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With the continued dark cloud over the economy and public market volatility, there’s been a deluge of startup advice lately. One point that’s been missed is that the advice is often geared towards a certain swing-for-the-fences style startup. Let’s dive in.

When reading TechCrunch and posts from leading venture firms, it’s easy to get sucked in that all startups are the top 10% of venture-backed startups, have raised money at crazy valuations, and are burning inordinate amounts of money. While it’s true that there are more than ever doing that, the reality is that it’s the extreme minority of startups that have done so.

Most startups that wanted to raise money at top-of-market multiples couldn’t. It doesn’t mean these are bad companies. Rather, these are good companies — in the top 1% of all companies just by definition of raising venture capital — building valuable franchises. When a handful of venture firms, crossover funds, and hedge funds paying huge premiums passed on a deal, there were hundreds of additional venture firms that paid more normal-ish multiples. Yes, these firms were stretched higher than their comfort zone, but nowhere near what a tiny number of firms were paying. Put another way, most venture-backed startups raised money at normal-to-high valuations, not exotic outlier valuations.

Whereas a small percentage will have to grow 10 or 20x to have an up round, most startups that raised on a multiple of run-rate will have to grow 2-4x to have an up round — just do the math. If a startup raised at 100x ARR, and multiples are now 10x for the same type of business, they have to grow 10x to get to their last valuation. If a startup raised at 21x ARR, and multiples are now 7x for the same type of business, they have to grow 3x to get to their last valuation. While 3x is massive growth, it’s much less dramatic than 10x.

So, startup advice always need context. Most of the famous firms invest in startups with the biggest markets and fastest growth rates. Most startups have big markets and fast growth rates, and didn’t receive astronomical valuations. Context matters, especially for startup advice.

Last week I was asked about some of my current goals and I replied that I’m more focused on systems and processes to achieve desired outcomes. Goals are important insomuch as you need to decide where you want to go. Only, too often, entrepreneurs spend their valuable time thinking through goals only to have them sit on the side in a dormant state. Once there’s a general direction, effort is much better spent on the systems and processes that will culminate in achieving the goals.

Take for example a common entrepreneur statement: we want to sell 10 new customers this quarter.

How so? We’re going to allocate more time and money to sales and marketing.

Then what? We’re going to track our metrics more closely.

And how does that help? We’ll see where we’re tracking and can optimize our efforts more effectively.

That’s typically the end of it.

Now, instead of focusing on selling 10 customers, and making that the emphasis, the effort should be on the process that produces new customers. Some questions to ask:

• What sales activities are within our control?
• How many activities do we need to perform?
• How frequently do we need to perform those activities?
• What are the different stages of the sales funnel and conversion ratios?
• What changes if we fall behind our required output?

Goals represent the outcomes and systems represent the flow of work performed to achieve the output. Especially important is controlling what you can control. You can’t guarantee 10 new customers will sign up this quarter. You can guarantee the activities necessary to have a good chance at the desired outcome are performed. Then, the result is the product of what you can control.

For another perspective, watch The Perfectionist on 60 Minutes about coach Nick Saban. The big takeaway: Saban doesn’t talk about winning and the current score, he talks about how to “challenge the players to play every play in the game like it had a history and life of it’s own” so that the results take care of themselves. Too much time is spent worrying about what’s happened and where things stand — elements that can’t be changed. What can be controlled is focusing on the task at hand and performing it at the highest level.

The next time the topic of goals comes up, focus the efforts on the systems that will achieve those goals.

Market gyrations and startup valuations have been the hot topics lately. With so much turmoil across the economy, it’s clear we’re still in for more pain as the world adjusts. On the startup front, a number of entrepreneurs are thinking through what to do and what needs to change in their current plan. While some startups are doing well, many that raised money in the last 18 months did so in a way that their valuation got too far ahead of their performance. What to do?

In the most recent episode of the All-In podcast, David Sacks shares that high growth startups with moderate burn will get funded while ones with moderate growth and high burn won’t. Continuing that thinking, he outlines four metrics startups need to optimize for if they want to raise money:

1. Growth rate > 100%
   Growth has been one of the biggest drivers of value creation for the last few years. Now, instead of growth at all costs, it’s one of several factors that must be evaluated. So, keep growing fast, but do so in way that’s more measured in relation to other metrics.
2. Gross margins > 50%
   Gross margins are what’s left over when you subtract the cost of goods sold from the sale price. Some startups have negative gross margins (lose money on every customer) or low gross margins because the business model is either sub-scale or challenged in other ways. The key is to have large, positive gross margins.
3. Customer acquisition cost (CAC) payback < 1 year
   Sales and marketing costs to acquire a customer can easily get disconnected from what makes for a good business when capital is cheap. Now that capital is more expensive, it’s important to be able to acquire customers at a cost that’s less than the revenue received from the customers in the first year.
4. Burn multiple < 2
   The old adage that you have to spend money to make money still rings true. Only now, for every $1 dollar of burn, the startup should add one net new dollar of annual recurring revenue. Many startups are burning an excessive amount of capital relative to a new dollar of recurring revenue and will have to adjust.

This isn’t RIP Good Times; it is a return to the basics: build something people want, acquire customers in a way that makes sense financially, and scale as fast as the metrics allow.

Entrepreneurs should focus on their growth rate, gross margins, CAC payback, and burn multiple in a way that’s thoughtful and optimized for their business and market opportunity.

Last week I was catching up with a few startup leaders and we were talking about different styles and personality traits of entrepreneurs. One of the entrepreneurs in the group said something that really resonated with me:

I believe today’s our best day and tomorrow’s even better.

Now, I’ve known this entrepreneur for over a decade and he’s truly sincere when he says that. There’s something to be said about the real belief that today is absolutely the best day and the conviction that tomorrow will be even better. Optimism and positivity is a wishy-washy subject that incredibly subjective. Yet, personally, as someone who feels rather analytical, I believe it makes a difference, even if it isn’t objective.

Why? I’ve met many entrepreneurs that have done amazing things — things that are so far beyond defying the odds — and they are all optimists. Even with a world around them saying “no” or “that can’t be done” these entrepreneurs push on and make things happen. It’s so easy to not take the risk, not put yourself out there, and not get rejected.

The next time you talk to an entrepreneur, ask them about today, and then ask what they think about tomorrow. If there’s optimism and enthusiasm in their voice, know that their chance of success is higher. Today’s our best day and tomorrow’s even better.

One of my favorite learnings is the power of the catalytic mechanism to drive a desired outcome. Jim Collins popularized it decades ago writing:

Catalytic mechanisms are the crucial link between objectives and performance; they are a galvanizing, nonbureaucratic means to turn one into the other. Put another way, catalytic mechanisms are to visions what the central elements of the U.S. Constitution are to the Declaration of Independence—devices that translate lofty aspirations into concrete reality.

Turning Goals into Results by Jim Collins

In everyday life, the most common ones we see are things like “The meal is free if you’re not given a receipt” and “Money back guarantee if you’re not 100% satisfied.” In the first example, the desired outcome is that every order is entered into the cash register and rung up so that the payment isn’t stolen. In the second example, it’s an effort to ensure customers are happy such that they are both treated well and more inclined to speak up if something wasn’t right. By doing one thing, you’re increasing the chances that a different, more important thing happens.

Here are a few questions startups should ask:

• What is the desired outcome?
• What’s necessary to achieve that outcome?
• How can I catalyze or incentivize the opposing action or actor to help achieve the desired outcome?
• What are other ways to align adjacent pieces to help with the desired outcome?

Simply put: what is it that you want to happen and what other behavior can you influence to achieve it?

Catalytic mechanisms are a powerful tool entrepreneurs should incorporate into their startups. While some can seem obvious, take the time to think through how you can use catalytic mechanisms to help achieve your goals.

As a little kid I loved playing the card game war. War is an incredibly simple, pure luck card game. Two or more people are dealt all the cards in the deck. Then, each turn every player flips over their top card and the person with the highest card wins all the other cards. If two or more of the highest card are the same card, then it’s a “war” where only the players with the highest card then put two cards face down turn a third card face up. Whoever has the highest card wins all the war cards. Finally, whoever wins all the cards in the deck is the ultimate winner.

As a kid, there’s excitement and joyful randomness playing the game. What’s going to flip over next? Is it going to be a war where we have matching cards? Who’s going to win the war? Am I winning?

As an adult, there’s joy in playing with the little ones, but also concern as the game can continue on for hours after one or more players are out. Ideally, three or four of us could play and the downtime between getting out and starting a new game wouldn’t be that long. When I first played with my kids, after decades of not playing the game, I was taught a new rule: every time that a war occurs, each opponent puts one additional card face down. So, instead of always having two cards face down for each war, the first time you have two down, the second time you have three down, and on and on.

One little detail — adding an additional card for each war — changes the game so we can play more often, with more people, and have more consequential wars as the game progresses.

While there are no silver bullets, I’ve found that there are step function improvements that can come with changing one little detail. In the moment, they’re rarely identifiable, but with time, the results can be dramatic. The key is to keep iterating, keep improving, keep working through ideas. All the work is necessary, but some little changes are more valuable than others.

The next time you’re iterating on the product, go to market motion, or any other initiative, remember the war card game and how tweaking one detail can dramatically change the entire experience. Make the small changes knowing that they build on each other and occasionally one little update will turn into a major improvement.

Several years ago there was an entrepreneur that I’d meet with regularly. As is custom, I’d ask the standard meeting intro, “How are things going?” Now, with 99% of the people I talk to I get something along the lines of “Good. How are things with you?” Instead, with this entrepreneur, I’d always get the same answer, “I have all the problems I want.”

Hmm, “I have all the problems I want” is an unusual answer and I’ve never heard it from anyone else. At the time, I didn’t think much of it. Yet, here I am, years later, thinking about that answer to the most common of questions.

That answer prompts several questions:

• What problems do I want?
• What problems don’t I want?
• Do I want a life with no problems?
• What’s the value of having problems?

This makes me think the entrepreneur has a strong locus of control and works to manage his life around “good” problems and attempts to eliminate most “bad” problems.

From here, I go to a saying I heard last year:

Humans feel most alive when experiencing, creating, or problem solving.

That resonates with me. If most “bad” problems are removed, more flexible time is available and can be devoted to experiencing, creating, or problem solving.

Do you have all the problems you want?

Lately, I’ve been thinking more about David Friedberg’s Rubric for Business Value Creation. I’m always searching for ideas that capture an important concept with broad applicability. After working on it a bit, I’ve distilled the six value creation questions into simpler phrasing and tweaked them slightly.

Six questions for business value creation in 10 words:

1. Makable?
2. Desirable?
3. Customer profitable?
4. Customer profitably acquirable?
5. Investment scalable?
6. Platformable?

Makable?

Can you actually make the product or service? Is it possible? Some categories are easier, like a mobile app, while other categories are significantly harder, like a solar panel with dramatically more efficiency.

Desirable?

Do people want what you’re offering? Is there authentic demand? Most new ideas suffer from a lack of demand — no one wants the product — ultimately resulting in failure.

Customer profitable?

Can you make a positive gross margin on each unit you sell? For software, this is easier, while other categories, like more complicated physical products, becomes much harder.

Customer profitably acquirable?

Can you make a positive gross margin on each unit you sell after adding in the sales and marketing costs to acquire the customer? Acquiring customers is often expensive, making it challenging to both produce the product and sell it with a positive gross margin.

Investment scalable?

Can you continue to invest in the business and earn a high ROI as the business grows by improving gross margins, economies of scale, etc.? Some businesses, like software, have high ROI from continued investment whereas others don’t see an improvement in their business.

Platformable?

Can you add more products and services to upsell and cross-sell customers thereby taking advantage of your scale and infrastructure? Also known as a multi-product strategy, the main idea is being able to scale beyond the initial product in a way that creates additional enterprise value.

Conclusion

Now, in 10 words, we have six questions for business value creation that are universally applicable and readily understandable. Use these ideas the next time you’re contemplating a new business or working with an entrepreneur on her business. Creating value is challenging, but not impossible. Good luck!

Last week I was talking to an accomplished entrepreneur and I asked what trait he saw in another entrepreneur that made her successful. Without missing a beat, he said she was a probabilistic thinker. Hmm, that’s interesting. I hadn’t heard anyone use that characteristic when describing someone else.

Now, several days later, that idea is still resonating with me. Growing up in the traditional K-12 and higher education world, most things were black and white — grades, test scores, etc. Only, the real world is dramatically different. Perfect information isn’t a thing. Decisions are made using the best available information and outcomes are much more nuanced. Then, layer in entrepreneurship and the quantity of decisions that have to made with limited information goes up even higher.

A probabilistic thinker is someone who thinks through chance variations. What’s the likelihood A, B, or C happen? What can we do to change those probabilities? What decision do we make based on the probabilities? Whether they realize it or not, entrepreneurs are constantly assessing the chance variations and picking a path.

Layer in chance variations across so many facets of a startup like sales, marketing, product development, customer success, operations, and more, and the overall complexity is intimidating. Yet, an entrepreneur that’s a strong probabilistic thinker is making better decisions repeatedly that compound over time. Similar to the idea that if you’re 1% better per day, that equates to a 37x improvement over a year, better decision making on a daily basis results in remarkably better outcomes over longer periods of time.

The next time the topic of successful entrepreneur traits comes up, add probabilistic thinker to the list.

Lately, I’ve heard of new search funds eyeing Software-as-a-Service (SaaS) startups as their acquisition target. A search fund is typically an individual that’s raised a specific amount of capital with the sole purpose of acquiring and running a company. Think of it like a private equity firm with a solo partner that only buys one company and the partner becomes the CEO of the company. Search funds have been around for decades but ebb and flow in popularity.

From a search fund perspective, the target is usually a “good business” with the potential to grow into something significantly larger, often exiting in 7-10 years, just like a standard investment fund. In addition, they have a set of criteria of what they’re looking for in an acquisition:

• Strong management team
• Consistent growth and profitability
• Recurring or re-occurring revenue
• High gross margins or maintainable gross margins
• Industry growth or opportunity to grow market share

Looking at this list of criteria, it becomes clear why search funds are eyeing SaaS startups. Save for the profitability component, many SaaS startups check all the boxes:

• Consistent growth
• Recurring revenue
• High gross margins
• Industry growth

While a strong management team is critical, it’s slightly less so in the search fund example where the search fund leader is going to be the CEO of the acquired company.

In addition, a huge number of SaaS startups have raised a large amount of money over the last few years, yet a meaningful percentage haven’t been able to grow into their valuations. The clock is ticking for these angel and VC-backed startups to find a home as ones that aren’t growing fast are having a harder time raising money. Search funds, much like private equity, are a perfect exit opportunity.

Look for search funds targeting SaaS startups as a growing trend.