Are you a seed-stage founder who’s building a unicorn?
NFX Founding Partner James Currier would like to save you some time: Startups that grow into billion-dollar companies have three basic forms of defensibility.
- Network effects: Your product becomes more valuable as more people use it.
- Embedding: Integrate your services so deeply, customers “cannot rip them out.”
- Data loops: Gather, process and act on real-time data.
“This is really only talking about world-changing, big-ass businesses with a lot of impact that could be a billion dollars or more in value,” he said at TechCrunch Early Stage last month. “That’s what we’re investing in. And what I’m talking about today is only for the people who want to build those types of businesses.”
After giving a presentation he’d previously shared at Harvard Business School, Stanford and MIT, Currier outlined the mental models unicorn founders adopt and offered candid advice for early-stage entrepreneurs.
“Don’t take market risk — find things that people want and just do a better job at it. That is the most common way to get to a unicorn company.” James Currier, founding partner, NFX
“This idea that it’s 99% perspiration and 1% idea is not correct, because the right idea has power in it,” he said. “The right idea at the right time will attract you the right talent, it will attract you the capital — OK, it’ll attract you the press that will then attract you more talent, more capital.”
Pop culture and tech journalism lionize founders who shoot for the moon, “so most people think of having ideas,” said Currier, noting that unicorns like Lyft, Meta and Alphabet simply “copied” existing companies. In doing so, they swapped market risk for execution risk, which is much easier to manage.
“Don’t take market risk — find things that people want and just do a better job at it. That is the most common way to get to a unicorn company.”
According to Currier, who was an angel investor in Lyft, DoorDash and Patreon, NFX reviews about 8,000 deals each year, but only invests in around 30. “Sixty-five percent of the ideas we see are in what we call sort of the ‘dead zone’ — this area will waste your life’s energies if you pursue the bad ideas.”
Just around 10% of pitches land in “fertile soil, whereas if you get a good team, and you go hard at it, and you get a little bit of capital, you should have some sort of an outcome.” He described the remaining 25% as “the in-between group where I gotta admit, I don’t know … like Airbnb, will people sleep on an air bed in your extra room while you eat your frosty flakes? Maybe?”
Keep it simple and “just keep pivoting”
Airbnb ultimately succeeded because its founders pivoted away from their initial idea and reduced their market risk, Currier said.
“Ninety-eight percent of all the Airbnb listings are on 365 days a year, just like VRBO,” he said. “VRBO started in 1996. So it wasn’t until they copied VRBO’s idea that it actually worked, because the idea that was working was already there.”
If you intend to build a billion-dollar company, “don’t be attached to the idea, just keep pivoting,” Currier said. Moving quickly is a key success factor, which means founders who iterate will always enjoy an advantage over those who set out to build best-in-class products. “No one’s gonna fund you for 15 years to build a Ferrari,” he said, “but they might fund you long enough to build a skateboard.”
Holding onto your first idea for dear life is a sure way to fail: “You have to constantly be reevaluating what the idea is,” he said — even after investors have given you their money.
Unicorns often emerge after new technology rapidly disrupts legacy systems, like digital photos in the early 2000s or the shift to mobile post-iPhone. “You need to look for rapid shifts in technology” like generative AI, Currier said. “You’ve got two-and-a-half years before the window shuts and most of the easy hanging fruit of AI is taken.”
Simplicity is another key mental model for startups that reach scale. “Mobile ads for Facebook, click-through ads for Google, SaaS revenues for Oracle — it’s very simple. All you people are too smart. You keep making your businesses too complicated.”
How to build a unicorn founding team
After a certain point, pivoting may not be sufficient, but deciding when to throw in the towel is “the hardest question to answer,” Currier said. “You have to figure out what you and your team are capable of doing. There are all these big pivots that you need to take, but you might not have the people for it. And then it’s a real tear-down.”
To build a team that’s capable of executing repeated pivots, Currier said it’s helpful to sort startup workers into three personality types: commandos, soldiers and police.
“The job of a commando is to take the hill, find resources, make it happen. Don’t worry about anything, get it done, move the metrics,” he explained. Soldiers are good at following orders, “but it’s kind of slow.” Definitely don’t hire police, he said.
“The only job of the police is to make sure nothing goes wrong, which means that they’re there to make sure nothing happens at all,” he said. “So if you have someone in your organization who is a police or a soldier, you need to let them go find better pastures for them. Only hire commandos. And if you’re not a commando, you’re not in the right job.”
In spite of the commando ethos he described, Currier said he’s not looking for founders who have an overdeveloped sense of confidence in the idea they’re pitching.
“I’m looking for a person who has outsized belief in their confidence in themselves. If you are too passionate about your idea, that is a big red flag for me,” he warned. “You have to be flexible to find the business that lets you get big, so that everyone can have the benefit long term, not the short-term thing.”