Decision Compounding

“Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.” — Albert Einstein

Interest isn’t the only thing that compounds.

In startups — and in life — every decision you make changes your trajectory and sets up the conditions for your next decision. Each new circumstance you find yourself in is the child of all the decisions you made up to that point.

Early in the life of a company (or a person) this tendency for decisions to compound is more difficult to see. The world is your oyster, and it’s easy to try many things and learn lessons from each without feeling like you’ve committed yourself irrevocably to any. The so-called “lean movement” has institutionalized this lightness of being among early-stage companies, with “pivots” now an accepted — even celebrated — part of the startup journey.

All of this is both good and true: young people and young companies should cast a wide net before settling into the course of action that will come to define their later lives.

But for founders who aspire to scale the highest heights of startup success — attracting world-class talent, asserting and defending a leadership role in their chosen category, and accessing the capital markets on fair terms at each step along the way — those early decisions have a tendency to compound in ways that either enable, or impede, this goal.

Running a startup is hard and founders can’t afford to optimize on every front, but there are three categories of decision that I would urge young founders to give more time and consideration than any other — with an eye to setting up a positive rather than negative decision compounding cycle for their companies and careers:

1. Team + Culture

This has been said many times, but as I watch the teams I work with scale — or fail to scale — through the many difficult moments in a young company’s life, the one variable that defines the positive outcomes more than any other is quality of people the founders are able to attract, retain and integrate as a high-performing team.

There’s no one “right” way to do this, but the thread that ties all successful startup teams together is a deep and universal conviction that the entire team is on an important and exciting journey together, and that each’s person’s maximum effort and contribution is required for the team as a whole to succeed. As soon as leaders begin to turn a blind eye to underperformance, or create an internal competitive culture that celebrates individual achievement over the work of the team, a negative compounding cycle is set in motion that can be very hard to reverse.

Leadership is hard and many first-time founders find themselves in charge of other people’s lives and careers with very little practical experience or effective coaching on how to do it right. Despite some celebrated negative examples, founders who put themselves on a positive path — investing in their own self-awareness and devoting themselves to the craft of leading — can create a massive unfair advantage for themselves.

2. Investors + Terms

Nothing is more frustrating to me as an investor than to meet an exceptional team striving toward a worthy goal that has — out of ignorance or desperation in their earliest days — taken on a set of investors and associated investment conditions (which can be any mix of inappropriate valuation, preferences, governance or other “special rights”) that make the company effectively uninvestable by later-stage investors.

Despite significant cyclical changes (the overcapitalization of venture in the first internet bubble and the current overcapitalization of the seed stage are just two recent examples) the institutional capital markets for innovation are a highly functional and well-ordered system. Specialist firms at each tier — from the newly-institutionalized Seed tier through Series A and B venture and on to the growth equity and pre-IPO “crossover” funds — have a professional interest in helping strong companies progress through each stage of the system, fueling the company’s growth and (if successful) creating wealth for founders, employees and investors alike.

Any player at any level in the capital markets stack that overoptimizes for his or her gain at the expense of founders or later-stage investors can trigger a negative compounding cycle that either prevents the company from proceeding through later stages, or steadily skews its financing options toward less and less attractive financing and liquidity options as time goes by. This counterproductive behavior is most evident at the angel stage, but I have seen it crop up among “professional” investors as well and should be a red flag to founders at any stage.

3. Ethics + Transparency

All relationships are built on trust, but few industries rely so heavily on trust among all parties as the early-stage startup and investing community. Almost by definition, privately-held companies with short operating histories create massive information asymmetries — between founders and early hires, investors and founders, current and prior round investors, acquirers and insiders, etc. — leaving the door open to financial and ethical abuses of various kinds.

In my experience, the startup community has a much lower incidence of bad actors than the general business population, but they do turn up from time to time. What these folks may not realize is that the professional startup community is actually very small, and is a lifetime “repeat game” for most players — founders, early hires and investors alike. Because roles tend to change over time — early hires often become founders, and successful founders very often become investors — every repeat player has more than the usual empathy for the roles of the others. This also means that every ethical player has a strong incentive to weed out bad actors at whatever level of the system they find them.

Ethically challenged members of the startup ecosystem are often surprised find themselves shut out of companies, financings and other opportunities that appear to be unconnected to their past behavior. The easy answer for people who want to make startups their life’s work is to deal openly and fairly with all participants — not just the ones who have the power to fight back today.

So go ahead, move fast and break things — that’s what entrepreneurship is about, after all — but when it comes to the three topics above, take care to make decisions that will compound in ways you’ll feel good about when it’s way, way too late to take them back.