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Startup Catchphrases and Rules of Thumb

December 22, 2011

In his fabulous Thinking, Fast and Slow, Daniel Kahneman clarifies a distinction about the learnability of environments.  Where can you be an expert, and where is it impossible?   Kahneman de-mythologizes the idea of intuition by linking it to memory and learnability.  He argues that learnable environments are those where situations can be recognized and remembered, moves can be made in those situations, and those moves result in feedback that you can assess.  He gives the example of learning to drive around a curve as a very learnable environment. As a driver, you see lots of different curves, but not an infinite number.  You can act, by braking, accelerating, or steering, and you get immediate feedback on your decision.  Drive enough and you will become an expert on negotiating curves.  Playing tic tac toe is another highly learnable environment.  There are about a quarter of a million possible games, but only 1145 that people are likely to play.[1]  Chess is more challenging but still learnable.  There are an estimated 10 to the 111th reasonable chess games, but you don’t have to memorize all of them – instead, you learn to recognize prototypical situations, variations on them, and potential outcomes of various changes.  Kahneman calls all of these “high validity environments.”

There are also low-validity and zero-validity environments.  Zero-validity environments are like predicting the future of the Middle East, or the career path of young child, where the potential number of situations and moves are infinite, and the feedback is sparse.  In these situations, experts are usually over-confident about their intuitions.  Low-validity environments are somewhere in between, and decision-making in a startup is one of them.

Kahneman shows that in low validity environments, you almost always make better decisions by following a simple algorithm than by using your intuition.  If you want healthy babies or productive employees, then simple algorithms like the Apgar Score for newborns or a checklist for new hires work consistently better than a doctor’s intuition or a managers feel for a candidate.

The equivalent of this in the startup world includes the rules of thumb, proverbs, and catchphrases used in the venture community.  Even simple catchphrases like “dry powder” or “burn rate” effectively work as rules of thumb because they draw attention to something important that VCs attend to. Rules of thumb are not always true, but on average, you are more likely to go wrong by ignoring them than by following them.

The trick is to know when you really know enough about some aspect of your business to do better than by using a rule of thumb. There’s an epidemic of illusions of expertise in low-validity environments.  If you have some experience, assume you’ve caught this disease.  Be mindful about recovering from it by acquiring and validating data and by focusing on learnable domains.  In the meantime, pay attention to rules of thumb.

Herewith some of the best, culled from several places on the web, especially Quora:

A fish doesn’t know it’s swimming in water: some market conditions which are second nature to people who have been immersed in them for a long time, can be interesting or valuable to customers who are new to the situation.

Adult supervision: bringing in a CEO with substantial market and/or company building experience on top of founding entrepreneurs

Bet the jockey, not the horse:  Invest in great entrepreneurs, rather than in a particular business plan

Bootstrapping: Funding a company only by reinvesting your initial profits; from ‘pulling yourself up by your own bootstraps.

Cram Down: When a new funding round is done at a lower valuation than the previous one, meaning the original investors (or Founders) end up with a much smaller percentage ownership.

Burn Rate: The monthly negative cash flow from a pre-profitable startup.

Dance partner: If you’re entering an established market, find a partner with established credibility.

Don’t be without a chair when the music stops: Don’t be the last company that is not acquired after all the market leaders have acquired competitors in your segment.

Drip Feed: When investors fund a startup a little bit at a time instead of in a lump sum. This is very painful for both entrepreneurs and investors.

Drive-by Deal: an investment by a VC looking for a quick exit through a short term sale; different from the current ‘Early Exit’ approach by angel groups, which is a strategic focus

Dry Powder: Money held in reserve by a VC or angel in order to be able make additional investments in a company

Hire A players:  A players hire A players. B players hire C players

If you’re not at the table, you’re on the menu

Is that a ‘top 3’ pain?  Most IT departments have 3 priority initiatives that they are working to fix at any one time and your solution should address one of those commonly held initiatives across the market

Magical thinking. When investors or company executives create irrational theories to justify their causal role in things that succeed by happenstance or sheer luck

Make sure the lemons ripen early:  Recognize failure early and stop wasting resources on it.

More companies die of indigestion than starvation:  This one is attributed to  David Packard

Most startups die of self-inflicted wounds:  In other words, internal conflicts are far more likely to kill your startup than external competition

Nine women can’t make a baby in one month: When companies try to go faster by growing the technical and product teams but then discover the larger team doesn’t go any faster than the smaller (and therefore less cash consuming) team

No conflict, no interest

On mergers & acquisitions: Tying two stones together doesn’t make them float.

Put some wood behind this arrow: putting substantial resources behind a well-conceived tactic

Retail investors: angels and other outsiders who invest at full price, without any perks, quid pro quo, or other advantages.

Skate to where the puck is going: position a company in front of emerging secular trends as opposed to today’s market reality

Soft landing:  selling an underperforming company or its assets quietly at a bargain, to avert a crash-and-burn.

Smart money: investors with inside knowledge, connections, or other personal attributes of use to the target company.

Special sauce, black box, mojo, magic, etc. Intellectual property of unspecified nature that may or may not exist, used to justify why a company’s product is unique, valuable, and hard to copy.

Spray and Pray: investing in lots of companies in the hopes that one of them will hit it big

The Golden Rule: The investor with the gold makes the rules. Forget whatever any previous contracts say; if you need money and only one source is willing to supply it, you’ll take the money on their terms, period.

Tip of the Spear:  the starting sales proposition/use-case for a broad-based technology that will help with market and account penetration

Runway: How long a startup can survive before it goes broke; that is, the amount of cash in the bank divided by the Burn Rate.

Valley of Death: The period between the initial funding and the end of the Runway.

Walking Dead: a company that isn’t bankrupt, but will never succeed, and thus can’t be sold or otherwise exited

Waterfall: the order in which investors (and everyone else) get their money out on an exit. Almost always this is ‘last in, first out

Wave a dead chicken over it: in due diligence, a perfunctory analysis of factors unrelated to company value, designed to legitimize a faith-based investment. Comes from a coder reference to voodoo programming.

What you get when you hire B players, who then hire C players: “The bozo explosion”

What are some of your favorites?
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