Startup Advice Has A ‘Lowest Common Denominator’ Problem

An uncomfortable truth for startup founders is that the majority of their peers will fail. Real success stories, the household names that produce multibillion-dollar outcomes, are quite literally exceptional.

As a consequence, it’s difficult to build a curriculum around these examples. Strategies that worked in one market, for one business model, may never again be repeated to the same effect. Even the most generic sound bites like “ship fast and iterate” or “do things that don’t scale” aren’t always applicable elsewhere.

This illustrates one of the factors that defines great founders: The confidence to carve their own path from first principles rather than going with the flow. They have the conviction to do their own thing and to see it through to the end — however, challenging it may be to swim against the current. The best advisers and mentors nurture this eccentricity rather than pressing founders into a mold.

This idiosyncratic nature creates a “lowest common denominator” problem in the advice offered to founders: The most easily understood principles tend to be most valued — regardless of impact. This is also referred to as “simplicity bias,” or the “illusory truth effect.” Recycling factoids allows the presenter to project authority without the risk of being “wrong,” and it doesn’t hurt that fortune cookie wisdom is catnip on LinkedIn. Whether the outcome actually helps or harms founders is a significantly more complicated question.

An easy example is to look at how startup discourse leans toward averages as a source of false confidence. The average round size, average revenue for each stage, average dilution — all framed as optimal by advisers that do not understand that the “average” startup fails. Exceptions rule. Market data should be carefully presented as a way to provide context on a proposition, not to shape it. Many of the most well-known startups were outliers from day one.

The problem is worse with complex topics. Founders are frequently directed to simple heuristics, like valuation as an outcome of target raise divided by typical dilution. This ends up punishing those who raise less, or pushing them to raise more. Or they’re told “real investors don’t care about financials,” and are blindsided when real investors do indeed care about financials. Misunderstandings like this are a result of the fact that simple messages travel further.

Making an impression

The best way to make sure a pitch is ignored by investors is for it to be undifferentiated or incoherent; a generic template with the same tired jargon, a strategy slide showing unsurprising ambition, a standard raise at “market” terms. Fundraising is not a box-checking exercise. The goal is not to meet expectations, but to cut through the noise and make an impression.

Why raise a typically sized seed round if the pitch implies huge capital expenditure? Why imply a normal range of dilution if the company only needs a small amount of capital today? Why target a typical range of valuation if you can make a clear and rational case for it to be higher? The most compelling pitches are designed with the goal of highlighting strengths, not hiding flaws.

A whole industry has formed to exploit the uncertainty that accompanies entrepreneurship. Whether it’s accelerators, advisers or consultants, many claim to offer a “recipe for success” for founders who are desperate enough to pay for it. Nine times out of 10, founders would be better off spending that time talking to potential customers.

Where founders can get input from genuine experts that understand the above, whose experience is shared as “food for thought” rather than a dietary restriction, can be a great benefit.

Dan Gray, a frequent guest author for Crunchbase News, is the head of insights at Equidam, a platform for startup valuation, and a venture partner at Social Impact Capital.

Illustration: Dom Guzman