Making progress on ventures before even starting
How entrepreneurs can de-risk ventures years before starting them
Hi - I’m Mike Wilner, the writer of this post which is part of my weekly newsletter, Getting Shots Up. The newsletter includes frameworks, analyses, and profiles about building entrepreneurial careers. This isn’t just startup advice – it’s a zoomed out view of how entrepreneurial people can think about constructing a career that results in a lot of high quality shots on goal.
If you’re in the middle of en entrepreneurial career or want to start something down the road, consider subscribing:
Last week, I wrote about how anyone building an entrepreneurial career – from investors, to founders, to startup employees – are investors. We invest our time and money into a combination of day jobs and side hustles to maximize both financial returns (capital) and entrepreneurial asset returns (growing skills, network/audience, and/or domain expertise).
It follows that the best entrepreneurs share a skill in common with investors: managing and reducing risk.
Good entrepreneurs are able to systematically reduce the risk of what they’re “invested” in – whether it be as the founders, advisors, investors, or employees working on an internal new project. We’ll dive into systematically reducing risk over time next week. This week, we’ll dive into how entrepreneurs can de-risk their investments before day 1.
With any venture, progress can be measured its expected value. If we think of the example of building venture-backed startups, this expected value is essentially the valuation. Over the lifecycle of a venture-backed startup, a valuation grows as a startup makes progress, and if the startup regresses, then the valuation can go down.
The expected value of any venture breaks down into the following simple formula:
Expected Value = Potential Value * Chances of Success
Chances of Success = 1 / risk
Expected Value = Potential Value / Risk
Therefore, there are two ways to make progress on any venture – whether it be a venture-backable startup, a side project, or an internal project for a bigger company: (1) build evidence that the potential value is higher, or (2) reduce the risk that it will work.
I often see entrepreneurs make the mistake of conflating “traction” with “progress.” This was a mistake I made with my first startup (freelance marketplace where you could hire web designers), which was a big part of the reason we failed. I thought that if we kept growing each month, then we would be making progress. I was obsessed with month-over-month incremental growth and didn’t de-risk some of the most important parts of a marketplace business. As a result, we never solved the initial chicken-and-egg problem – the biggest early risk that marketplaces have that marketplace businesses encounter.
Traction is the growth in a clearly defined KPI, like users, revenue, or number of customers. Traction can sometimes serve as evidence that parts of a business have been de-risked, but that’s not always to case.
For example, here are two scenarios of two companies that are directly competitive. They’re building software for 20-100 employee companies that makes it easy for employees to schedule and run more efficient internal meetings:
Company A has more traction – they’ve been at it for 2 years, have 10x as much monthly recurring revenue, and are growing 20% month-over-month – indicating that they’re starting to figure out how to grow. But Company B, which has 1/10 as many customers and revenue, is not yet growing, and has only been at it for 6 months – has made more progress. One of the biggest risks with selling a B2B productivity tool is end user adoption. The fact that 90% of their customers’ end users are weekly active users shows that Company B has figured out (AKA de-risked) that part of the business, while Company A has not. If I was an investor, I would bet that if you fast forwarded 12 months, Company B would end up with just as much traction as Company A, and would have a faster growth rate. While it’s seductive to focus on traction early on because it’s the easiest to measure, at the end of the day, whether you have $1K in MRR, $5K in MRR, or $20K MRR, if the startup fails, it all rounds down to zero anyway.
That’s why some ventures can have significant progress on day 1, even though they have zero traction. Some founders are able to raise venture capital with nothing but a pitch deck. The progress on day 1 is based on (1) the riskiness of the idea, and (2) how much the entrepreneur themselves de-risks the venture with the relevant entrepreneurial assets (skills, network/audience, domain expertise) that the entrepreneur brings to the table.
For example, suppose three entrepreneurs have the same idea for a women’s apparel company that has the potential to be a $1B business, but bring different entrepreneurial assets to the table:
Entrepreneur #1: 24-year old first-time founder passionate about women’s apparel
Entrepreneur #2: 30-year old first-time founder who spent 3 years as the head of brand marketing for a venture-backed consumer apparel brand
Entrepreneur #3: Sarah Blakely, the founder of Spanx
Entrepreneurial Asset Breakdown:
Based on the entrepreneurial assets that these entrepreneurs bring to the table, they have different starting points.
Entrepreneur #1 has a 1/800 chance of realizing venture’s potential. The expected value (AKA valuation) would be $1.25M, meaning there likely aren’t any investors who would get involved until they make some progress.
Entrepreneur #2 has a 1/400 chance of realizing the venture’s potential. The expected value (AKA valuation would be $2.5M, and therefore they could raise a pre-seed round from angel/seed investors or join an accelerator.
Entrepreneur #3 has a 1/20 chance of realizing the venture’s potential. The expected value (AKA valuation) would be $50M, meaning she could go immediately to a top-tier VC and raise $10M+ at ~$50M valuation.
If Entrepreneurs #1 and #2 were excellent entrepreneurs and were able to de-risk their ventures by 10% month-over-month consistently, it would take Entrepreneur #1 36 months and Entrepreneur #2 29 months to get to where Sarah Blakely was on day 1.
Note: we’re going to tackle this idea of de-risking month-over-month next week.
So other than starting a $1B company like Sarah Blakely, what can entrepreneurs do to de-risk and make progress on their future ventures, months or potentially years before starting them?
Ways to make progress before day 1
Method #1: Build Entrepreneurial Assets by working backwards from future ventures
Day jobs help us build entrepreneurial assets, but we may need to go beyond our day jobs to build up all of the entrepreneurial assets we need – from skills, to network/audience, to domain expertise.
If you have some sense of the direction of your future ventures, then you can start building relevant entrepreneurial assets years beforehand.
Ryan Hoover illustrates this in his post from 2017: Building a Startup? Build an Audience, first. While a network/audience is just one type of entrepreneurial asset, an entrepreneur who has 10K newsletter subscribers is able to reduce the risk of any new venture from day 1 when compared to an entrepreneur without an audience. As Ryan puts it:
An audience-first strategy helps with:
When you’re pre-product + pre-traction, it’s difficult to convince anyone (technical or not) to join.
User Acquisition 👋🏼
Acquisition is difficult pre AND post-product. Sooner you can de-risk this the better.
Audience-building leads to customer development and a better understanding of who you’re building for.
Building a big audience isn’t the only way to build up entrepreneurial assets. Another example of a side project that could build a strong network would be creating a monthly meetup of HR executives at Series B-backed startups. This might not give a high-quantity audience, but it would give a high-quality network of HR executives.
If we know the types of ventures we may want to build in the future, we can de-risk them by taking on jobs and side projects in the near term that build the skills and domain expertise that would de-risk those ventures down the road. We can even build personal flywheels that help us accumulate relevant entrepreneurial assets at an accelerating rate.
This is part of my motivation for this newsletter – I’m pretty sure that my future ventures (years down the line) will involve the helping entrepreneurs navigate entrepreneurial career paths. I don’t know what that will look like, but I do know that writing this newsletter is helping me build domain expertise and an audience that would be relevant to whatever that future venture and de-risk it years ahead of time.
This all makes sense if we know roughly what we want to do in the future. But what if we’re not sure what type of ventures we may want to build? We can look backwards at our existing entrepreneurial assets to determine the potential direction of future ventures.
Method #2: Reflect on entrepreneurial assets to determine future ventures where we can start on second base
We already have experiences which give us a unique blend of skills, network/audience, and domain expertise that would be relevant for some venture. Reflecting on our existing entrepreneurial assets and can give us an answer to the question: “what type of venture would leverage my unique experiences would give me a big day 1 advantage?”
This type of reflection is what gave me a sense that my future ventures would be in the realm of entrepreneurial career-building. As I reflected on my past experiences (and what I’m passionate about), it was clear that my past personal experience have given me a unique blend of Entrepreneurial Assets that would allow me to start on second base when building ventures around entrepreneurial career-building.
While I’m not starting a company any time soon, these past experiences allowed me to start day 1 of this newsletter having already made significant progress. I already had a unique point of view for the newsletter, and I have an existing network of colleagues, friends, acquaintances that are both (1) my target audience, and (2) run communities of entrepreneurs.
With this newsletter, there’s a lot of potential but still significant risk that I’ll realize that potential. There’s still a lot of work to do to de-risk this newsletter. But I was able to get a head start on day 1. And the newsletter is helping me get a head start on whatever comes next for me years down the line.
Being mindful of our entrepreneurial assets - especially in relation to other entrepreneurs who might have a lot more experience – can help us figure out how to make progress on our ventures years before we start them. Reducing the risk of these ventures before day 1 makes them far less risky than they might seem on the surface.
Next week, we’ll dive into de-risking after a venture has been started, and how to maximize the rate of de-risking over time.