Notes on Super Founders: What Data Reveals About Billion-Dollar Startups
Super Founders: What Data Reveals About Billion-Dollar Startups by Ali Tamaseb
Original notes here.
Carl Schramm: the single biggest contributor to a country’s economic growth is how many startups become unicorns within twenty years of being founded.
Unicorns account for less than 0.1% of startups. As a venture capitalist, the author spent four years from 2017 collecting tens of thousands of data points—roughly 30,000 in total—and analyzing 65 key attributes of each startup.
In terms of the founders’ ages, the unicorn group and the control group were broadly similar: the median age in the former was 34, breaking with the media’s image of the young entrepreneur and suggesting that youth offers no significant advantage in entrepreneurship.
Twenty percent of unicorns were founded by a single entrepreneur, compared with 36% for two founders and 28% for three. This too runs counter to the media stereotype. Four-founder teams accounted for 12%, suggesting that the number of founders is not a determinant of success. A study by Jason Greenberg and Ethan Mollick even found a slight advantage for solo founders, and solo founders were also more likely to have founded companies before.
Among unicorns, 45% of cofounders had previously been classmates or colleagues. Cofounders who communicate effortlessly tend to perform better than solo founders.
Among unicorn CEOs, 50.5% came from business backgrounds and 49.5% from technology; in the random sample, 40% came from technology and 60% from non-technology backgrounds. Cofounders were also often from similar backgrounds.
Some argue that cofounders should avoid being relatives. There is too little data to say, but there are still unicorns founded by brothers, father and son, and married couples.
Henrique Dubugras, who founded the unicorn Brex at 21 with no credentials, no guarantees, and virtually nothing to start with: instead of recruiting people with excessive seniority, hire fierce people who are passionate and desperately hungry.
Thirty-six percent of unicorn founders had bachelor’s degrees, 22% had a bachelor’s degree plus an MBA, and one-third had even higher qualifications—little different from the random sample. Compared with the random sample, however, more unicorn founders had graduated from highly ranked schools. The median world ranking of their universities was 27 for unicorn founders versus 74 for the random group.
About 30% of unicorn founding CEOs had worked only for themselves and had never worked for anyone else. Among those with work experience, 60% had worked for first-tier companies, while 28% had worked for second-tier companies—large, well-known companies that were nevertheless less attractive to top talent—and 14% had worked for obscure brands.
Google and Oracle were the companies that had employed the most unicorn founders, followed by IBM.
More than half of unicorn founding CEOs, and more than 70% of founding C-level executives, had less than one year of prior work experience in the relevant field. In healthcare and life sciences, 75% of unicorn founders had industry experience; the figure was 40% in enterprise technology and only 30% in consumer industries. Yet Flatiron Health, a cancer-treatment company valued at $2 billion, was founded by people with no medical background at all.
More than 40% of unicorn entrepreneurs were first-time founders, while nearly 60% were repeat founders. Of the latter, 70% had previously built at least one successful business, defined as selling it for more than $10 million or generating more than $10 million in revenue.
Nat Turner, who had founded Invite Media, sold it to Google, then worked at Google for two years, had a nephew with leukemia. Before founding Flatiron, he and his partners met daily to study together for 10 to 15 hours, questioning everything and fighting through problems together. Only after developing the product did they discover that hospitals and cancer centers had limited budgets, forcing them to change direction and offer the software for free while selling the data to pharmaceutical companies. Beforehand, they had no idea what “real-world evidence,” or RWE, even meant. The company adopted Google’s hiring process: at least eight interviewers, working in pairs, with standardized scoring, questions, and tracking systems. Department heads had to defend each candidate as if they were preparing a thesis.
Not all unicorns are mission-driven companies solving a personal problem. Both mission-driven and opportunity-driven companies can succeed.
Key turning points are common among startups. In 2008, Stewart Butterfield left Yahoo to found the game Glitch. After it failed, he turned an internal email tool developed during the process into the product Slack, and later spun its image-sharing function into Flickr, which Yahoo acquired for $35 million.
Other major pivots include YouTube, which began as a video dating site, Instagram, which cut away most of its functions and kept only photo sharing, commenting, and likes, and Intel, which shifted from computer memory to processors 16 years after its founding.
Angel investor Elad Gil notes that most major pivots fail because they are merely turning within the same market when the original market itself is simply terrible.
Author: unless the market is clearly beckoning for your product, do not hire a marketing team. If you are unsure whether you are seeing even the first glimmer of product-market fit, you probably are not.
When pivoting, either change the product for the same customers or find new customers for the same product. If neither works, come up with a new idea and start a new company. If you cannot see yourself moving toward the same vision over the next ten years, you might as well shut it down.
Neha Narkhede developed the open-source project Kafka for LinkedIn, helping LinkedIn realize that its real secret lay in the data it possessed. After more than a thousand companies began using Kafka, she summoned the courage to tell senior management that she wanted to start a company. Unexpectedly, they supported her, and Confluent was born from it.
Fifty-four percent of unicorns are software companies, 17% consumer products, 14% healthcare, 8% enterprise products, and the remainder are in energy, materials, and finance.
The largest subsectors are enterprise productivity software, social and consumer software, application software, and e-commerce software.
Past trends do not necessarily predict the future. When the author interviewed unicorn founders about which fields they believed would produce the next wave of unicorns, the answers varied enormously.
Just over half of unicorns were founded in the San Francisco Bay Area, compared with only one-third of the random sample. Examples of non-Silicon Valley unicorns include Root Insurance, founded in Ohio in 2015, which uses a mobile app to observe driving patterns and determine insurance prices, and Carvana, which automated used-car sales.
Rachel Carlson, founder of Guild Education, wanted to move the company from San Francisco to Denver so employees could enjoy a better quality of life. A director who had served as her mentor opposed the move, saying it was like “leaving Venice during the Renaissance.” She recruited in three cities, collected résumés, and used the strong candidates she was able to hire in Denver to persuade the board.
Companies that solve an aggravating pain point are painkillers; companies that improve on something that already exists are vitamins. Because there is no objective standard, the author distinguishes between them based on his own judgment. Nearly 70% of unicorns are painkillers, while more than 30% are vitamins—a larger share than the author expected. In the random sample, more than 40% were painkillers.
The greatest number of unicorns sought to solve needs related to productivity and saving money, accounting for nearly 40% and 20%, respectively. In the random sample, the figures were one-third and about 13%.
Nearly half of unicorns were systems integrators, 25% general technology companies, and 27.5% high-tech companies. In the random sample, the corresponding figures were 56%, 20%, and 24%.
A superb example of systems integration is Airbnb. Engineering work is still necessary, but most of the added value comes from the distinctiveness of its business model or marketing strategy.
More than two-thirds of unicorns achieved a high degree of differentiation, with only a small minority being incrementally differentiated. The author sets a very high bar for the label of “highly differentiated.” Airbnb and Snapchat qualify because the experiences they created were radically different from those offered by their peers.
Tony Fadell, founder of Nest, which made thermostats, and the “father of the iPod”: from Jobs, he learned to examine products from the customer’s perspective and keep challenging them, making sure they were simple and intuitive to use.
Coinbase took a huge risk by entering the small but rapidly growing cryptocurrency exchange market and succeeded spectacularly. There are also unicorns such as Amazon that started in a huge market—the global book market. The author found that more than 60% of unicorns started in large markets, 25% in medium-sized markets, and 10% in small markets. In the random sample, the figures were 47%, roughly 35%, and roughly 12%, respectively.
About 68% of unicorns compete for market share, while only 32% create a new market. The random sample was similar, at about 71% for the former. This overturns the popular belief that unicorns necessarily have to create entirely new markets.
The number of unicorns serving consumers and businesses is roughly equal. In the random sample, the split was 43% and 57%, suggesting that the success rates are similar and that the difference may simply be a cyclical random outcome.
Max Levchin brought a cryptocurrency idea to Peter Thiel, secured funding, and turned it into PayPal, creating a market. He later founded Affirm, using algorithmic credit scoring to challenge the lending industry.
The value of being first is often overrated. Twelve years before the first iPhone was launched, General Magic had already built a prototype smartphone, but the company has since been forgotten. Before Google, at least eight companies had built search engines. Ten years before Facebook was founded, social networks already existed.
Among unicorns, 30% were the first company to try a new idea, roughly another 30% were among the first five, and as many as 40% were late entrants. The costs of components, technology architecture, and changes in the law all determine when the optimal time for execution actually is.
In 2008, Warby Parker emerged from a sea of old-line companies that dominated the eyewear industry. It designed its own frames to slash costs, pledged to be carbon neutral, and donated glasses to poor countries.
Advantages when taking on old, large companies include the fact that incumbents are often bogged down by legacy systems that have become burdens, while startups can save customers the cost of education. Among unicorns, 55% competed against large established companies, 17% had no competitors, and 15% competed in fragmented markets. In the random sample, about 44% competed against large incumbents. This suggests a slight advantage for startups competing against large companies, while those competing against other startups are at a slight disadvantage. Still, there are success stories such as Uber.
Eric Yuan (founder of Zoom) was not an ambitious person, but because Cisco’s WebEx was still using code written 12 years earlier, he had never seen delighted customers. He decided to break out and build something new, correcting those weaknesses, and Zoom became the industry leader in 2018.
Auris Surgical was founded by surgeons dissatisfied with existing operating-room equipment. It spent more than a decade and a great deal of engineering R&D work before launching its first product, by which time it had obtained 150 patents.
More than 90% of unicorns have moats. Fifty-six percent are based on engineering and R&D (38% in the random sample), 28% on network effects (about 7%), about 25% on intellectual property (about 26%), and 19% on brand strength (<7%). Many companies in the random sample lacked the investment needed to build a brand.
A successful example of leveraging brand strength: in the beauty industry, Emily Weiss wrote about what she heard and saw on a blog, which became an instant hit with more than 10 million monthly visits. She founded Glossier to focus on millennials and turned it into a major brand.
More than 90% of unicorns received venture capital funding. This is partly because ambitious companies tend to seek venture capital, but there are also successful examples of bootstrapped companies, such as the women’s apparel brand Spanx, which initially had one person handling packaging, marketing, PR, and customer service.
The venture capital industry is still not that large today. There are only about 1,000 active firms in the United States, managing more than $400 billion in 2019. Compared with the financial industry, which manages assets worth several trillion dollars, this is tiny. Of the hundreds of thousands of newly established companies in the United States, fewer than 10,000 receive venture capital funding.
The results of venture capital investments from 2009 to 2018: 51% lost money, while fewer than 4% generated returns of more than ten times the investment. Because of dilution, venture capitalists care deeply about whether a startup can become a unicorn, as that is what allows them to make their profits.
It is extremely important to learn how the market responds as quickly as possible with the minimum amount of capital. A failed example is Quibi, which raised $1 billion to produce short-form live-streaming content for mobile phones and shut down after only six months.
The founders of GitHub dropped out of college in their sophomore year to run the company. In the early days, they operated entirely on company revenue. This caught the attention of venture capitalists, although the founders remained cautious. They eventually accepted investment after seeing that a competitor was already a year ahead of the company. Even when disagreements arose, they would still insist on handling things the GitHub way.
The author recommends that startups raise money after development is progressing smoothly, making it more likely that founders can retain their equity and control.
Market contractions reduce venture capital activity, yet many unicorns were founded during downturns and successfully raised money. Starting a company under such conditions requires even greater courage and determination. The founder of Okta reportedly even had to give a presentation to convince his wife that he was not crazy.
Cybersecurity company Cloudflare was founded in 2009, in the depths of an economic recession, by a first-time entrepreneur who did not come from the technology industry and later went to Harvard for an MBA.
Stitch Fix, which sold clothing, was unattractive to venture capitalists because it was seen as labor-intensive, capital-intensive, and inefficient. But it learned to spend money with astonishing efficiency, accelerate inventory turnover, alter its cash-conversion cycle, and avoid piling up inventory. It also hired top data scientists to understand customers’ tastes. Its founder believes that telling entrepreneurs to raise as much money as possible is among the worst pieces of advice they can receive.
Among unicorns, 42% had low capital requirements, 28% medium, and 30% high. In the random sample, the figures were roughly 65%, 14%, and 20%, respectively.
High-capital businesses are not necessarily capital-inefficient. On average, they were only 25% less capital-efficient than low-capital companies. Some drug-development companies also achieved high capital efficiency.
Technological change can alter capital efficiency at any time. The emergence of cloud services dramatically increased capital efficiency for software companies, but it has since declined again as cloud-computing prices have risen.
The 19-year-old founder of cloud-storage company Box failed to raise money from more than 100 investors. He asked Mark Cuban to buy the company, and Cuban mentioned him on his blog, eventually leading to an angel investment.
Angel investing in the United States is subject to strict regulations. Although returns vary enormously, diversified portfolios produce higher average returns.
Accelerator programs receive a great deal of attention, but in reality 85% of unicorns never participated in one.
Before moving into venture capital, prolific angel investor Keith Rabois basically regarded knowledge of the startup-investing industry as a plague for founders: industry knowledge tells you what cannot or should not be done, and people do not ask “why” often enough. The most innovative people do not possess huge amounts of domain knowledge. He considers Paul Graham’s thirteen pieces of advice for entrepreneurs immensely useful. The phrase that best captures the quality he seeks is someone who can navigate “The Idea Maze” described by Balaji Srinivasan. When he thought about founding Opendoor in 2003, he had already spent ten years doing this at Peter Thiel’s company.
Once a promising unicorn begins to emerge, investors scramble to get in. Even when Gates invested in WhatsApp, he had to pay his way through the gate.
A ten-year-old venture capital fund founded in 2009 doubled its capital value over the following ten years, roughly matching the S&P 500.
In the early stage, 53% of venture capitalists said the team was the most important factor; in later stages, the figure was 39%. When the same group examined their most successful investments, however, 64% again attributed success to the team.
The author regrets that team evaluations are often biased—for instance, discounting founders who are unconventional or highly individualistic.
The median first round raised by unicorns was $4 million, and the second round $15 million. In the random sample, the figures were $2.1 million and $4 million, respectively.
Among unicorns founded from 2005 to 2010, 46% went public and exited, 19% were acquired, 20% remained private, and 17% either fell out of unicorn status or ceased operations.
Alfred Lin of Sequoia Capital: fundraising is also the process of selecting partners. Founders who hate raising money should see it as an opportunity to present a unique vision. Successful founders focus only on the important issues in their industry rather than trying to solve every problem. Bring bad news and problems to the table early; doing so does not destroy trust and allows everyone to solve them together. Telling the story well demonstrates clarity of thought and is also key to persuading people to join your company. Sequoia strives to become the first call founders make when they need help. Investors also make mistakes: rejecting Tony Xu’s DoorDash at the seed stage was a mistake, though it was partially corrected in the Series A.
About 60% of unicorns received backing from Tier 1 investors in their seed or Series A rounds. Another 40% raised money from relatively unknown venture capitalists. In the random sample, about 60% raised money from Tier 3 investors.
Airbnb had been in business for a year and a half, failed to raise funding, and left its founders in debt. During the 2008 presidential election, they sold breakfast cereal boxes featuring the presidential candidates and made more than $30,000 in profit, providing badly needed relief. Their refusal to give up eventually won over Sequoia and changed their fate. Uber was initially considered to have a very small market, and nobody saw it as capable of replacing taxis. The legal risks appeared enormous, and neither founder was even working on it full-time.
About 44% of unicorns took less than three years from their first fundraising round to reach unicorn status. A similar proportion took four to seven years. There are also cases such as Medallia, which was founded just before 9/11, later endured the financial crisis, and did not become a unicorn until fourteen years after its founding.
Fast-paced investing has advantages. The team’s strength is the most important factor, and some major venture capital firms did not even look at the pitch deck. It is better to think deeply from the investor’s perspective: What is the problem? What is the solution? What is the value proposition? Why now?
Before funding, giving job candidates cofounder titles can be very helpful. Top talent is also easier to attract when there is investment behind the company.
Focus on why the company represents a huge business opportunity rather than talking at length about your own story, background, or how you came up with the idea. Keep the pitch concise, and include obscure facts and interesting anecdotes to make it memorable.
Personal relationships are worth little more than a small check written out of personal funds. Instead of trying to cultivate relationships with venture capitalists, it is better to stay low-key, remain elusive, and create momentum.
Peter Thiel: successful companies have differentiated products and markets, but they are often categorized incorrectly. Before the millennium, people were hesitant about investing in one of twenty search engines called Google, but in reality it was the first fully automated search engine. Facebook initially had a tiny market consisting only of college students, but in reality it was a media company with access to all college newspapers nationwide. Demand for the product was so strong that all it needed was more servers. It was also the first real-name social network based on real identities, at a time when people generally did not want to reveal their real identities online.
He recommends that fundraising pitches be 20% story and 80% reality, with the narrative moving from the least controversial points to the more ambitious and far-fetched ones.
In the conclusion, the author synthesizes the entrepreneurial myths this book has debunked and emphasizes that the road to becoming a unicorn begins with a mania for creation. The best preparation is simply to roll up your sleeves, start a company, and get to work: forget all the myths, keep at it, think deeply, and become the next great founder.
Finished reading on Jan 27, 2022
Tamaseb uses rigorous data to debunk Silicon Valley’s media myths, revealing the traits, resilience, and problem-solving mechanics that separate billion-dollar unicorns from the rest. But achieving a massive valuation is only the first chapter of a company’s history.
What happens after the turbulent startup phase is conquered? In BE 2.0, Collins provides a masterclass on the next critical phase: how to transcend the initial entrepreneurial hustle and build the enduring systems, leadership, and “clocks” required to turn a breakthrough startup into a lasting institution.