Parallel between NGO-Donor and Startup-Investor Relationships

From what I hear, one reason that startups fail is that their visions don’t line up with their investors’. A vision disconnect between the people who are the startup and the people feeding money to the startup leads to an end to funding, replacing some founders, or some other kind of nasty outcome.

The disconnect’s origins make perfect sense. A team of founders and a team of investors both spend lots of time developing their own hypotheses (about business opportunities or the direction of technology or a specific industry), and by the time startup meets investor to raise funding, there is often little overlap. Founders spend their time executing the details of specific visions, while investors meet with many companies and hypothesize broad visions; it’s easy to see why the two sides’ hypotheses don’t often overlap. Unfortunately for the startup, whether the investor funds the startup is exactly the same question as whether the two sides’ visions overlap!

Let me give an example. One of my friends (let’s call him Adam) is building a company that makes data visualization software for wealth managers. Adam told me about his first interaction with one of his prospective investors:

He got really excited when I first explained my company to him, especially when I told him about the partnerships we’ve landed. Then he started asking me these weird questions that had nothing to do with the company. “Are you guys incorporating social?” he asked. “Not in the near future… that doesn’t really fit in our product,” I said. “OK… how about mobile?” “No… not yet.” “Local?” “I don’t think our product has synergies with location either…” After each “no,” he looked more and more disappointed, and I was confused about his questions and dwindling enthusiasm, until I realized it was because he really wanted to invest but my company didn’t fit into any of the theses of his firm – social, mobile, and local!

So Adam didn’t get money because his vision for data visualization for finance didn’t overlap with an investor’s vision for social, mobile, and local.

Interestingly, there is a very parallel relationship in the global health world between non-governmental organizations (NGOs) and donors. Just like startups, non-profit global health NGOs need to raise money to fund their worldwide personnel, materials (any medicines or malaria bed nets, for example), administrative costs, transportation, and any physical capital. So they turn to (often international) private donors to raise money. But just like investors, these donors have their own personal visions for what kind of health solutions they want to see.

One example I picked up in my global health class is the influence of neoliberal philosophy on donors in the 1970s. (Take this interpretation of global health solutions with a grain of salt, but consider it.) According to Professor Salmaan Keshavjee at Harvard Medical School, the economic crisis in the 1970s led to blaming government regulation as the crisis’s cause, and a “justification” to revive a decades-old philosophy of neoliberalism – which argued for the free market’s ability to distribute resources and questioned efficiency of most government intervention. This neoliberal spirit manifested itself not only in the election of conservative leaders like Ronald Reagan and Margaret Thatcher, but also in the shifting policies of global health leaders like the World Bank president Robert McNamara. For health policy, the neoliberal current was the call for free market instead of public sector solutions to distribute health care. The example of people like McNamara set the tone for pro-neoliberal donors.

One instance of this is the influence of international donors in swaying the Ugandan health care system to implement user fees. User fee programs required citizens to pay for medicine, a reversal of medicine previously freely offered by the government. As you can imagine, in a poor country like Uganda, user fees had the effect of substantially reducing access to healthcare, and many families ended up unable to pay to maintain even their basic health. User fee programs were part of this broader neoliberal philosophy that called for free market rather than public sector health care solutions. Even though Uganda’s national health care system worried about the risk of such programs on citizens, it had to implement them because the alternative was to have no money at all, and some Ugandans were worse off because of it.

What are the lessons between the NGO-donor relationship and startup-investor relationship? One key takeaway is that so long as both sides’ priorities are matched, such situations don’t have to occur. The next question, then, is whether or not there exist enough donors with priorities closely aligned with those of NGOs and developing nations (I’m going to focus on the problem for these actors because they seem to be the worst off). And based on the dreadful state of health in many developing nations despite billions of dollars of funding, my guess is that not enough of these vision-aligned donors exist. If that’s true, how can we create more of these? Building potential donors’ awareness and empathy to win them over to the priorities of health organizations on the ground (rather than the donors’ intellectual priorities) might be the answer.

Treatise on Startup, Part 1

Why “do startups”? It’s hard to imagine a phenomenon in recent memory that has had a stronger stranglehold on the imagination of young, ambitious America. Popularized and made sexy by The Social Network and $1 billion Instagram exits, startups have become the combination of all American principles and definitions of success – rags-to-riches, fame, be-your-own-boss individualism, exploration of unknown frontiers, powerful impact on society, and (for the younger generation) a cool combination of technology and business. The potential to achieve success and become the 21st century American technological cowboy has led many to “do startups,” while this very same prospect of danger has scared others away into less risky pursuits.

So why do startups? One certainty is that it doesn’t make sense to “do startup” without thinking about what startups are designed to accomplish or why starting a company might be important to the founder. I’m not going to support or criticize any of the above “success” criteria as reasons for pursuing startups, because the validity of each reason depends completely on the individual. Then a better question to ask is, “Why should you do startups?”

Below, I outline the framework that I use to answer this question. I hope this framework confirms or adds perspective to the seasoned entrepreneur, the incipient dabbler, and the uninformed outsider. If you’ve read other posts from this blog, you won’t be surprised to learn that this framework for deciding whether to pursue startup and which startup to work on builds first and foremost upon the personal value system (just like everything else).

Start from your value system. What do you care about most, and what are the principles you live by? Those are the values you aspire for in your everyday activities; they constitute your value system. If you’re interested in entrepreneurship, your value system likely includes something like “making an impact beyond self,” in which case you probably (perhaps subconsciously) see specific things in the world worth impacting. Then you have some vision for the world that is different from the status quo. You’ve developed this vision after years of life experience, collecting data from your environment and (subconsciously) synthesizing that data into intuition and world view.

Articulate this world view. Then you can articulate the differences between this world vision and the status quo. What are the biggest differences as measured by your values? For example, one of your values might be learning, which might mean that you care about everyone learning together in a collaborative, college-like style because in your experience this style has helped you learn the most. So you might envision a world in which learning from kindergarten onward emphasizes social interactions with others in addition to (or even instead of) individualistic classroom-style learning or rote memorization of knowledge; this refocusing of the education system is your “difference.”

“Differences” could be solutions to present problems that frustrate you beyond belief (e.g. ridding of inefficiency in our healthcare system) or improvements you could not see the future possibly living without (e.g. cheap knowledge of my personal genome). Choose one such “difference” – let’s call it an “innovation.” Do you personally wish to invest the effort to create this innovation? You should consider how creating this innovation would optimize your personal values (e.g. how much would you learn? How much would you enjoy the struggle and unknown of solving this problem? How much money would you make?). If one of the values you’re optimizing is world impact, you have to be especially careful to not assume anything in measuring the impact of this innovation. You have to find out if enough other people value your innovation, an undertaking I call “problem discovery” (in business talk, “market research”). Go further than cold-calling one hundred potential customers (i.e. people you plan to impact) and asking each if he/she would value this innovation; in many cases, you’ll have to envision or even prototype a minimum viable product that your customers actually use to help them understand how much they value (e.g. how much they’d pay for) your innovation; you’ll probably even want to fairly sample your customer base beforehand and construct an entire demand curve to know who places what value on your innovation. Be sure to ask your customers questions about related innovations too, and to sense them beyond asking questions, because you might then choose a slightly different innovation for a slightly different customer group that achieves much more impact and similarly satisfies your other values.

Just as you should be meticulous measuring your innovation’s impact if you value impact, you should be equally deliberate in measuring your innovation’s achievement of your other values. Evaluating your potential innovation based on your values should tell you whether you actually want to make it happen. Compare the world in which you’re creating this innovation to worlds in which you’re pursuing other fulfilling activities, and evaluate your opportunity cost based on your values. Given that you could invest the same energy and time elsewhere, do you still want to do this?

If you do, the next question is how to do so. Notice that I haven’t mentioned the word “startup” in this framework once up to this point. That’s because many of the innovations you’d want to create are not best facilitated in a startup or even a business. For instance, you may wish to solve one of Hilbert’s unsolved problems in order to contribute to mathematical thinking around the world; this is probably best done in academia. You may want to change the way that the United States conducts foreign policy; this is probably best done in government. But a surprisingly large number of innovations are best facilitated by companies and startups specifically. Startups in particular have the mission-oriented aspect that makes them great facilitators for innovation. Just by their smaller size, they have lower n-squared bilateral communication costs (because the cost of transferring information between each pair in a company scales quadratically with the company size). Just by smaller size, startups have a higher concentration of people strongly aligned in a similar version of the above personal philosophy. Peter Thiel speaks on why it’s difficult to innovate on your personal mission in other environments:

The easiest answer to “why startups?” is negative: because you can’t develop new technology in existing entities. There’s something wrong with big companies, governments, and non-profits. Perhaps they can’t recognize financial needs; the federal government, hamstrung by its own bureaucracy, obviously overcompensates some while grossly undercompensating others in its employ. Or maybe these entities can’t handle personal needs; you can’t always get recognition, respect, or fame from a huge bureaucracy. Anyone on a mission tends to want to go from 0 to 1. You can only do that if you’re surrounded by others to want to go from 0 to 1. That happens in startups, not huge companies or government.

This is why good entrepreneurs build startups (and, in my opinion, the only valid reason for you to build them) – because their values drive them to achieve some innovation in their world vision that doesn’t currently exist, and because startups happen to best facilitate this innovation and mission. Why do I think that this is the right philosophy for thinking about startup? Simply because this philosophy is consistent with the entrepreneur’s (and the human’s) fundamental individual decision-making framework by building on his/her values. The fact that the choice to pursue a specific startup springs forth from personal values keeps the entrepreneur motivated, visionary, and certain that that specific startup is where the entrepreneur wants to invest energy. Imagine asking such entrepreneurs why they are working on their startups. In essence, you’d be asking, “Why are you doing something that you’ve determined is in highest accordance with your values… Wait, never mind; silly question.” The entrepreneurs’ responses would just be a matter of articulating values and vision.

This being said, I certainly don’t advocate consciously thinking at such a high level 24/7 while working on a startup. Too much pondering and optimizing at this level makes it impossible to focus and actually experiment without the fear of being wrong. But values and vision in the above philosophy are things I believe all good entrepreneurs keep in the back of their minds, and they are things that good entrepreneurs revisit every once in a while to paint the big picture for themselves and their teammates. You can tell when you’re talking with a good entrepreneur; ask any question, and the answer you get is some piece of a bigger world vision that forms a clear picture in the entrepreneur’s mind and drives the excitement in the entrepreneur’s voice. As you ask more questions, you get more puzzle pieces that you can fit together into a world vision. How do you know if you’d like working with, investing in, or even buying from this entrepreneur? Ask yourself how beautiful his/her vision is to you.