Ever seen birds on a wire or a fence? They stand on the edge, perched, observing everything above and in front of them. They cluster and group, finding comfort in numbers. Each all face the same direction waiting for the next opportunity or threat.

If you look closer you will often notice in a large group, one, maybe two exceptions. They are the odd birds, the ones who dare face the opposite direction. They dare not to fall in line and behave like the rest of the brood. They dare to look in the opposite direction, chancing the risk of not being the first to spot the threat in the direction the brood faces. But, whether they know it or not, the odd birds have made the best choice.

Take for example, 20 birds on a fence. 18 face one direction, 2 face the other. This means 18 birds will spot a threat or an opportunity in one direction and immediately jump to compete for it or escape. Another way to think of this is in terms of mathematical angles. One side of the wire covers 180 degrees. If 18 birds compete for 180 degrees, by simple math they each could claim 10 degrees of opportunity without competing with one another. Now the odd birds, the two of them share the other side of the wires 180 degrees. They each get 90 degrees of coverage before they begin competing with one another for the opportunity. That’s 9 times more opportunity then the grouped birds! Since threats can come from either direction equally, the odd birds are better equipped to react to danger as they are able to spot threats coming from the odd birds direction and rely on the brood to alert them to threats coming from the brood facing side, while the brood is less likely to rely on a single bird flying away from the cluster and so vulnerable to threats from the odd birds direction.

How is this relevant? Be the odd bird. Don’t copy your competitors or follow the trend. Make trends, build markets. Walk without a rhythm and you won’t attract the worm. (Sorry had to throw in a Dune reference). Take chances and you may find the field is wide open, rich with opportunity and little competition. And if things go wrong, fly away and start over doing things differently and eventually you will win.

“He who dares, wins.” It’s the British SAS special forces motto, and you know something, they are right.

There’s the obvious macro-economic answer: Everyone selling too early is bad, because no new tech giants are created. There’s the obvious micro-answer: A few million dollars is life changing for most people, and those entrepreneurs deserve to make a life-changing amount of money.

These are obvious answers, and very valid at that. The majority of the discussions have been back and forth on how these events change the consumer’s life later or the entrepreneurs life immediately. However, what’s not often discussed is the systemic changes to how businesses form and wind down and their subsequent impact on exit strategies. It’s why I believe the $50mm exit is more realistic.

The first corporation was founded around the 14th century when the only form of communication were written and delivered by hand, or word of mouth. The next major change in communication was the printing press, in the mid 15th century, which removed the need for hand written sources of data and made information much more accessible to the masses. Fast forwarding to the next significant iteration in communication, the telegraph facilitated data to be exchanged over longer distances in significantly shorter times, but to a narrow audience in the first half of the 19th century. The telephone opened up the first mass communication that facilitated information to be exchanged in real time at the pace that people could understand the spoken word first during the later half of the 19th century. Lastly, email and the Internet age has brought about mass communication at what will eventually be unrestricted levels of data exchange starting from the mid 20th century. Each iteration in communication technology has produced shorter and shorter leaps until the next major breakthrough in communication. This holds true until we discovered the Internet and it’s application theories that are still very much being iterated upon. This rapid growth in communication technologies has impacted the business life cycle in a similarly dramatic and ultimately disruptive fashion.

Businesses utilize people (human capital), and resources (industrial or financial capital) to acquire more resources (wealth). If the life blood of a business is employees and capital, then as communication efficiency increased, so does individual productivity. As individual productivity increased so too did the fruits of such labor produce better industrial and financial capital efficiency. This iterative process continues today and will tomorrow as communication and industrial capital continue to become further efficient. The problem however is that each iterative cycle continues to produce diminishing returns in productivity until the marginal utility gained from an iteration becomes ultimately indistinguishable and therefore irrelevant. It’s why when we talk about the value of infinity, a figure technically unobtainable, we say we approach infinity when applied to reality.

The Internet has placed us on the express train to quickly approaching infinity.

Now, here’s the real problem. While businesses continue to become more efficient, the wealth they strive for remains ultimately zero-sum, meaning there is a finite amount of real wealth available in our world for distribution. Since businesses are built upon the intersection of human, industrial and financial capital, in a world approaching infinity, the economic advantage of economies of scale provide significant advantages for large existing firms to capture an uneven percentage of real wealth. At the same time, smaller capital investments are capable of achieving significant results because of gains in efficiency of productivity.

Now here’s the irony. As these larger firms continue to expand to capitalize on economies of scale they become a victim of their very own success. In order to leverage economies of scale, larger firms must function as closely coupled in productivity as possible leading new innovation to smother within an environment that promotes uniformity in it’s creativity. This dilemma presents the opportunity for startups to innovate free of such constraints, and to iterate quickly to build something of value for which the world is willing to exchange their real wealth. This is the reason why large corporate entities become publishers of new innovation through acquisition and not through internal development. It’s why big pharmaceutical companies buy drug makers, and why Google has bought 23 companies 3 quarters into this year.

What does this all mean? Well, startups can always succeed by innovating free of the constraints larger businesses suffer. But as they grow from their initial innovation, they too become victims of success by accumulating their share of the finite real wealth willing to be exchanged for their innovation. So the startup must then innovate a new product in order to achieve further wealth. As this process iterates, it will eventually soon find itself needing to leverage economies of scale to compete with smaller startups that are able to innovate free of such constraints. In this manner, the cycle completes itself.

So why do I think smaller exits then larger are the new systemic reality? Because all resources, be they human, financial or industrial capital are ultimately finite and growing a startup beyond it’s initial innovation requires diminishing investment capital in a world where the incumbent large entities are already at an advantage against you in competing for those same exact resources. Whats worse is, ultimately to succeed under such conditions requires successful reiteration of new innovation over and over with diminishing returns with each iteration. And in a world where communication has pushed us to approach infinity faster, opportunity for significant gains in marginal utility has declined inversely. Even so, if the startup becomes larger, it becomes indigestible to many potential acquirers and therefore removes from the pool of chance acquirers whom provide exit opportunities outside of IPOs. This means the most marginal utility, or in this case, opportunity to be rewarded with real wealth, with the least amount of expenditure in resources (read risk) exists in capitalizing on singular innovations that larger corporations are unable to achieve. The entrepreneur’s goal should then be to iterate free of all constraints including the shell that holds the previous successful innovation. Lastly, when talking about successfully run acquisitions, a competitive bidding process will occur between the innovation publishers competing for your startup. The acquirer is then likely to fall victim to the winner’s curse, and because of the lack of data available about the profitability of such an innovation, over pay for your enterprise at the time of acquisition.

An entire generation of entrepreneurs are building dipshit companies and hoping that they sell to Google for $25 million - anonymous VC

Dipshit companies have the wind behind them in the new reality of investing and exiting in the Internet age. That doesn’t mean you can’t build something that’s more then just one product. It’s not at all impossible, it’s just harder and much more inefficient.

This post is likely a work in progress. I greatly welcome feedback.

My inspiration for this post comes from my hotel room in Harrahs Lake Tahoe as I attended the Tahoe Tech Talk Conference. Looking out the window from my room, I saw approximately ten small sized birds flying around in tight formation, pivoting quickly and moving as one hither and thither. The bird in the front would pivot, and all the others would shift to retain an identical heading and keep the flock formation. This was true even when this meant the entire flock would fly within the same space back and forth what appeared to be aimlessly. Having been engaged the past 36 hours with consistent startup talk, my mind drifted rapidly to think about how this phenomena is relevant to the startup world.

Birds fly in flock formation when migrating in order to be more efficient with their energy, as the lead bird expends up to 20% more energy then those that follow due to aerodynamics of flight. (Awesome explanation of the aerodynamics) They then rotate positions and switch the lead out as necessary. But why do birds fly in flocks when they aren’t migrating? Even when they don’t have a particular destination? Perhaps the behavior can be explained in how people flock.

Lets see how investors flock. Often times deals don’t gain traction till a lead investor, someone willing to put money down on the table under certain terms, is secured. Once this has been achieved, the follow-on syndicates, or the rest of the flock in this example, often pours in to fill the remaining allocation available. Of course this plays out differently depending on what stage of funding being raised.

At the Seed round, this typically means a recognizable and respected super angel or early stage VC becoming the banner from which their bannermen rally to invest alongside. At the A round, early B rounds much like the seed round, you typically have a single recognizable and respected early stage VC become the anchor from which another firm they commonly invest with will follow. At the B and onwards rounds, much like the earlier rounds, you may encounter the flock mentality, but often this is where a key change in behavior occurs. Here is often when the flock falls apart and new investors become directly competitive with one another. The investing flock no longer operates as a group, but instead as a single entity and the company typically has it’s destination in mind and is raging towards it albeit without enough resources/energy.

So why does the flock mentality exist so strongly in investors in the Seed, A and early B rounds? I believe the answer is revealed to be insecurity. Much like the flock, investor’s and the company don’t know for certain the path the company needs to travel, but the investor flock knows if someone makes the decision to go in a certain direction, it’s easier to validate that direction by following then to lead and propose another path. This means, if your first investor “validates” you, and they are “trusted” by other relevant investors then its much more likely they will pile on to be a part of the syndication. Investing at this stage initially always falls victim to group think until one investor or the entrepreneur change the course of the whole flock for right or for wrong with how they decide to pivot. The weakness of flock behavior is also a great strength for the company. For in nature, the flock pivots in different directions as new leads step up to determine the path, it is in these iterations back and forth, that one lead ultimately finds the right direction to the goal; Or doesn’t, in which case the company fails. The better a company adds strong leaders to it’s flock of investors and employees, the quicker the iteration of pivots by the flock and the sooner and likelier the company will find their destination; a functioning business model. This is the strength gained and why you want to leverage strong syndicates for your investment in early stage deals.

This typically changes when you get to series B rounds. Often, by then, through pivoting the course of the flock back and forth, a company has found the path it will take to reach the destination and it’s success. This means the existing flock of investors and entrepreneurs no longer provides pivoting efficiency except to continue traveling with one another and leveraging each other’s resources in getting to the destination, much like the migratory formations. In such a situation, the new investors do not seek to add further leadership and pivoting by the flock and thus find syndication with other investors typically unnecessary and competitive. This is also why term sheets at this stage become highly competitive for companies that have found their destination and the path to get there. The insecurity has been reduced by the iterations of pivots and accomplishments achieved by the company and thus the stakeholders are rewarded with a higher valuation and resources to get there.

So going back to the original question, why do birds flock when not migrating, perhaps like the startup it’s because they’ve discovered the secret to success in achieving whatever goal is ultimately achieved through determination and iteration. I’m convinced the flock theory applies to nearly any kind of societal interactions involving uncertainty and I’d welcome others to tell me about where they’ve seen it apply.

For example, Groupon has created a beast of a market with limited quantity, time and geography based commerce solutions. This was effectively a pivoting of the flock of entrepreneurs looking to start companies, and many in the remaining flock of entrepreneurs reacted by founding companies duplicating the pivoting model, practically over night. Even the entrepreneur is vulnerable to insecurity until the path towards the destination becomes apparent, till then, they too flock.

If there is a clear message here though, the big winners are those that dare to pivot away from the flock, chancing being picked off and possibly dying, for the opportunity to be first to discover the path to success.

Heads up, this is a very long post. It is however structured such that you don’t have to read to the end to find value in it.

The Way of the Samurai is found in death. When it comes to either/or, there is only the quick choice of death. It is not particularly difficult. Be determined and advance. To say that dying without reaching one’s aim is to die a dog’s death is the frivolous way of sophisticates. When pressed with the choice of life or death, it is not necessary to gain one’s aim…To die without gaining one’s aim is a dog’s death and fanaticism. But there is no shame in this. This is the substance of the Way of the Samurai. If by setting one’s heart right every morning and evening, one is able to live as though his body were already dead, he pains freedom in the Way. His whole life will be without blame, and he will succeed in his calling.

The true entrepreneur commits from the bottom of their heart, and as a result, their souls swell with the passion of their vision. Commit to your vision freely and resign to accept failure and you will free yourself from the fear of failure. Commit, and even if you fail, you will have not failed your soul.

Because we do most things relying only on our own sagacity we become self-interested, turn our backs on reason, and things do not turn out well. As seen by other people this is sordid, weak, narrow and inefficient. When one is not capable of true intelligence, it is good to consult with someone of good sense. An advisor will fulfill the Way when he makes a decision by selfless and frank intelligence because he is not personally involved. This way of doing things will certainly be seen by others as being strongly rooted. It is, for example, like a large tree with many roots. One man’s intelligence is like a tree that has been simply stuck in the ground.

The successful entrepreneur surrounds themselves with the counsel of others intelligence and wisdom. The best decisions take into consideration the many different opposing and supporting views and vantages and ultimately lend themselves to stronger results. The man who makes decisions all by himself is a fool waiting to fail.

It is a fact that ash will not live where the water is too clear. But if there is duckweed or something, the fish will hide under its shadow and thrive. Thus, the lower classes will live in tranquility if certain matters are a bit overlooked or left unheard. This fact should be understood with regard to people’s conduct.

This quote just kicks ass, and so I put it in. However, I do believe a lesson that could be learned from it is: Resist the urge to micromanage your employees. The result will be that they spend their time inefficiently making sure they don’t make the smallest of mistakes, ever, and they will grow to resent you for it. Find employees who have high levels of integrity and can manage themselves after given directions. Checking in regularly with them then is all that will be required.

These are the levels in general;. But there is one transcending level, and this is the most excellent of all. This person is aware of the endlessness of entering deeply into a certain Way arid never thinks of himself as having finished. He truly knows his own insufficiencies and never in his whole life thinks that he has succeeded. He has no thoughts of pride but with self-abasement knows the Way to the end. It is said that Master Yagyu once remarked, “I do not know the way to defeat others, but the way to defeat myself. ”
Throughout your life advance daily, becoming more skillful than yesterday, more skillful than today. This is never-ending.

I’m just going to quote another awesome quote cause I think the above is pretty self explanatory. “Intellectual growth should commence at birth and cease only at death” - Albert Einstein. So should it also be for the entrepreneur. Ever learning, ever vigil.

A man who makes a mistake once will be considerably more prudent and useful because of his repentance…A man who has never once erred is dangerous.

A failed entrepreneur has learned many lessons that one who has never failed has not. That being said, I would also say an entrepreneur who has made many mistakes and has not learned from them is useless.

By thinking that you must complete the job you will run out of time. By considering things like how many men the enemy has, time piles up; in the end you will give up. No matter if the enemy has thousands of men, there is fulfillment in simply standing them off and being determined to cut them all down, starting from one end. You will finish the greater part of it.

Think too hard and you’ll over think the problem. Consider the size of the problem too much and you’ll make a mountain out of a mole hole. Often, the agility of entrepreneurs favors execution and action. Once you’ve taken the action, its time to rethink. Entrepeneurial agility allows for problems to be corrected easier. That being said, don’t make critical design flaws! I’m looking at you Twitter!

It is not good to settle into a set of opinions. It is a mistake to put forth effort and obtain some understanding and then stop at that. At first putting forth great effort to be sure that you have grasped the bastes, then practicing so that they may come to fruition is something that will never stop for your whole lifetime. Do not rely on following the degree of understanding that you have discovered, but simply think, “This is not enough.”
One should search throughout his whole life how best to follow the Way. And he should study, setting his mind to work without putting things off. Within this is the Way.

Do not let your opinions become stale with comfort that they are right. Always be flexible and willing to welcome challenges against your entrepreneurial vision. An idea grows from resisting and accepting the right kind of changes. Like your vision, so too should you allow yourself to be challenged and learn through resistance and acceptance, always.

Inside the skin of a dog, outside the hide of a tiger.

Being an entrepreneur requires significant a fortitude within. Convincing the world you’re the real deal requires a powerful demeanor. Another perspective. Sometimes, to land customers, you need to demonstrate you’re a tiger, even though in reality you’re still just a little dog.

It is said that one should not hesitate to correct himself when he has made a mistake. If he corrects himself without the least bit of delay, his mistakes will quickly disappear. But when he tries to cover up a mistake, it will become all the more unbecoming and painful.

Honesty lends itself to integrity. Integrity lends itself to reliability. When speaking the truth, you will free yourself from the burdens of lying, and demonstrate your character for reliability. Business is built on relationships, and relationships grow stronger through disclosure and reliability. This is also known as the “Don’t bullshit” principle.

When meeting calamities or difficult situations, it is not enough to simply say that one is not at all flustered. When meeting difficult situations, one should dash forward bravely and with joy. It is the crossing of a single barrier and is like the saying, “The more the water, the higher the boat.”

Challenges faced with excitement are much easier to overcome then when faced with doubt. You can move a mountain stone by stone, but the job goes a hell of a lot better when its not counted stone by stone. There is a lot to be said about the great strength of optimism in the face of pessimism.

If you think that you will be inferior in doing something, you will be on that road very soon

This should be straightforward, but often overlooked. The way you choose to see things very significantly affects how they happen.

In the words of the ancients, one should make his decisions within the space of seven breaths. Lord Takanobu said, “If discrimination is long, it will spoil. ” Lord Naoshige said, “When matters are done leisurely, seven out of ten will turn out badly. A warrior is a person who does things quickly.”
When your mind is going hither and thither, discrimination will never be brought to a conclusion. With an intense, fresh and undelaying spirit, one will make his judgments within the space of seven breaths. It is a matter of being determined and having the spirit to break right through to the other side.

The entrepreneur will always struggle with decisions. A decision may not be the right way or the best way, but unless you have the will to make it happen, it will never be any way. Nothing will result from anything, lest you have the courage of your convictions.

No matter what it is, there is nothing that cannot be done. If one manifests the determination, he can move heaven and earth as he pleases. But because man is pluckless, he cannot set his mind to it. Moving heaven and earth without putting forth effort is simply a matter of concentration.

A daunting task can only be accomplished when the entrepreneurs determination has been concentrated on putting forth an effort.

If one is but secure at the foundation, he will not be pained by departure from minor details or affairs that are contrary to expectation. But in the end, the details of a matter are important. The right and wrong of one’s way of doing things are found in trivial matters.

Know you’re visions northern star and never falter. Big decisions are easy to make, but it is in the trivial matters that the results will show.

During happy times, pride and extravagance are dangerous. If one is not prudent in ordinary times, he will not be able to catch up. A person who advances during good times will falter during the bad.

Always run lean and agile!

It is bad when one thing becomes two. One should not look for anything else in the Way of the Samurai. It is the same for anything that is called a Way. Therefore, it is inconsistent to hear something of the Way of Confucius or the Way of the Buddha, and say that this is the Way of the Samurai. If one understands things in this manner, he should be able to hear about all Ways and be more and more in accord with his own.

In the end, everything is relative. Wisdom can be found in things that seem to be irrelevant, even samurai codes! That being said, one’s path is not determined by another’s and the true Way for all is determined on the journey for each travelers path. In short, all advice should be taken for face value; Its only when synthesized internally to your own thoughts that it may become of any real value. Or not.

“Hokey religion and ancient weapons are no match for a good blaster at your side, kid” -Han Solo

In my last post “Now is the time to invest” the subject was broached in the comments that one of the primary keys to success for a startup was the marketplace and that the current economic climate is not a friendly marketplace to most if any market. I’d like to explore this idea further. A marketplace is the collective goods and services of an economy, while the market is a particular economy for a good or service. This dichotomy means a startup can succeed even during economic recession or depression as long as the markets it participates in grow or  fail to compete against a startup with a new innovation. We’ll talk about the later form of success in another post.

So what does this all mean relative to today? Well, during times of economic prosperity, the marketplace thrives and results in systemic, wide spread, success to all markets. This is the result of what amounts to be a collective of excess producer surpluses and rents. A sort of inflation of consumer wealth, that is being redistributed in the form of profit-subsidies to companies that would not thrive had it not been alive to exist during this time and place. And, when the economy does poorly, then as expected, the opposite takes place. There is a widespread redistribution of producer surplus as consumer demand falls. The same companies that depended on the profit-subsidies from their customers can no longer afford to exist, and they either learn to cut overhead and be lean to survive, or fail. However, in actuality, most companies try and adapt to become leaner to survive, but ultimately fail because organizational culture and structure take time to genuinely reform.

Okay, so, again, what does this all mean relative to today? Well, it means startups should be built to run lean and agile always. It should always run near to the bone; the bare essentials. A startups sole purpose is to survive until that exact moment when, luck, time, an unique inflection point  offers the company the rarest of opportunities to move forward with great success.

The company that can retain the structure and culture of lean and agile through prosperity are the companies that grow to become great. The one that gets fat and lazy too much overhead  from expanding poorly during successful times, struggle and or fail when the next inflection point downward happens.  This means, if you’re building for a quick exit, run lean, mean and agile and survive until you are at the right time and place. When it hits, you’ll want to start looking for an acquirer to sell before the marketplace deflates. The easiest would be in the middle of a boom. The most dangerous but highest premiums are towards the end of a boom. But, that being said, companies built for acquisition exits often manifest their destinies with failure. If you’re building to last a great company, run lean, mean and agile and only scale variable costs during times of great economic prosperity. This means when things go south you’ll be able to survive and retain those rich earnings to become even bigger and better the next time and place your up to bat. Do this enough times and you can build enough reserves to even survive  mistakes that would crush a lesser company.

The reality is, when success will happen will never be  a time line you have control over. When success is ready for you, being there at the right time and place to react is when success is granted. Companies forged in hard economic times are tempered with the philosophy of  lean and agile, naturally improving their chances of surviving for when success is ready to be granted. That is why I feel the time for investors to invest is now. So, build to be there for when success calls and you will succeed. Lucky you.

Do you agree or disagree? Join the discussion and comment below!

I feel, now is the time to invest and generally speaking, it is always the right time for startups.

Founders who startup today will be forced through the gauntlet of major economic, social, and technological challenges before them, emerging tempered in their faith to change the world. That, or they wash out, and the survivors grow tougher for it. The surviving hardball Founders will be forced to run economically lean and capitally efficient just to stay competitive or alive. Granted, it is harder to start a company today and succeed, good companies will always be funded and great companies will always be built. A testament to this is Paypal, which grew and prospered during the last major recession.

The fact is technical constraints breed technological innovation while economic constraints breed organizational innovation. The companies that overcome both these constraints will be the titans of tomorrow.

Now is the time to invest in these Founders and their companies. Our titans of tomorrow.

Do you agree or disagree? We’d like to hear your thoughts.

• Surrounds itself with the best and the brightest of ambitious, dedicated and passionate people; the best give the expertise and experience needed, the brightest will always find innovative solutions and the ambition & passion will give the courage required to pick yourself up when you fail.
• Understands that it will, baring incredible luck, likely fail catastrophically at some point and is always planning for this.
• Has the patience, courage, conviction, and irrational faith to persevere even when there are better alternatives in the market and when the going gets tough.
• Recognize a significant and genuine market pain. Provides a cost effective and adoptable solution to an undiscovered need or problem that exists and is better than any present, emerging or conceivable alternatives.
• Knows how to successfully market and monetize their solution. Validates their market pain and monetization plan by lining up potential customers for their solution early on.
• Executes, executes, and executes. Makes sure to do the right things and to do things right. Thomas Edison is known to have said “Genius is 1% inspiration and 99% perspiration” he is also known to have said “There is no substitute for hard work.”

Do you agree or disagree? Please feel free to comment and suggest what you feel makes successful startups!