I learned a lesson 20 years ago that I’ve carried with me ever since. Whenever I look at a business, I can’t help but think about it in terms of “motions”, discrete actions that, taken together, either combine to create a fluid, self-reinforcing whole or (much more often), tug and strain at each other in ways that ultimately tear the whole machine apart.
It takes incredible vision and consistent leadership across functional lines to build the former, which is why it’s so rare. I was lucky early in my career to work at a company that, in its quirky and inimitable way, had forged itself into a whole much greater than the sum of its parts. That machine, Patagonia, is still thriving today, and it’s no accident that it’s still led by its original founder, Yvon Chouinard.
Like a lot of Seattleites, I’m also an avid student of Jeff Bezos. The company he founded and leads is easily the best-run big company in the world today, with seemingly unbounded future opportunity thanks to its unique culture, enabling technical architecture and consistent leadership.
What has become clearer to me over time is how fundamentally similar Amazon and Patagonia are in a few key ways (despite being wildly different in many others). I use these two companies as touchstones when evaluating the companies I choose to work with, with each representing an archetype of a specific path to excellence.
With the startup world once again awash in money, the answer is more important than ever.
Starting a company is easier now than at any point in history. Over the past 20 years, what was once a little-understood and less-discussed process has become a central preoccupation of our culture. From books and blogs to magazine covers and editorial pages, startup founders and the companies they create have never consumed so much of our national brainspace.
But to popularize is inevitably to trivialize. Starting a company now looks so easy that many more people are tempted to try. As in the last startup bubble, an entire industry of incubators, “startup studios” and accelerator programs has sprung up to smooth the rocky path to entrepreneurship (and take a sometimes shockingly large slice of ownership for their brief contribution).
In early innings, when the macroeconomic tide is rising, it can be hard to tell the difference between good and bad startups. Weak founders starting businesses on weak premises are still able to raise money, assemble teams and achieve breathless coverage in Techcrunch. More than ever are swimming naked, but the tide hasn’t gone out for so long that we’ve forgotten how to spot the skinny-dippers. It’s often only in retrospect that we’re able to say we knew it all along, whether good (Amazon) or bad (Theranos).
But there are tools for spotting good startups early. And they depend on filtering for founders who understand the principles of Zen Archery (even if they’ve never heard the term), and Flywheels (even if they aren’t described in that way in the raise deck).
Founders who intuitively understand the principle of iterative, process-based excellence – the core of Zen Archery – are easy to spot. They’re less likely to pretend to have all the answers, and more likely to say “I don’t know but I have an idea for how to find out.” They’re confident and clear in their long term vision, but flexible and hypothesis-driven when developing paths to achieve it. And perhaps most importantly, because they understand that the path to outperformance is not better ideas but better execution over time, they build diverse founding teams who share share their mutually reinforcing habits of extreme curiosity, urgency and accountability.
Happily, these Zen Archer founders are also more likely to choose opportunities with the capacity for Flywheel business dynamics. Inherent in the concept of a flywheel is compound difficulty: flywheels are massive and hard to budge at the beginning, only becoming valuable as mass is added and velocity is increased. Founders who understand that excellence is iterative aren’t daunted by obstacles that seem insurmountable to others; technical complexity, regulatory hurdles, significant capital requirements and difficult paths to market are features that lend long-term value and defensibility to flywheel opportunities, not reasons to avoid them. And when overcoming difficulty in one domain adds leverage in another, you have the beginnings of a flywheel.
In boom cycles, most of the founding teams we see represent a kind of anti-pattern to these two frameworks. The founders have limited experience in the domain they hope to disrupt; they pursue simplistic business ideas that are clearly derivative (if not exact copies) of existing innovators in the category; and they believe their long-term competitive advantage will arise from superficial aspects of their execution (especially the gratuitous application of buzz-phrases like “blockchain” or “machine learning”, or the Jobsian assertion of “superior design”). These teams tend to be business-heavy and engineering-light, and they expect to be funded (on generous terms) at the concept phase of their journey, with narratives based on analyst reports and press headlines instead of primary customer research and running code.
The positive example is much more common in economic downturns, when the raw difficulty of being a founder is obvious and those less-suited tend to stick with their day jobs. These founders are irrationally obsessed with an unfashionable problem. The problem is unfashionable because it’s dauntingly hard, in a segment of the economy that most people don’t know / hear / read about, or anticipates business or technical conditions that don’t yet exist. The founders have learned about the problem through first-hand experience, and their ideas about how to solve it rely on insights invisible to the casual observer. They have picked a point of entry to the opportunity that might seem trivially small, but creates a vector for learning and evidence-gathering in support of a bigger vision. And each step along the road to that vision, if successful, creates an asset that adds to the long-term value and defensibility of the enterprise as a whole.
Does any startup at the earliest stages cleanly map onto one or the other of these extremes? Of course not. Even the most exciting opportunities come with obvious flaws and stomach-churning uncertainties, which is what makes being an investor so fun. But boom cycles can be particularly confusing for investors and founders alike, because houses of stone and houses of cards both tend to stay upright, and often look very similar from a distance, until the wind begins to blow again.