Principles followed by successful startup founders

A short list of “Principles”, inspired by Ray Dalio, to summarise some of my key learnings and hopefully help some founders navigate their way in this competitive, yet ferociously rewarding entrepreneurial world…

Ray Dalio’s “Principles” is part memoir, part how-to guide that has shaken the entrepreneurial world. More than just a New York Times best seller, “Principles” has become a handy mentor to countless managers around the world. Ray Dalio founded Bridgewater Associates in 1975 in New York, leading him to become one of the world’s most successful hedge fund managers. In his book, he describes both life and work principles by which he, and consequently Bridgewater Associates, live by.

A year into working in the investment team for Mangrove Capital Partners (early backer of 3 unicorns: Skype, Wix, and WalkMe), I began recognising the main principles of startup success, all while understanding the hardship founders feel when entering the startup world. After interacting with countless founders, analysing hundreds of decks and working with most of our portfolio companies, I’ve decided to compose my own list of “Principles”, inspired by Ray Dalio, to summarise some of my key learnings and hopefully help some founders navigate their way in this competitive, yet ferociously rewarding entrepreneurial world.

I’ll start with three of Dalio’s principles which “just make sense” for early stage startups.

“The individual’s incentives must be aligned with the group’s goals.”

This principle does not apply solely in a startup context, but also in many other aspects of business, sports and life. For a founder, living by this principle is crucial in order to recruit and retain the best talent. Laura Urquizu, CEO of Red Points, believes that being a team player is one of the most important leadership attributes one should have. I believe being on a team means sharing success. Therefore, this principle is best embodied in a founder’s attitude towards Employee Stock Ownership, which allows founders to actively engage their team in the company’s success. The importance of a sufficiently large Employee Stock Ownership Pool at Seed and Series A stages is often overlooked. As an investor, I understand that it might initially be “painful” to set aside a 15% ESOP pool. However, I have learned that the benefits can be enormous. With efficient Employee Stock Ownership, the management team’s incentives will be directly correlated to the company’s growth. At Mangrove, we strongly encourage that founders implement an efficient ESOP allocation and we have seen it to perfection. At Wix, we were able to create 200+ millionaires and the founders were able to retain most of the company’s management until today. Another example is Criteo, whose founder Jean-Baptiste Rudelle realised after the US expansion the importance of employee ownership (which at the time, in 2010, was not common practice in Europe). When his company went public in September 2013, at least 50 employees became millionaires. Farfetch’s founder, Jose Neves, also implemented this principle with his “Farfetch for all” program: Later this also turned out to be a great recruiting tool as people outside the company knew about this program. Let everyone join the journey of the company’s success.

“Triangulate your view with believable people who are willing to disagree.”

Successful founders allow people to ask them tough questions and to be challenged: If their conviction is strong enough, backed by arguments, traction and vision, then they will convince potential investors to invest. At Mangrove, this is staple practice. We constantly challenge founders’ assumptions and business models, as well as our own opinions and biases. A great founder expects her investors to question her and pick her brain. This will force her to analyse and potentially revaluate certain decisions. I realized that extraordinary founders even embrace these uncomfortable discussions and expect the resulting outcomes to be worth it. On one hand, the uncomfortable, but certainly valuable, experience of letting a team or board disagree with the founder, may help them to see the bigger picture and potentially prevent them from making a business damaging decision. On the other hand, following some tough questioning, she may be able to convince her board that she is making the right choice and she will have collective certainty in her decision. As Jeff Bonforte, CEO of Grindr and founder of Xobni, which he sold to Yahoo, puts it: “Once I realized the board was there to help and not just to judge, I became much better at asking for and getting that help.”

“Be an imperfectionist. Don’t spend too much time on little differences at the expense of the important things.”

This is a vital principle for early-stage startups to abide by while their traction is low and product iterations and company pivots occur almost daily. I have come to understand that the best founders focus on vision and growth while disregarding some of these points of minute detail. Perfecting the product and internal processes optimization should not come at the expense of growth. A great example of this is Skype: In the early 2000s, an entrepreneur envisioned “being able to call for free around the world using the internet”. Skype’s Mission Statement embodies Skype’s intention. While the company’s mission should remain the same, everything about the product and production can change… and change can lead to friction during this evolutionary period. Now imagine back then all of the points of friction that existed for Skype: Telcos fighting this, regulatory challenges, low internet connection speeds and a world where smartphones or tablets were exceptions. Here, the belief in vision mattered more than the points of friction that might have discouraged other founders to start a company in the internet communication space.

Over time, I overserved that the following 3 principles are also followed by outstanding founders.

“Be a great story teller.”

The founders of a company must be able to tell their own and their company’s story captivatingly and genuinely. This principle matters for multiple reasons:

• Founders often have a single chance to convince others that this product is ground-breaking and is better than the competition.
• The story tells their clients and investors about them as a person — how passionate they are about their product and how much they are fuelled by their ambition.
• Early stage startups often have little traction or successes to flaunt, therefore, investors will pay more attention to how well the founders are able to transmit their vision to them.
• Last but not least, a great storyteller is much more likely to raise future rounds. At the end of the day, venture capital is a people’s business and VCs invest in people more than in product. As Mark Tluszcz, CEO of Mangrove and chairman of Wix, puts it: “Storytelling is a skill that is designed to pull your audience into your reality so that it becomes theirs”.

Consider Julia Collins, who raised a total of $423 million with Zume Pizza (she has by now founded a new company called Planet FWD). When asked for tips on how to raise money, she said that you should pitch the bigger picture to investors and lead with the vision. She told investors: “I want to save the planet; I want to feed the world” as this grabbed their attention more than saying “I want an automated platform to feed others”. Clearly, her story telling skills were one of the key factors to raising so much money. Another example is Zohar Levkovitz, founder and CEO of L1ght, recognized a problem that many of us are aware of: Online toxicity. He and his team develop AI solutions to safeguard children, users and platforms. His reason for founding his company was simple and relatable: “I started L1ght because as a father, I suddenly became aware of the dangers my children were facing online and how these nefarious characters changed their tactics continuously to stay under the radar…” Now that’s a genuine and powerful story.

“Ambition and vision matter. Demonstrate that you have both.”

Ambition is a strong desire and determination to achieve success. Vision is the ability to construct the future with creativity and wisdom. This principle can also be perfectly summarised by Mangrove’s slogan: Dare to dream. Consider K Health, which aims to increase access to affordable healthcare around the world. Its founder, the incredible serial entrepreneur Allon Bloch, is able to transmit his vision (increasing access to affordable healthcare) and his ambition (reaching the whole world) in a single sentence. Of course, ambition should not be confused with delusion. Goals should be high reaching, but also realistically achievable. Great companies, develop a scalable solution that tackles a problem with a large total addressable market size. In fact, while we often tend to discard the details of projected revenues in a pitch as they depend on too many variables at an early stage, they can tell us a lot about a founder’s ambition. Exceptional founders convince their audience that they will be able to build a billion dollar company in the next five to seven years. A perfect example of this is Melanie Perkins who is the co-founder and CEO of Canva. Founded in 2013, her company is worth a whopping $3.2 billion today! She clearly followed this principle as her goal was to “take the entire design ecosystem, integrate it into one page, and then make it accessible to the whole world.” Here her vision of integrating the entire design ecosystem into one page and her global ambition have both been turned into reality.

“In early stage startups, focus more on execution than product excellence.”

I have seen examples of products where the UX was stellar, but the product failed to take off. Consider the Segway, which was once deemed to revolutionize urban transport: Today it’s merely used by mall cops or tourist tours. Payal Kadakia, founder and executive chairman of ClassPass, considers this principal to be essential to a startup’s survival. In an interview with Forbes she said that “one key to survival was focusing on expanding and establishing ClassPass as a market leader instead of perfecting the product”. Execution skills are one of the most important attributes investors look for, which is why previous successful entrepreneurs are much more likely to secure funding from VCs. Startups with solid traction (revenues, number of clients, partnerships etc.), display this in the first slides of their deck. These numbers can be early signs of great execution skills. Many people can identify a global problem: Very few can actually transform a proposed solution into reality. Execution skills also address the question of product-market fit: Bringing a product into the users’ hands shows fearlessness. It reflects a founders’ prioritisation of successful execution over product excellence. Having users interact with a product often means that founders executed their distribution and marketing strategies well. From this point on, they can simply learn more from the users’ experiences. Of course, in the mid to long-run successful start-ups also focus on product excellence, since a superior UX will result in a high retention and low churn among users.

That’s it, these are the principles that I wanted to share with you and which I have observed to be followed by successful founders. It’s true, many other principles could have been included in this post. However, I felt like these were some of the most important ones. The idea behind Ray Dalio’s book, as well as my own suggested principles, is that they can act as a guide or a starting point. I’d love to hear about your own principles, so feel free to share them with me. Do contact me as well if you are building something exciting; anything software or internet related.

Yann

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Sources I used:

• Ray Dalio’s “Principles”
• Laura Urquizu’s quote via Anne Ravanona’s medium post
• Index’s handbook “Rewarding Talent”
• “Farfetch For All” via PR Newswire
• Jeff Bonforte’s quote via First Round Review
• Mark Tluszcz’s quote via his post on “The art of storytelling”
• Julia Collins’ quote via Inc
• Zohar Levkovitz’s quote via Forbes
• Melanie Perkins’ quote via CNBC
• Payal Kadakia’s quote via Forbes