Blog

Last week, I met with an entrepreneur to hear his pitch for the first time. This wasn’t a fundraising pitch. Rather, it was a casual catch-up to share what he’s working on and how he’s thinking about it.

After diving into the idea and the market, I went through my five favorite questions to ask an entrepreneur.

Question #1: Why now?

Timing is one of the most important but unsung elements of the entrepreneurial journey. If you’re too early, it’s a fail. If you’re right on time, it’s often still a fail. The ideal is to be a little early so that by the time the market is ready, you already have a strong product, platform, and team in place to capture it.

Question #2: Why do this?

Entrepreneurs have a variety of motivations. Some have an idea they can’t get out of their heads and feel compelled to pursue it. Some want to change their lifestyle for themselves and their families and see entrepreneurship as the path to get there. Others want to control their own destiny with more freedom and flexibility over their time and efforts. Every entrepreneur has a reason, and it’s important to understand it.

Question #3: How is this 10x better?

When people ask why most entrepreneurs fail, my answer is that their product or idea was only marginally better than what’s already on the market. To get people to change their behavior, it has to be 10x better. Most products aren’t valuable enough to justify the upheaval and change management required to switch.

Question #4: Why you?

Lots of people have talent. Why are you uniquely suited to solve this problem? What experiences, motivations, and drive put you in the best position to build a large, enduring company? There’s no single right answer, but it’s important to see a clear connection between the founder and the problem, one that can sustain them through the inevitable challenges ahead.

Question #5: What’s the top priority?

More entrepreneurs fail due to indigestion than starvation. The best founders are laser-focused on the single most important thing needed to move the startup forward. If an entrepreneur lists ten priorities, there are no priorities. Ideally, there is one clear, meaningful focus, and they are working diligently to solve it.

Speaking with entrepreneurs and hearing their stories is an incredible gift. Entrepreneurship remains one of the most impactful ways to move society forward through innovation and invention. After hearing a pitch, I enjoy asking these questions to better understand the “why” behind the massive undertaking of building a startup. The next time you meet an entrepreneur, consider asking a few of these questions and listen closely for the story behind the story.

Last week, I spoke with two different second-round entrepreneurs. Second-round entrepreneurs are founders who built a business in a given space, made meaningful progress, and either raised capital or sold the company to an acquirer. After their earn-out or noncompete period ends, they still feel compelled to start a new company in the same market and address unfinished business.

Over the years, I’ve noticed a few consistent themes among entrepreneurs in this category.

Theme #1: The market is better now.
Entrepreneurs often have a strong sense of where the world is heading, but that foresight can lead to being too early. Being too early can be just as problematic as being too late. The ideal scenario is a “Goldilocks” moment where timing is just right. In practice, this often means being three to five years early, giving enough time to build product, customers, and distribution so that when the market is ready, the company is positioned to scale quickly. Many founders end up slightly earlier than this ideal window. They make progress and build something of value, but when they exit or raise significant capital, the broader market still hasn’t caught up. After a year or two of a noncompete, it becomes clear the opportunity still exists and the market is still forming.

Theme #2: Unfinished business from a negative outcome.
In some cases, being too early results in a business that doesn’t achieve sufficient financial traction. The company may be sold prematurely or forced to raise capital on unfavorable terms, creating a frustrating experience for the founder. This leaves a sense of unfinished business. The entrepreneur often feels motivated to prove they can execute better the next time. With a clean slate, a clean cap table, and no technical debt, they can move faster, operate more efficiently, and deliver value to customers more effectively.

Theme #3: Deep familiarity with the market.
After years in a specific industry, founders develop deep relationships with customers, partners, vendors, employees, and investors. The market becomes familiar and comfortable. Even after a successful exit and financial independence, many entrepreneurs choose to build again in the same or an adjacent space. It is what they know best, and often what they do best. It becomes their life’s work, and they continue to compound their expertise over time.

Second-round entrepreneurs are an important part of the startup ecosystem. They are more experienced, more connected, and often more disciplined in how they build. That combination frequently leads to stronger outcomes the second time around.

The key takeaway is that timing, experience, and persistence compound. The first company builds the foundation, including market insight, scar tissue, and relationships. The second company is where those inputs often translate into sharper execution and better results.

With all the continued talk about the SaaS apocalypse and the challenges facing software in the age of AI and “vibe coding,” last week on the podcast 20VC, startup investor Gokul Rajaram shared his eight moats for sustainable software companies. Similar to other frameworks around what makes a business durable, these are presented in the context of software and cloud.

Let’s take a look at the eight moats for software:

1. Data
Software companies with proprietary data have a clear advantage. This data can come from reaching a critical mass of customers or from exclusive agreements with third parties. Even in the age of vibe coding, where building software has less friction, some products are 10x better or only possible because of proprietary data.

2. Workflow
Workflow refers to software that is mission-critical to running a business. Examples include accounting systems or e-commerce platforms. The more deeply embedded the software is in daily operations, the harder it becomes to replace.

3. Regulatory
Companies in industries like financial services and healthcare often face heavy regulatory requirements. These include things like money transfer licenses or approvals to integrate with government systems. In some cases, only a limited number of players are allowed. In others, approval requires significant time and capital.

4. Distribution
Getting software into the hands of customers is often expensive and time-consuming. Some companies build strong distribution advantages. For example, Apple’s App Store controls how billions of devices access software. Distribution is one of the hardest moats to build and one of the most durable once established.

5. Ecosystem
Ecosystems emerge when a product becomes a platform and third-party developers build on top of it. Well-known examples include Salesforce.com and Shopify, each with thousands of integrations and add-ons. This moat takes significant time to develop and typically only happens once a platform becomes the clear leader in a large market.

6. Network
Network effects are especially powerful in marketplace-driven software platforms that connect buyers and sellers. These often combine software functionality like ratings, reviews, and pricing with mechanisms to solve the chicken-and-egg problem. Over time, the value of the network compounds faster than user growth and eventually becomes the de facto standard.

7. Physical Infrastructure
While software is often viewed as asset-light, some companies rely on physical components such as devices, equipment, warehouses, or data centers. If a product requires hardware and you have a million devices deployed, switching costs and customer stickiness increase dramatically.

8. Scale
Some software companies achieve scale across multiple dimensions including geography, employee expertise, and customer base. This makes it difficult for new entrants to compete. This is especially apparent when startups try to displace incumbents or expand into adjacent markets with well-established vendors.

When thinking about these eight moats, one approach is to assign a point or partial credit for each category and then total the score. Moats are a critical component of building a sustainable business, especially for software companies.

Entrepreneurs would do well to evaluate their ideas through this lens, recognizing that most of these moats take significant time, effort, and success to build. Achieving one or two is difficult. Achieving three or four is rare. Companies that reach four or more are best positioned for long-term, durable success.

That said, entrepreneurs should not limit themselves only to ideas that check multiple moats upfront. Instead, they should understand how software is evolving in the age of AI, where barriers to entry are falling, and be intentional about how they build defensibility over time.

Last week I was talking to an entrepreneur who is going all in on a new idea. Halfway through the conversation, he asked whether he should optimize for signing new customers as quickly as possible or focus first on deepening the product and technology before pushing harder on distribution.

Right now they have a small number of beta customers providing feedback while paying next to nothing. I have talked to many entrepreneurs over the years who faced this same dilemma, and I almost always push for product value over distribution when things are still so unproven.

On the product value side, I cannot emphasize enough the importance of building something that is either mission-critical to how a company runs its business or directly in the path of revenue, where it is unequivocal that the product helps the company make more money. Products that are merely nice to have or incrementally better than what is already on the market almost always fail. Products that are must-have or ten times better than what exists have a real chance at success.

Part of this is making something that people want. The other part is actually fulfilling that want. I have seen entrepreneurs build products that the market clamored for, but the technology could not deliver. After signing a large number of customers, churn became unsustainable and the product fizzled out. Demand was enormous, but the product value simply was not there.

On the revenue growth and distribution side, it is still critical to confirm that the market wants this type of product. A product should never be built in a vacuum. It should be built with a few design partners that fit the ideal customer profile and align with the entrepreneur’s vision.

One challenge of focusing on growth before the product delivers real value is that customers will buy it, spend time implementing it, and require support, only to discover it does not do enough. It does not do what they truly need, and it does not provide the value they expected.

Sometimes, with enough resources and energy, startups can enhance the product quickly while simultaneously signing a large number of customers as the product is still being developed. This is possible, but it adds even more complexity to something that is already extremely difficult.

When entrepreneurs ask whether they should prioritize product value or revenue growth in the early days, my answer is almost always product value. If the cofounding team is exceptionally strong and financial resources are deep, pursuing both at the same time may be possible. For most entrepreneurs, however, the better path is to go deep on product value while keeping distribution lighter, maintaining enough customers to iterate quickly.

Once the switch flips and it becomes clear that the product delivers tremendous, must-have value to customers, that is the moment to go all in on product distribution.

Recently, I was meeting with an entrepreneur who lamented that they weren’t making much progress in their startup. My immediate response was simple: every bit of effort helps.

The crazy thing about startups is that, in the early days, you never know when the breakthrough will come. One more meeting. One more phone call. One more feature. One more introduction. While progress often feels incremental, it really is a leap of faith that the pieces will eventually come together and things will work out.

One of my favorite phrases about entrepreneurs getting started is that you have to be blissfully ignorant of the challenges and difficulties of building a successful business. It is astronomically hard to get a novel idea off the ground. Yet it has always been that way, and it is exactly what it takes to move the world forward.

Another phrase I like is that you just have to put one foot in front of the other. The idea is simple: keep going and keep moving, even when you don’t know exactly how you are going to get there. What you do know is that progress requires effort, and every bit of effort helps.

One of the best things an entrepreneur can do is find a group of like-minded founders at a similar stage and meet with them regularly, whether weekly or monthly. There is something powerful about being in the grind with a group of peers that makes it slightly easier to push forward in the face of adversity. With a peer group comes accountability, shared experience, and camaraderie as you navigate the high highs and low lows of entrepreneurship. Many founders create their own groups of peers or join organizations like Entrepreneurs’ Organization or Young Presidents’ Organization. Either way, a peer group helps sustain the effort.

Being an entrepreneur really is one of life’s great challenges. Getting a business off the ground, signing the first customers, and building the product all require leaps of faith. But like anything important in life, every bit of effort helps.

As the founder of Southwest Airlines, Herb Kelleher, once said: “I have a strategic plan. It’s called getting things done.” Turn effort into results, and results into startup success.

Last week, I gave a talk at a conference. After the event, a gentleman came up to me and started asking about the local startup community. After going back and forth for a bit, it became clear that he was interested in angel investing.

He then shared that he had already made 15 angel investments over the past several years, and every single one of them had gone to zero. Worthless. He participated through local angel investment groups. It wasn’t him running around by himself writing checks. Like many of us are told, he diversified. He made a number of investments with the expectation that one would perform exceptionally well and make up for the losses of the others.

But here he was, after 15 investments and all failures.

Reflecting on his story, I’m sure he’s not alone. I’m certain there are many others who have made that many angel investments and seen them all fail. We know that the vast majority of startups fail. We know that 99% of startups never achieve $1 million in revenue. With those kinds of statistics, it makes sense that there’s a meaningful probability that 15 angel investments could produce zero winners.

So what should someone do?

Number one: invest with a local venture fund.
Become a modest limited partner in a reputable local venture fund. Use the experience to understand how they select entrepreneurs and evaluate startups. Spend time with the portfolio companies and look for ways to add value. Then consider participating in select follow-on rounds for the startups you believe in most.

Number two: invest when there is an experienced lead.
If a successful angel or venture capitalist is leading the round, the odds improve. Experienced investors have pattern recognition. They have seen what works and what does not work. The biggest challenge for first-time angels is what I call the “leftovers law.” After deals have been shopped around to professional investors and experienced angels and everyone has passed, they often make their way to newer angels who are eager to get started. Frequently, there is a reason others declined.

Number three: invest in areas where you have unique expertise.
Many angels I meet want to invest in tech startups but do not actually work in the tech industry. They come from law, medicine, finance, or real estate and want to dabble in tech because it sounds exciting. It is often far better to invest in startups within your own domain of expertise, where you have a genuine informational or network advantage. Invest in what you know, not what sounds cool.

Overall, my goal is not to dissuade new angel investors. Entrepreneurs need capital, mentors, and advisors, and angels often serve as all three. My goal is to help angel investors increase their odds of success so they continue investing and build long-term relationships with entrepreneurs.

The great thing about startups is that this is not a zero-sum game. The more innovation and invention we create, the better off everyone is. We need to invent the future, and angel investors are an important part of that ecosystem.

Silicon Valley Bank recently published a report analyzing the growth and decline of VC-backed startups since 2022 across the largest metro regions in the United States. Using 2022 as the baseline year, the data shows that, across nearly every major market outside the San Francisco Bay Area, the number of newly VC-backed startups has dropped sharply. In places like Atlanta and Los Angeles, the number is down nearly 50 percent.

What happened?

Here are a few perspectives.

1. The hangover from 2020 and 2021

During the depths of COVID, tech startup valuations surged. As millions of people shifted to remote work, capital poured into productivity tools and software for laptop-based workers. Combined with near-zero interest rates, this created a speculative environment where significant amounts of capital were invested at valuations that, in hindsight, were not sustainable.

When interest rates rose and liquidity tightened, growth rates slowed. Public market valuations declined, which forced a reset in private markets. Many startups that raised capital during that period found themselves overvalued relative to new market conditions. Venture funds from that vintage are, in many cases, still underwater.

As a result, venture capital firms slowed their pace of investment, and limited partners reduced allocations to the asset class. Given those dynamics, a decline in newly VC-backed startups was inevitable.

2. AI investments crowding out everything else

On November 30, 2022, ChatGPT was released, marking a clear inflection point. It was both an “aha” moment and the beginning of a new technology cycle centered on artificial intelligence.

The implications for legal services, finance, healthcare, software development, research, analytics, and virtually every other knowledge-based profession became immediately apparent. Venture capital and corporate investment dollars shifted aggressively toward AI. The center of gravity returned to San Francisco, where much of the foundational AI work was concentrated.

Capital that might have gone to traditional SaaS and productivity startups instead flowed into AI infrastructure, foundation models, and experimental prototypes. Expected growth in traditional SaaS segments failed to materialize. As AI capabilities advanced faster than anticipated, even more capital followed.

Today, a meaningful share of economic growth is tied to AI-related investment, including data centers, GPUs, specialized chips, power generation, and cooling infrastructure. In this environment, non-AI startups are competing for a shrinking pool of venture dollars. AI has crowded out a substantial portion of traditional venture-backed startup formation.

3. Public software company valuation resets

As AI has improved, particularly in areas like code generation and software development, the perceived terminal value of many traditional software businesses has come under pressure. Barriers to entry are lower. New competitors can be launched more quickly. At the same time, companies expect to achieve greater productivity with fewer employees, slowing seat-based SaaS expansion.

The net effect is that public software company valuations are down significantly from their highs. When public multiples contract, private market valuations must adjust as well.

If a startup raised its last round at 10x revenue and the market now supports 5x revenue, management teams are understandably reluctant to raise capital at a lower valuation. Instead, many choose to conserve cash and attempt to grow into a stronger valuation. Venture capitalists, closely tracking public market comparables, are also less willing to pay premium valuations for non-core AI startups. This often results in a valuation impasse. Fewer deals get done, and fewer startups are newly VC-backed.

The broader perspective

The most important reminder when reviewing the SVB data is that the vast majority of startups are not venture-backed and never will be.

Startup activity itself remains strong. It has never been cheaper to build a product. The tools available to founders, especially AI-driven tools, dramatically lower the cost of experimentation and iteration. Robotics and intelligent hardware are also emerging as significant long-term trends.

We are at the beginning of another innovation cycle. Venture capital plays a role in a small fraction of startup formation. While VC is still digesting the excesses of the COVID-era bubble and concentrating capital in AI, particularly in large foundation model companies, entrepreneurship more broadly is alive and well.

The number of newly VC-backed startups may be down. The number of new startups, however, is not. The long-term outlook for builders remains bright.

AI—and how to get real value from it—is one of the hottest topics in startup land right now. Entrepreneurs have been sharing how they’re incorporating it into their businesses in ways that go far beyond the basics.

By now, we’ve all used LLMs for research, summaries, and content production. Those use cases are powerful—but they’re just the beginning. Coding companions and “vibe coding” have received most of the attention, deservedly so. Still, even for non-developers, there are more advanced AI tools that should already be part of the workflow. Here are a few I’ve been experimenting with:

1. Open-source AI as an employee
For the past few weeks, I’ve been using OpenClaw, an open-source agent running on my Mac Mini, prompting it to create software, conduct longer-running research, and act as an assistant. The big idea is simple: treat the AI like an employee. Give it access to your corporate tools and a full web browser, and there’s no reason it can’t handle a significant percentage of the tasks knowledge workers typically do.

2. Spreadsheet and financial model work
AI tools are now incredibly strong at building financial models, writing scripts for data transformation, and running complex analyses. Instead of delegating the first draft of an analysis to someone on your team, try doing it yourself—with AI as your partner. Force yourself to use AI to accomplish the goal and see how far you can get. You may be surprised by how much leverage you already have. Start with Gemini for Google Sheets or a similar tool.

3. A coworker agent as your default mode
Run through a coworker-agent tutorial like Claude Code for Everyone and then use it as your default operating method for the day. Let it draft emails, summarize documents, analyze data, and plan tasks. It won’t be perfect, and it won’t finish everything. But by making it your starting point—and cleaning up around the edges—you’ll quickly appreciate what’s already possible. The productivity gains are real today, and the software will only continue to improve.

There’s also a growing debate about AI eliminating “laptop jobs.” I’m in the camp that believes higher productivity ultimately increases demand for capable team members. Historically, the diffusion of new technology takes longer than people expect. The world will absolutely change—but it’s unlikely to result in mass unemployment in the next 12 to 24 months. Over the next decade, we’re far more likely to see a productivity boom that enables people to do more meaningful work at greater scale and make a larger contribution.

Entrepreneurs should deeply integrate advanced AI tools into the workflow of every team member. If someone isn’t willing to adopt them, that’s a real issue. The companies that fully embrace these tools will move faster, learn faster, and compound progress more quickly.

It may feel uncomfortable at first. But over time, founders and teams who put AI at the center of their workflow will increase their velocity and accelerate progress toward their vision.

Don’t wait. Make AI foundational—personally and across your startup.

One of the most talked-about trends right now is the rapid decline in software-as-a-service valuations. Public markets in the sector have fallen dramatically over the last few weeks. Strong SaaS companies that were previously trading at seven to eight times revenue are now often trading at three to four times revenue.

Why is this happening? Let’s look at the main reasons being discussed.

1. AI coding tools enable “vibe coding.”
AI coding tools make it easy to build your own software. You can simply talk to a computer and it will create new software to replace existing SaaS applications. Don’t like your CRM? Vibe-code a new app that does exactly what you want.

2. Software lock-in is disappearing.
AI tools are extremely good at manipulating data and converting it between systems. In the past, SaaS businesses benefited from a premium valuation because switching costs were high. Now, AI makes it much easier to move between vendors, eroding that lock-in.

3. Per-seat SaaS pricing is under pressure.
Most SaaS products are priced per user, per employee, or per seat. In the age of AI, a single AI agent can effectively act as a “seat” and do the work of dozens or even hundreds of humans. Combined with companies having fewer employees and pushing for higher productivity, the ability to sell more seats is significantly diminished.

4. Long-term revenue durability is less certain.
Historically, it was easy to assume that SaaS products, especially platforms of record, would have 20- to 30-year longevity. While short-term durability may still exist, long-term durability is now more questionable. If future cash flows are less certain, company valuations should decline accordingly.

5. Customers don’t need all the functionality—and can’t unbundle pricing.
A friend recently shared a story about paying six figures annually for a product with extensive functionality, when they only needed a small slice of it. There were no lower-cost or modular options. Instead, they vibe-coded the specific functionality they needed in a single weekend and chose not to renew their contract. Many SaaS products are comprehensive, but their pricing and packaging are not agile enough for this new reality.

6. Barriers to entry are near zero.
AI coding tools dramatically reduce the cost of building new products. Tens of thousands of new SaaS applications are being created with cost structures that are a fraction of incumbents. Even if companies don’t build their own tools, they can increasingly find alternatives in the market at one-tenth the price.

7. Value is being captured by AI platforms.
As SaaS products are reduced to services, data stores, or systems of record, AI platforms layered on top will capture most of the net new value. Customers may receive more value overall, but traditional SaaS applications will capture a smaller share of incremental spend.

SaaS valuations have been under pressure for some time, particularly after the bubble of 2020 and 2021. The last few weeks have been especially dramatic and may represent an overcorrection. Even so, the valuation landscape for SaaS has changed permanently.

For these reasons and others, the future of SaaS fundraising and valuations will likely be more modest on a long-term basis. Entrepreneurs would do well to embrace this disruption: build AI-first SaaS companies with low cost structures, flexible pricing and packaging, and a focus on solving the hardest customer problems at dramatically lower cost.

The future is not fewer SaaS products—it’s ten times as many. And wherever there is opportunity, entrepreneurs will step in to fill the void.

Last week I had a great conversation with a group of entrepreneurs, and our first topic was identifying each startup’s North Star metric. A North Star metric is the single most important metric in a business—the one that best captures customer value, reflects what is going well, and creates a singular focus for continually improving the company.

The most common answer when you ask an entrepreneur about their most important metric is revenue or annual recurring revenue. While these are critically important, they are outcomes of customer value, not the value itself. The better question is: what is the specific thing customers do where value is most clearly created? What action best represents real benefit from using the product?

When I posed this question to the group, one underlying theme emerged: many founders started with a vanity metric because it felt like a quick and easy way to measure progress. A classic example of a vanity metric is page views inside a web application. Usage can be a proxy for value, but merely clicking around is not the same as achieving a meaningful result with the product.

Once you decide on your North Star metric, the next step is to embed it everywhere. Put it on a big screen in your lobby. Include it in your weekly email updates. Make it the headline metric in your quarterly board deck. Align company goals and initiatives around it. Make sure every employee understands how their work contributes to it.

A simple test of alignment is to ask any employee, “What is our North Star metric, and how are we doing?” If they can’t answer clearly, your communication around it has been insufficient.

Entrepreneurs, my recommendation is this: choose a North Star metric that truly represents the value you deliver, track it rigorously, and ensure your entire team rallies around it. A startup is more than a single metric, but there is nothing more powerful than clarity about what you are working toward and why.