What separates the truly exceptional startups from the rest.
This post was originally published on Medium
At the end of March, like every other morning, I began my day by scrolling through my inbox until all senders and subject lines turned into a blur. However one email in particular caught my eye. It read: Subject line — Fwd: term sheet...and meant, the company Oskar, Daniel and Chaq had founded two years ago, were getting a shot at becoming the ‘Monster Company’ they had always envisioned. Accel Partners, investor of Facebook, Slack and Flipkart was betting and betting big on them - the team disrupting the Latin American groceries industry with tech and passion. After three financing rounds, and thousands and thousands of happy customers upheld by an impressive, underlying code that had seemingly cracked online groceries, success suddenly felt within grasp.
Great news indeed!
We know funding does not make great. The pedigree of your investors does not magically harvest great tech. Your consumer happiness is certainly not a function of the size of your post-money valuation. Indeed, funding only accelerates foundations ie. that which is already awesome. So Cornershop will scale faster but it will not become great after its latest round. It already is. Two questions arise from this. First, for founders — if not funding, what makes good startups become awesome? — and for investors — what separates the good startups from star performers? — .
In 2001, just as the Internet bubble busted the irrational exuberance, Jim Collins tried to respond to a similar question. He published Good to Great, a highly influential management book based on his research of public companies' long term performance. He argued that great companies rose from the rest when a group of outstanding managers executed sound strategy with great discipline. Some of the most interesting insights of his research are still relevant today. Other learnings are however difficult to apply to small organizations and a faster moving world. I will try to respond to these two questions by coming back to a business classic that I taught in a classroom for many years.
Before I start, it is important to mention that we don’t have the luxury of elapsed time nor public data in our young ecosystems to undertake rigorous research. However, over the past 6 years, we have heard pitches from thousands of teams including all Series A and B funded companies in the Spanish speaking Latin America. Moreover, as VC investors we are required to learn from our mistakes but we also strive to learn from our colleagues’ hits and misses. In my opinion, this yields enough information to provide us with early insights and intuitions into what separates good and awesome startups. At ALLVP, we created a methodology to evaluate tech companies in Latin America: the 4Ts framework. We believe success is a function of the team, the tech they are building, the observed traction and the timing to market.
Team — first who then, what.
Great vision without great people is irrelevant. ― James C. Collins
Good to Great introduced the Level 5 leadership concept. Great leaders are not loud public speakers with bigger than life personalities but brilliant introverts with outstanding determination. They are able to create teams around them and collectively design a powerful organization and strategy. His research found great companies always started with disciplined teams rather than a unique product or market position.
When approached well, early stage investing is an extreme form of first who, then, what business. Leaders of founding teams come in all shapes and sized: some are over-driven warriors others are humble minds, some are extroverts while others live inside their own world. All are passionate about the problem they are trying to solve. People in search of a quick buck or a bright spotlight crash and burn as fast as the cash. We have found that previous experience in building tech companies and working as a team are the best attributes in predicting success. Additionally, entrepreneurs in developing economies are somewhat older than in the Valley. The average founder at ALLVP is over 40 years old. Navigating through emerging markets requires patience and resilience, the kind you only get through experience. It involves a deep understanding of how non market forces impact their business. It requires building coalitions around them: closing complex partnerships and federating outstanding talent. In fact, great teams are broad and diverse. They include founders, partners, advisors and investors.
Tech — building the future.
When you’re dealing with machines or anything that you build, it either works or it doesn’t, no matter how good of a salesman you are. — Marc Andreessen
Good to Great sees technology as an important accelerator but it is not the difference between greatness or decline. For Collins, ignoring technology is as bad as going all in with software and automation. He recommends an approach of Pause — Think — Crawl — Walk — Run. For startups not running with tech from the start, is not an option. They would become obsolete before they get to scale. Quick loops of feedback and adjustments are more appropriate than over thinking and pausing.
As our ecosystem evolves from copycats to innovation to technology disruption, we place a far greater emphasis on the technology potential of startups. First off, just because a value proposition is online delivery, you are not necessarily dealing with a tech company. It’s a website. It can still be a very cool website that generates lots of clicks and sales. Great startups solve a problem that would otherwise be impossible without deep technologies like a portfolio optimization algorithm or a machine learning powered order dispatch system offering tenfold the efficiency of blast dispatch. Secondly, the core of the technology must be proprietary to have a sustainable competitive advantage. It is the only way to keep getting better and better at solving a very specific problem for a very specific market. Thirdly, the founding team needs builders — not an external adviser, nor a junior partner and certainly not a software shop.
‘You will not get funded in the Valley with those kind of unit economics in the Mexican market! But if you get a lead investor from good guys in the neighborhood… sure, come back to me and I’ll chip in’, an investor told us sporting a white shirt and blazer reserved for yacht formal dinner nights. After getting the Cornershop series A syndicate together in early 2016 with a few good guys from the Valley, we did not come back.
Traction — show me the love
While you can buy your way to growth, you absolutely cannot buy your way to greatness. ― James C. Collins
One of my favorite passages from Good to Great is the description of the Flywheel concept. It argues that all organizational change efforts build up in time before the benefits of the action take full effect and gain momentum. When you are in the middle of a failed turnaround like I was many years ago, the Flywheel concept was the only reason I came into the office each day. Believe me!
For tech startups, however, it’s rare to see slow motion pick up momentum after a long period of disciplined execution. Even marketplace models get early traction no matter how long it takes to gain scale. As investors, we look for fast-from-the-start-businesses. We believe the most reliable technology and value proposition validation is a function of how fast users adopt and pay for your product. There are of course multiples measures of adoption, engagement and growth. In our experience the more simple, the better. If we have learnt anything from ecommerce, it’s that paid traction coupled with complex cohort analysis reflects more on your willingness to allocate resources to marketing than anything else. Two caveats for speed are relevant in early stage companies in developing economies. First, speed is not an indicator of scalability, one of the biggest challenges for our regions. Secondly, monetization has more friction in our countries. Startups may slow down fast as soon as they introduce value capture mechanisms in their models.
Timing — show up on time
No matter your situation, your success depends not just on your own efforts but also on the ability, willingness, and likelihood that the partners that make up your innovation ecosystem succeed as well. — Ron Adner, The Wide Lens
James Collins argued in his book that greatness is not a function of circumstances. He contends greatness is largely a matter of conscious choice and discipline. Don’t we all wish it was the case. But in the business of disruption, timing seems to play a large role in explaining outsized success.
These days it’s rare to see an investor deck without the biggest proxy for timing: similar startup funding around the world. How many times were Beepi, Theranos, Juicero or Linio mentioned in a presentation and investors got back to them. ALLVP invests in consumer service startups. Therefore, targeting a consumer that has already adopted a technology, a platform or has been trained by another service can be critical. Think of the impact of Uber or Amazon in Latin America. The competitive landscape of startups, corporates, and international players needs to be aligned. Finally, although timing seems out of your control and is hard to gauge, nailing it can make a big difference. The best example in Latam is probably Cabify. Juan de Antonio, founder and CEO, launched his endeavor right on time to get ahead of Uber in several markets and make it to the fundraising extravaganza for ridehailing plays around the world.
Doing it like Uber. But in LatAm. And in groceries. — Cornershop raising a $21m Series B by Carl Fritjofsson
Back in February 2015, on a trip to San Francisco, I grabbed coffee with angel investor Mike Hennessey at Galvanize in SOMA. At the end of our catch up, Mike, as the great connecter he is, offered to introduce me to a team from Chile who was working on an interesting project. A few minutes later, a surprisingly tall European guy appeared in shorts and t-shirt. No deck and no business card. We had an intriguing and friendly first exchange. Oskar and his team had started a coupon startup acquired by Groupon and had scaled Groupon Latam into a very large regional player. All founders were engineers building the foundation of a Latam on demand grocery business based in San Francisco. We had several more conversations in the following weeks while they started a pilot financed by an angel round. We wrote the first check for Cornershop in May that year. Only the first decision to invest was tough. Since then, we have led two rounds and participated in three. We have continued to back the same outstanding team building world class software, and gaining a solid traction right from the start. We think the timing is right on.
It's always hard to predict which company will be the star of a portfolio. Closing a large Series B is definitely promising for Cornershop to be our star portfolio player, but being awesome does not garantee success. And we’re betting it won’t be the only one. For sure, other funds in Mexico have backed great companies. Hopefully our ecosystem will produce many awesome startups in the next few years. We’ve seen what one superb startup like Mercado Libre in Argentina or Yemeksepeti in Turkey can do to foster regional entrepreneurship. However, a truly great ecosystem needs many. In the meantime, we continue to keep calm and help deliver avocados.