
Thought Experiments to De-Risk Your Startup - lpolovets
https://codingvc.com/how-to-use-thought-experiments-to-de-risk-your-startup/
======
ChuckMcM
I really resonate for planning with the 'debate from hell' and while its fun
to posit a world class debater on the other side, sometimes it helps to
imagine a clueless idiot as well.

Founders are clearly founders because they really like their idea, and people
"just don't get it" and are spewing irrational arguments at it in an offensive
way can easily get under your skin if you haven't already thought about them
attacking you. Sometimes you'll just have to walk away and if you really want
their support that can be really hard to do.

~~~
CalChris
Yes. This is like debating a rational knowledgeable opponent as opposed to
debating an irrational unknowledgeable opponent. You really need to be
prepared for both. The one is more like vetting. The other is more like
selling.

I think investors especially want an answer to the irrational because frankly,
the rational knowledgable argument is hard to understand. That gets worse the
deeper into a bubble we get.

Did I just say that investors are not rational? Yes, I just said that
investors are not rational. I'm not a believer in the Efficient Market
Hypothesis:

[https://en.wikipedia.org/wiki/Efficient-
market_hypothesis](https://en.wikipedia.org/wiki/Efficient-market_hypothesis)

~~~
barry-cotter
You misunderstand the EMH. It doesn't say that the average investor is
rational. In its weak form it says that it's very, very hard to beat the
market.

Imagine you are an average VC. You lose money. You lose money because the
market means Sequoia and other top tier firms get first refusal on all the
best deals. Also you are overwhelmingly likely to be a fairly useless
investor. If you are a great investor you can set up a top tier VC fund based
on your own investing history. See Andreesen Horowitz.

Likewise in the stock market, bond market, every market but the process
happens faster the more open, transparent and liquid it is. If you can achieve
a 30% year on year return people will happily lend you money or invest with
you. Most people are just lucky or their advantage disappears at some point.
But some people really are just that good and they either reach a size where
they can't get above average returns any more because their strategy doesn't
work at that scale, Apple, Berkshire Hathaway or they deliberately stay
smaller than they could be to keep their money spigot working, Renaissance,
Citadel.

------
jeffdavis
"during first meetings, most investors are looking for "reasons to say no"

Is that true? There's always a reason to say "no" to a startup. I would think
that they are looking for reasons to say "yes", and then getting more
skeptical as they get interested.

~~~
lpolovets
(I'm the author.)

It's not exactly true but it's a decent approximation. Because the investment
rate is so low (~1%), and because professional VCs often see 1000+ pitches per
year, red flags are a quick way to allocate time more efficiently. If I see
1000 pitches, 100 might be very strong right off the bat, 200 have promise,
and 700 have a number of aspects that would make me reluctant to invest. I
will pass on the 700 quickly so that I can focus more on the other 300. If my
investment rate were higher -- say 15% -- then I might drill into some of
those 700, too. But because it's 1% and there are only so many hours in a year
for meetings, if I see a red flag or a few yellow flags in a first meeting,
I'll use that as justification to give a quick pass. I think most VCs are
similar.

~~~
randall
This is why YC is such a breath of fresh air for entrepreneurs. VCs aren't bad
for this behavior, it's completely rational, but if the big winners look like
red flag city initially, a higher investment rate of smaller capital
allocations can net better outcomes. (Airbnb / Pebble for the up and
downsides)

YC's scaling over the last few years w/ sam + pb (and now michael) is a
feature that some see as a bug of dilution. 200 companies a year now get extra
access to angel money at a minimum, some percentage of which (mine!) likely
wouldn't have normal access b/c of red flags.

~~~
dilemma
>VCs aren't bad for this behavior, it's completely rational, but if the big
winners look like red flag city initially, a higher investment rate of smaller
capital allocations can net better outcomes.

And this is one of the reasons why human organizations eventually stagnate and
then decline. They get too big so that they have to manage by filtering out
those unique opportunities that would have been necessary for their survival.

------
Nomentatus
"Execution skills" \- yup, nearly everyone thinks they're above average but do
note that in business those supposed "execution skills" very frequently turn
out to be trade secrets instead - that is, intellectual property that's
confidential and invisible. If anyone uses the phrase "execution skills" (even
if just in internal dialogue) and isn't referring to specific trade secrets,
they're probably just pumping out hot air, with extra jazz hands.

------
CalChris
> If you need more capital to keep the company alive but don't have a clear
> plan for using that money then you're probably not ready for your next major
> round of financing.

That's a polite way of hinting that you really should consider shutting down.

~~~
lpolovets
(I'm the author.)

Kind of :). But this is also what bridge/extension rounds are for. Perhaps you
raised a $1.5m seed round and your goal was to validate 4 key hypotheses with
that capital. If you validated all 4, then that's usually a great segue into
raising a Series A. If you validated 0-1, that probably means your company
isn't viable. If you validated 3 out of 4, or maybe even 2 out of 4, there's
evidence that you might be on the right track, and you can often raise another
$1m or $2m extension from investors who believe that you will validate the
remaining hypotheses if you have a little more runway.

------
btrautsc
this is great

------
highCs
Just in case you got trapped, this is mostly a boilerplate which goal is not
to help you but the author to get the appropriate image that would allow him
to invest in companies that are doing well.

> How do competitors view you? Think about your 2-3 closest competitors. If
> you asked their CEOs to truthfully describe your company's strengths and
> vulnerabilities

Well, your 6 months old startup has no "strengths and vulnerabilities". It
should also not have direct competitors. Only big companies have this kind of
things. You have code, users and growth.

> Are you ready for a Series A? > Imagine that instead of being the founder of
> your company, you're an investor

You already ask yourself these questions.

> The debate from hell

This one is decent and I'm nice. You already did this with your cofounder most
of the time.

> Was your MVP truly minimal?

Who cares, you've survived.

> Stomach-churning churn numbers

You will stress automatically about churn.

> The missing key

Don't hire "key role". Only big companies do that.

> Laughed out of the room

Decent and I'm nice.

> Unexpectedly large market

By the way, only investors say _market_ when talking about startups. While
this has sense, it's kinda a concept for big companies again. Your startup has
early users and say pool / niche of those.

> Unexpectedly small market

You rarely have an unexpectedly small market. Most of the time you have no
market at all: you have built something people don't want.

> How does the trajectory of the world over the next 5-10 years align (or
> misalign) with what you're doing?

If you're growing, you're "aligned".

And on and on. The intention is not really to help you here I believe.

~~~
dang
This sort of dismissal based on platitudes ("Most of the time you have no
market at all") is the sort of comment we don't want on Hacker News. Anything
can be dismissed this way, and anyone can do it. It feels good, gets upvotes,
and generates more of the same—and thus the discourse clogs up up with more
and more of this. That's bad. And what does your apparent critique boil down
to? "The intention is not really to help you here I believe"—in other words,
(a) you read minds and (b) you assume your conclusion.

For higher-quality discussion, we should apply the Principle of Charity: that
is, assume the _strongest_ plausible interpretation of an article and respond
to that. Poking holes in a weak one may be fun but it is not substantive.

~~~
highCs
I have thought about that 10 more minutes and fortunately I get the same
result as you: one can say of everything that "this is bullshit and the
intention is bad". You dad got a new car? This is bullshit and the intention
is bad. So my post achieve nothing good indeed.

So now, I have a question. I've noticed some people use a clever communication
and social trick I call "word dropping". "word dropping" consists of forming
sentences only in the intention to say or write a set of words because doing
so can have an effect on some people. (Example of word set: de-risk, small
market, big market, MVP, hire, key role, business plan, etc.) It is exactly
like a text written with random words, it means absolutely nothing, but the
trick is to do that with a limit set of words which when put together quasi-
randomly provide a feeling of sense. One can see the disastrous consequences
such a thing can have if people start believing into it. It's super powerful
because word dropping cost nothing to produce and cost a lot to dismiss with
proper arguments. This only hurts terribly.

I've found some people use plenty of social intelligence hacks like that,
which works, hurts and decrease productivity. How do you protect someone from
that? For example, say someone use word dropping to hurt me, what can I do? I
guess I should read a book about that...

~~~
bradb3030
I was reminded of [http://strategy-madlibs.herokuapp.com/](http://strategy-
madlibs.herokuapp.com/) that is mentioned in this great talk by Simon Wardley.
[https://www.youtube.com/watch?v=fYH-
vLWHhyY](https://www.youtube.com/watch?v=fYH-vLWHhyY)

It sounds good, but isn't good. I think the answer in response to it is to
have ammo that both sounds good and is useful, and it'll win out to the smart
people.

~~~
highCs
Haha the heroku app. Exactly that.

