversight: a vision and mission are fundamental when you’re in the creative phase and want to change systems or find that new product cycle. Added to this, for Myers-Briggs fans out there the CEO was an ISTJ, whose introversion limited the ability to rally the troops around an inspiring vision (already lacking, as described above).
Whilst the MB assessment is sometimes criticised, it is a quick personality proxy giving surprisingly deep insight into what makes a person tick. Indeed, startups and VCs conduct a rigorous, non-traditional interview process to understand someone’s deep passions and motivations, as well as observing their ability to lucidly, clearly and convincingly communicate them. From Chamath from Social Capital:
The Missionary vs Mercenary Paradox
Entrepreneurs are visionaries — moonshoot masters — who are trying to change their surroundings, their returns being derived from the greatness of their change, not from the monetary gains (a nice consequence, of course).
Clearly, however, it’s the raison d’être of many company builders — holding onto equity and making more money on the upside. At worst, then, the sine qua non is to have a missionary founder who can convince proverbial sailors to board ship and sail them into uncharted waters and potentially over the edge of the world.
Back to founding CEOs, on the other end of the specturm, hired or non-founding CEOs with little equity participation are in reality employees in disguise, mere mercenaries. They’re in it for the money and likely to jump ship as soon as the short-term economic payoff isn’t apparent, aside from the fact that they may not share the vision or the mission. As legendary investor John Doerr from Kleiner Perkins once pointed out:
“We need teams of missionaries, not teams of mercenaries.”
Working in a builder, you’re an intrapreneur — the grey area between an entrepreneur and an employee — with incentives depending on the builder remuneration stucture. For a founding CEO, how do you find visionaries who want to work with you to build their dream? For top entrepreneurs, why give away half the equity when they can do it themselves?
Conversely, for a mercenary CEO, how can you as a builder have the vision and take a project to a developed enough stage and pass off the project and the vision to someone who is going to stick around for the long-term?
These are the unicorn-dollar questions. Friends at another company builder have seen all of their founding CEOs leave. This isn’t necessarily axiomatic, but a challenge for all builders and intrapreneurs alike.
The Remuneration Package Conundrum —Salary vs Equity
“Call it what you will, incentives are what get people to work harder” — Nikita Khrushchev
By design, a builder’s intention is to leverage the internal team to speed up building and offer initial seed capital, maintaining higher equity ownership and thus benefitting from the upside as the equity revalues upwards. Whilst this sounds good from a builder angle, a CEO brought in later on may not share the vision, and will also own a small percentage of the business.
Compare this to Elon’s payoff structure, which couldn’t be more aligned to the long-term success of the company: cash compensation almost zero, with all of the upside, his entire net worth, invested in the companies.
Back to a build CEO, she may get 10–50% depending on the moment of joining (e.g. a “founding CEO” / JV from the start vs one brought in later on). The downside is a topsy-turvy cap table compared to a traditional founding team which concerns future investors who look for incentive alignment and motivation of the captain of the ship. This is a recurring problem for builders, especially if they can’t finance future rounds. The one successful venture of the builder (see below) was a JV so was more aligned, but it too has issues of a CEO being overly-diluted which undoubtedly will have to be solved as it moves into later funding rounds, most likely at the expense of the builder.
From the internal team perspective, we were all basically mercenaries who were very averagely paid — various members in their next position immediately earned multiples of what they were on being a good indicator of real value generated— with the builder CEO, the CTO and the CMO having small stakes in the builds, whilst the other 6–7 members of the team had no equity. Aside from being top heavy, even this wasn’t the right balance: the CEO told me “I’m leaving a lot on the table”, and he left 6 months after the conversation to earn 60% more money, and the builder itself ceased to exist as a standalone entity soon after. It makes it apparent that neither the vision nor the mission were never fully internalised.
From a work angle, the multidisciplinary collaboration is fun — my favourite part, in fact — but what was the fundamental motivating factor to get up and work our socks off each and every day, something which is required to build? The “buzz” of entrepreneurship? That gets tiring after a while; in short, the incentives aren’t aligned.
Brand-name builder Rocket Internet goes down the route of paying more handsomely in cash its builds’ “founders” who own but a small percentage, with other C-level execs having even less skin in the game than the CEO. More mercenary than visionary, at least they’ve the incentive (hard cash) to put in the graft. For that model, obviously you need a lot of capital. Being ex Linio, an Amazon rip-off in LatAm, many former employees (both from in- and outside the builder) told me how it was a testing ground where they could throw money about willy nilly to try to get to scale; capital, at least at the start, wasn’t an issue. Linio finally got bought out in 2018, but not after pre-existing shareholders got significantly diluted by the LIV / Northgate round.
In general, startups need to think about the cap table and how it is managed to give the right incentives to founders and leveraging the ESOP (employee stock option plan) for key members of the team. The issue is that initial wages are low and building a company takes time (so the value of the equity is low whilst a liquidity event way off). When things take longer than you hope (spoiler: they will) and problems arise (spoiler: they will), will these workers they stick around? Entrepreneurship is a marathon, not a sprint; top staff remuneration packages need to be aligned according to the long-term nature of building a company.
The Value that Strategic Partners Bring
“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” — Albert Einstein
The idea of compound interest not only applies to money and wealth, but more broadly to areas such as relationships, knowledge, health and racism. As applied to strategic partners, you are standing on the shoulders of giants, leveraging all of the compounding which has occurred previously.
In our case, behind the builder were a few SMEs in the same holding, whilst a big Mexican media firm (MVS) and restaurant group (CMR) owned by the family was the history of the founders. Initially, this struck me as hugely valuable. However, just from a builder angle we didn’t have one meeting where we sat down with the heads of innovation or product of those firms to ask some simple questions: what are your largest problems that aren’t being solved? Where are you focusing your innovation efforts? What does your client base look like and what products are they looking for which they don’t have? What limitations does in-house innovation have (other department heads don’t have the incentive to be self-disrupted) which we can fulfill?
The priviledged position of being close enough to be trusted, but the right distance away that you aren’t hobbled by existing interests and corporate lethargy, means that if the partner is has two neurons to rub together and you’re decent at your job, the corporate will likely bite:
This best example of this locally is Innohub, another Mexican builder which has as an investor the founder of Contpaq (a large Mexican accounting ERP) with around 1m SME clients. It has since built a strategic partnership with Spanish bank Santander under a new venture, Rubik Ventures. Not being an intrapreneur, but instead an outside agent, can help to overcome the inherent hurdle of internal opposition from existing business units which can smell the deterioration of their economics due to internal disruption.
One of the oft-cited counter arguments in the builder was that it would naturally force us to only attend those verticals in which the strategic partner operates. Whilst this is true, choice has shown to reduce our ability as humans to execute, as in the classic jam experiment: humans inherently dont’ react well to variety; less is more. Jumping from industry to industry might seem fun, but you require new knowledge, expertise and networks, which are hard to replicate.
So even though it is limiting — in the case of Innohub, fintech — at the same time it also focuses attention, giving you significant leverage: access to capital, access to existing users to understand their pains and requirements, access to highly-developed and deep distribution channels and networks, not to mention expertise and the M&A angle from the start for the builder’s exit strategy.
In short, having a strategic partnership obviously doesn’t automatically give birth to successful companies, but if used correctly it certainly gives it focus and an immensely powerful catapult that can help them score the home run, which is why we were all there in the first place. Even if you don’t have a strategic relationships, building sequentially will allow you to leverage existing structures — networks, expertise, capabilities , portfolio— rather than chasing the next sexiest deal. This is compound interest. From Naval:
“If you keep switching locations and groups, every time you reset and you wander out of where you’ve built your network, you’re going to be starting from scratch.”
Investors Need to be Demanding Yet Patient
“Trees that are slow to grow bear the best fruit.” ― Moliere
Knowing that entrepreneurship isn’t a get-rich-quick scheme and takes a few attempts is key to understand for anyone in the entrepreneurial space. In VC, typically a fund will invest in 10–15 (if not more, especially in earlier phases) companies in the knowledge that returns follow a power law distribution. As Angel List points out, it’s preferable to swing the bat many times as you can as it’s extremely hard to identify a priori the eventual winners. A company builder needs to do the same; it needs a portfolio effect.
The difference between being a VC and a founder is that building a company takes serious time and effort. I’ve been on both sides, and in my humble experience building is significantly more demanding, and requires a broader skill set, than being an investor. Being on both sides of the table helped me understand why A16Z hires from ex operational roles into general partner positions, as well as focusing on industry “pre-wiring” (as Marc Andreessen describes it) to accelerate investee development.
Furthermore, investors in a builder need to have patience to see these projects come to fruition. As Naval Ravikant notes wisely, as a founder it takes 5 (if you’re lucky) or more realistically 10 years to build a company and make it successful. As a builder the process is by design faster, but you still need patience to to build the product and find product-market fit, even before looking for significant commercial traction or returns. Indeed, we needed to screw it up a few times to work out what works and what doesn’t.
This prior point aludes to the reality that build successes are going to follow a power law distribution as does VC in general. On that basis, once the builder finds a build with clear product-market fit it makes sense to put extra effort into making it even more of success. Back the winning horse, so to speak. This challenges the builder’s remit which is, as the name suggests, to keep building. For investors who are considering investing in the builder’s children, it should make ponder the Darwinist approach the builder may take with its offspring.
So What Was Our Batting Average?
Firstly, here are the companies we built and where they are now:
- Osmos: payroll management a la Zenefits.
- Asegurapp: insurance policy management a la Coverfox.
- Pop.Space: property space monetisation a la Sharedesk.
- Vuala: expense management a la Expensify.
And the overview based on the above points:
Osmos was the company that fits more with the key points above: the vision and mission came from a founding CEO with industry experience via a JV structure which gave him greater equity participation. This company followed, more or less, the above logic above, with the issues of overdilution as mentioned previously.
The others were a mish mash but essentially followed the in-house build where there was no clear founding CEO which meant the vision and mission was literally just “to make money", whilst the equity was mainly concentrated in the hands of the builder holding, and were built as “standalone” companies with no strategic leverage. It’s not surprising that they didn’t make it.
From a returns angle, 1 out of 4 from a portfolio perspective is a pretty decent batting average. Assuming a USD 3m Series A round in Mexico, 20% dilution, and just under 50% owned by the builder holding company, that’s soon to be worth around USD 6m in builder shareholder value. With a total investment of around USD 600k in the builder, that’s a 10x (give or take) paper return.
Whilst this is a narrow data set, it appears that the framework above goes a good way to explaining why the builds that succeeded did so, and where those that didn’t, failed.
