3 ways homogeneous VCs & founders incentivize capital inefficiency

Many venture-backed startups are capital inefficient, and while some of this is required for the model, the more homogeneous it is at the top (👨👋🏻), the higher the risk...

Here are three ways I saw this play out working across operations & marketing in startups from 2013-21:

1) Over-focus on revenue at the expense of real, sustainable, and specific customer/user acquisition

If you're paying any attention at all, one of the first lessons working in a startup is that revenue is a byproduct of growth, and growth means nothing if it's not segmented.

In many cases, the pressure of creating constant, impressive growth leads to up-and-to-the-right syndrome, where investors and founders essentially spend all their time figuring out how to corner the market & outmaneuver competitors rather than learning from and creating repeatable growth within specific segments.

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The hockey stick growth slide is broken (here's a better one)

Without question, the most popular slide in a startup pitch deck is the one showing hockey stick growth.

When you find product/market fit and start seeing rapid customer acquisition, the theory goes, your basic X/Y axis of time and revenue will show exponential jumps. Your monthly revenue goes from $7,000 > $70,000 > $700,000, hence the hockey stick graphic.

Obviously, this is an extremely attractive slide to put in your pitch deck or financials. And while it’s clearly oriented toward venture capital investors, over the last decade hockey stick growth thinking has made its way into private equity and the broader marketplace as others learned from and emulated the growth of Facebook, Google, etc.

The slide does have value, but investors, companies, and founders still frequently mistake the hockey stick as a model for growth, rather than the consequence of it.

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The power of looking for patterns that don't match

Pattern matching at it's most basic is about finding things that seem to fit together. 

In venture capital that often means looking at startups and interpreting what works well, or what makes a good entrepreneur. There are plenty of problems with the method - Chris Dixon wrote about a few of them in 2012, and there is significant research that suggests that pattern matching through things like gender and race may unconsciously lead to much narrower ideas of what works, and poorer outcomes for picking winners.

But one of the things that's not dug out as often is that looking for patterns that don't match is a valuable skill. Another way of thinking about it is: everyone wants to know what makes a winner, but not enough people want to know why something doesn't work, why a pattern you expected to fit, simply doesn't. As it turns out, those tend to be the underpinning to finding patterns that create growth in a company (and probably as an individual, too). 

For example, one of the most complex questions in an early stage business is: we've found something that works, but how do we know it will last? You can pattern match your way to more users or customers ("hey this works let's do more of it"), but unless you're paying attention to which patterns don't match, you'll likely get hit hard when a tactic doesn't work. There's a very small peek at that struggle in a recent update from Mike Wilner at Compass, which matches designers/developers to small business owners & entrepreneurs who need a smart, basic website.

Both sides of the coin are important. You have to be willing to seek things that don't make sense, because they can help you hedge against your own unconscious bias. And it increases your ability to see things at a much larger scale, instead of simply chasing things that fit what you've already run into.