Paul Asel
Paul Asel founded and led for two decades NGP Capital, a global venture firm with $1.7 billion AUM. Paul has a successful 25+ year track record as an early investor and Board Director in 31 startups, including eight unicorns, with a combined enterprise value exceeding $20 billion.
How Founders Can Manage Startup and Personal Risk
Founding a startup is risky business. But startup risk need not equate to personal risk. Corporate – and now government employees unwittingly assume more risk as pawns amid frequent reorganizations. Even if a startup fails, founders gain valuable experience and will have ample opportunities if they acquit themselves well.
Startup failure is a bootcamp for future success. Among 75 tech startups that celebrated unicorn IPOs in the past five years, their founders had uneven track records: 23% had prior startup failures and only 36% had prior success. Founding CEOs with prior failures include Applovin, Coupang, DataDog, Monday, Pinterest, Robinhood and Slack. The combined market value of these seven firms exceeds $325 billion.
"Startup failure is a bootcamp for future success"
In an uncertain world, entrepreneurs can do all the right things and still fail. COVID was a force majeure event that whipsawed many businesses. Two of our portfolio companies that had long struggled benefited from COVID and went public within a year. A dozen others lost most or all sales
How can founders manage startup and personal risk while betting big on their business? Here are eight factors that improve odds of startup success while managing personal risk.
1.Insight: Prior industry experience surprisingly can be a barrier to startup success. Founders of disruptive startups often bring new, unconventional ideas from outside the industry. Instead of industry experience, investors should focus on founder insights. What is your heretical idea? What basis do you have to believe it will work? Will you bet your next decade on this insight?
2.Experience: Entrepreneurship is an apprenticeship practice and startup know-how matters more than industry expertise. About 70% of founding unicorn CEOs have prior startup experience; only 50% have prior corporate experience. Startup founders must win a market and scale the business to succeed. Winning and scaling are two different skillsets. Founders who have managed the entire startup cycle from cradle to scale have a much higher likelihood of scaling their own startup.
3. Who: The foundation of any firm is the founding team. Who matters more than what. A players recruit A+ talent: create a company of giants by hiring people taller than you. Recruit complementary people with diverse skills and perspectives who share a common vision. Then create a culture of accountability with shared commitment in fulfilling company objectives.
4. Adaptable: Startups operate in an uncertain world with incomplete information. Flexibility is essential in the market Winning phase before a dominant design is established. The OODA Loop developed by the U.S. Airforce for combat operations applies well to startups. A Lean Startup runs carefully designed experiments to test initial hypotheses, does rapid product prototyping to validate customer demand and adjusts quickly based on target customer feedback. Firms with the fastest feedback loop may first to find Product Market Fit.
5. Product Market Fit (PMF): A startup can transition from Winning to Scaling when it has found PMF. Yet PMF is not binary and is often illusory. We have developed a nine step process to achieving PMF and found that the likelihood of success increases 4x by sequentially validating the product, goto-market strategy and unit economics of the business.
6.Take Shots: A startup CEO recently said his investors wanted him to derisk the business. Reducing risk is great but not at the expense of upside opportunity. Most people don’t take enough risk. Lenders should manage downside risk as upside is capped. But entrepreneurs and venture investors should pursue upside opportunity as downside is capped. A pessimism bias is more costly than optimism bias in high potential startups that truly have asymmetric upside opportunity. If this is true for your business, take shots on goal. As Wayne Gretzky observed, we miss every shot we don’t take.
7.Promotion: Bluffing is endemic to poker as the best hand wins just 12% of the time. Steve Jobs was renowned for his ability to create a reality distortion field. Great entrepreneurs are effective promoters: they recruit talent, win customers and secure funding despite long odds. They tilt the playing field to their advantage even against established competitors. Truly rare is the ability to fool others without fooling yourself, to alter business prospects without infecting your business judgment. Great entrepreneurs keep their head while others are losing theirs.
8. Communicate: Heathrow Airport is notorious for interminable delays. Yet British Airways customers report high satisfaction ratings due to frequent communication and good service. Leaders typically trumpet success and remain reticent with losses. Generals and crisis managers know this tendency must be reversed: leaders need early warning signals as rapid response is vital when conditions are desperate. Startup CEOs can mitigate risk by communicating with Boards and executive teams early and often. Outside perspectives may uncover options not visible in the heat of battle.
Risk is inherent in any startup, especially for founders who dare greatly and aim high. Founders who follow these eight practices can increase the likelihood of startup success. Founders who follow these practices will acquit themselves well and mitigate personal risk independent of startup performance.
