Wednesday, June 24, 2020

You can't tell people anything

I came across this blog post today with the seemingly absurd title You can't tell people anything. Any other day I certainly would have missed it, but today it very much resonated with me, as it captures a deep feeling and insight that developed in me during the last few months.

At the beginning of the year we have be raising a smaller pre-seed round for Since I considered myself sufficiently educated about what it takes on a founder's journey, "being an excellent storyteller" obviously was high on my list. And given my past, I always thought I know what that meant and I was confident that for me that would be one of the easier parts of the job.

All my life I spent time, so much time, explaining things to people. Being educated as a “man of reason”, I was convinced that if I’d only have the right arguments, presented in a way as comprehensible as possible, I can actually make people see and understand what I see and imagine. Of course, within the limitations of language and logic as outlined by Ludwig Wittgenstein, but still. If I could bring the pictures in my mind into the real world as best as possible, that has to make people see what I see.

Oh boy ...  have I been wrong.

Above article summarizes it perfectly: you cannot tell people anything. And that includes startups trying to explain their business to (early-stage) investors. It is impossible at that stage to convince anyone about your startup, unless they have some predisposition to believe in it. Because there is quite literally nothing to be convinced of at this stage. There is no way to get to a "reasonable early-stage investment decision". At this stage the whole game is unreasonable by definition. The best (and only) thing one can do as a startup founder is to tell a story that might ignite a fire in the other party. But for that to happen, the spark needs to be there already. So at the end, my task as a startup CEO is to reach out to hundreds of people, providing the right cues for that handful of potential investment partners that show a suitable predisposition for our business.

Everything else, is a waste of time. I learned the hard way. Do not try to convince people about your startup. It's impossible. Either they "feel it", or they don't . And if they don't, then move on. Do not waste your time.

Network Effects

The whole business world talks about (and chases) network effects. But there is a surprising amount of misunderstanding, also and especially among early-stage investors. When I talk about our vision for I always stress the point that our business model and (future) defensibility heavily relies on network effects. More often than not what I hear from the other side of the table is something in the line of:

You don't have network effects. Network effects is something you see in social networks leading to exponential user growth."

But that is not the network effect I am talking about. That is called virality. Clearly you can use networks to create virality / exponential growth, e.g. when every user invites > 1 users to your product, but it's not what is generally meant when talking about network effects.

Here is a link to an article by nfx, that very comprehensively explains the several types of network effects. The key take-away is: when talking about network effects, keep the following definition in mind:

A company is said to show network effects if its product(s) become not less, but more valuable with usage.

(By the way: Scott Galloway calls it the Benjamin Button effect -- which I like better, as it stresses the "more valuable with time" nature more and avoids the very common above misunderstandings.)