A theory of mind for entrepreneurs

Or: why the kids are not all right

Then I heard the voice of the Lord saying, “Whom shall I send? And who will go for us?” And I said, “Here am I. Send me!” (Isaiah 6:8)

Being a founder is hard. Everyone says it. Rarely is it the case that you breeze through fundraising, build a team, ideate on product, find product-market-fit, and so on without enormous mental and emotional strain. One reason is that the better you do, the bigger and more consequential your problems become. When things are small and don’t matter, you don’t need to worry about board decks or quarterly audited financials.

Early on, you might work 80-100 hours a week, pay yourself virtually nothing, and make huge personal sacrifices. Your payoff is deeply uncertain; failure is the modal outcome. You are responsible for the lives of many dozens of people and millions of dollars in VC capital. Most founders take on massive leverage in the form of preferred equity; even if they sell the company, sometimes they walk away with nothing, because every dollar of preferred has to be paid out first.

But we collectively can count ourselves extremely lucky that being a founder is so valorized. It’s the great magic of western capitalism that people want to be founders in the first place. The relentless drive to build new companies, discover, innovate, and disrupt is what gives society new drugs, product experiences, better software, ever-more efficient consumer products, and so on. The entire world benefits from the nexus of capital formation which exists primarily in Silicon Valley and a few other hubs, mainly in the US.

The secret formula seems to be capitalism paired with strong property rights and a common law system, which all together gives rise to deep capital markets. (Even western liberal democracies are not all equal when it comes to encouraging entrepreneurship. Civil law societies are less flexible from a business law standpoint, and it’s harder to build companies in that milieu, especially public ones. High taxes and burdensome regulations equally stifle entrepreneurial activity. And you need a functional nexus of capital <> talent <> exited founders to kick off the VC-founder-angels flywheel. There’s something quite special about the US, and in particular Silicon Valley in this regard.)

But even given the favorable latent conditions and abundance of capital, the truth remains that the odds are stacked against any given founder. Only around 30-40 percent of startups raise an institutional seed round at all. And then there’s huge attrition for each subsequent round. Only 10-15 percent make it to Series A, 5 percent to Series B, and so on. You can budget around 50 percent attrition per stage. Additionally, another less-appreciated reality of the business is that it's virtually impossible to know a priori that the timing is precisely correct for a given combination of idea, founder, and market. Sometimes a technology is too early for the market, but it’s impossible to know without simply making an attempt. The same exact concept might be tried over and over with one iteration suddenly working for no other reason than the tech became slightly more efficient or the market was simply more ready. So to undertake a founder journey is to accept a significant and unknowable risk of failure. For this reason, most people are not psychologically equipped to be founders.

So why do people do it?

It’s something I puzzle about a lot. In fact, being able to answer this question consistently is the most important skill in VC. As a venture capitalist, it’s my job to be a “founder psychologist”. Both in terms of filtering – trying to determine as part of our diligence whether someone has the mettle to build a big business – and also once we invest. A lot of what I do is “founder therapy”. I talk to thousands of founders every year and I’ve done this without interruption for about 8 years. So in theory I should know a thing or two about what makes them tick.

A lot of people would say that what drives people to start companies is “anticipated future reward.” You chew glass for 5-10 years, the thinking goes, so that you can exit to FAANG for 100m, put $20m in your pocket after tax, and sail off into the sunset. Or better yet, you go public. And certainly, this generic “capitalist motive” describes a good number of founders. However, when we as VCs encounter these ones, we often filter them out. Our job is to find people that will keep growing the business rather than taking an early exit. Purely financially motivated people will often want to take the easy way out and sell before running a company gets really annoying and bureaucratic – often around the Series A/B stage. You don’t really want to back someone that’s constantly doing the mental math of what their shares would be worth if they sold today.

One reason I don’t think the future reward hypothesis describes most founders is that if you talk to exited founders who are retired, they often aren’t that much happier. It’s often the case that when you ask successful people about a time in their life that they were happy, they will refer to the past when they were “in the trenches”. They’ll say something like, “I was working 80 hours a week, chewing glass, no money, living in a studio, but boy was I happy. I was in the thick of it. I wouldn’t trade it for the world.” Once these people exit, many of them complain of being bored and simply go back to being founders again. A good friend of mine is a successful twice-exited founder. For a year after selling his second business he took a sabbatical. He golfed, got into freediving and spearfishing, and had loads of free time together with unlimited financial resources. And he was miserable! He’s now happily back in the trenches building his third startup. Anyone that knows a good number of exited founders will report that they aren’t significantly happier than current founders.

(One exception to this observation is former investment bankers/consultants/junior lawyers/junior doctors. They will often be extremely relieved that they’re no longer working 80-100 hours a week for an overbearing managing director, or and missing birthdays and weekends because they were fixing the font on a slide deck for a client that would never read it. The difference between these groups and founders is that the former are wage earners and have no ownership in what they are doing, and no real agency. They are just executing on commands sent down through the corporate hierarchy, rather than choosing their own adventure. And it’s this lack of agency that saps joy.)

I think what really motivates founders is an alignment with what they’re building. Starting a company comes from a sincere belief that there is something in the world that is missing and that only you uniquely can fix it. Accruing significant wealth is a secondary outcome; a consequence of building a product that resonates with people and leading a strong organization. Making money is indicative of being a great founder, but not the ultimate cause.

And I think this explains burnout too. I’m not the first to observe that burnout isn’t a mechanical function of hours worked. I’ve worked plenty of 100 hour weeks in my life, but I have never felt meaningfully burned out, because for my entire professional career, I’ve had ownership in what I was building. If the incremental hour spent increases the value of something that you own, you’re not really going to regret it. But if you are simply selling your time to a boss or a corporation, even if you are extremely well-compensated, you are liable to burn out. The less agency and ownership you have, the more likely you are to realize at a certain point that it’s simply not worth it, even if you are clearing $1000 an hour.

Another thing supporting the alignment theory is my own journey. When I reflect on my own reasons for starting a company (I started Coin Metrics in 2018, which we sold to Talos earlier this year), they were not financial. I started it because I thought there was something about the world which was wrong and no one else was willing to fix. Specifically, that thing was a lack of useful on-chain data which I could use to better understand blockchains. I kept doing it because I was entranced by the phenomenon of making new discoveries, breaking ground, scaling the business, and being able to create reams of new data which wouldn’t have otherwise existed. The spark was obsession, and the kindling was a process of endless discovery. Even today, around 8 years after starting CM, I still haven’t collected a dime of salary or realized any consideration from the company. The financial component was never that important to me, although I suppose I was always vaguely aware of what my equity was worth. But when it came to selling the business I was most interested in making sure employees got taken care of, investors were happy, the fit was good, business continuity would be maintained, reputations would be protected, and so on.

And this is one reason why I’m bearish on this young crop of founders that seem to place a huge amount of importance on being perceived as an entrepreneur. For them, the social cachet associated with being a cracked founder seems to be a prime motive, rather than the desire to build a business. The product or service seems to be a completely ancillary concept, a mere side effect of being a founder. As a founder, you never really have enough time to harvest social points in the moment. If you do spend your time doing that (speaking at panels, getting features on Forbes or CNBC, going to happy hours or other founder-focused social events), you’re not going to win. The reality is that building a company from scratch is a fairly lonely and unglamorous mission that entails considerable personal sacrifice. The social and financial rewards motivating the “extremely online, content-oriented zoomer founder” cohort will not be sufficient to see them through once they encounter meaningful adversity. The only way is to truly, earnestly believe in what you’re building. And that’s the reward in and of itself.