What it actually takes for a startup to succeed

What it actually takes for a startup to succeed

As a VC, I’ve been obsessed with this question for a while. And although there is a plethora of brash advice out there (”exceptional founders find a way through any barrier”, “you need to ride a platform shift”), most of it feels inconclusive and unsatisfactory.

To answer the question, I spent time analyzing the 1984.vc portfolio, which now comprises ~ 70 startups invested in over the last 5+ years. From this vantage point, I gleaned a few valuable insights that hopefully demystifies some startup mythology. This is definitely a work-in-progress and I’ll update this article with new findings over time.

At the outset, focus on solving a very specific/narrow problem

  • Contrary to lore about big TAMs, we find that anchoring on market size can be misleading and sometimes irrelevant. This is because a large TAM (e.g. home services is a $600B market) doesn’t necessarily account for the difficulties in capturing the market. And a small TAM doesn’t account for adjacent market opportunities that can often arise once a company has built an interesting wedge product
  • What’s more important is to find a category with a screaming market need where your product delights even a small number of customers (relative to existing solutions)
  • In spite of the above comment, it’s still important to consider the buyer dynamics of your category (i.e. whether Crossing the Chasm from the early adopters to the majority is feasible, or will require too much of a behavioral change)

Once the initial product gets some traction, it gives you the opportunity to pursue adjacent product lines, which can significantly expand your revenue potential

  • We have found that companies with an interesting wedge product and a successful Act One often get the opportunity to build further products, which expands their revenue potential. A bunch of these product lines are logical extensions (e.g. embedded fintech plays for SaaS and marketplace businesses) and others are difficult to predict at the outset (i.e. only present themselves as you go deeper into a space)

With sustained and strong execution, high quality talent becomes aware of the company

  • Vinod Khosla has a saying that the team you build is the company you build. We’ve found this to be one of the few true moats in startups, whereby talent vortexes create momentum. With continued execution, prospective employees (and investors) begin to take note

Explosive growth can happen out of the gate with a great distribution strategy and also where the company is surfing a newly emergent trend

  • For example, our portfolio company Postscript is the top-ranked app on the Shopify App store for SMS marketing, which provides consistent and free top-of-funnel
  • Another portfolio company, Posthog, is an open source product analytics tool that is widely loved by developers. Their traction on Github provides mindshare with developers (who are their users) and also provides a consistent wave of new customers
  • I am an angel investor in Hey Jane, a telemedicine abortion company. As awful as it was, the fall of Roe v Wade in 2022 brought substantial attention to telemedicine abortion as a category

But explosive growth out of the gates isn’t essential to build a successful company

  • One myth about startup success is that all great companies grew explosively from the start. Within our portfolio, we have a significant number of companies who are growing consistently but aren’t necessarily surfing an explicit tailwind. In fact, many of them are simply digitizing/improving processes that were in need of a more modern solution

Playing in a somewhat uncrowded space can give you enough air cover to get going without having to think about competition too early on

  • This can also help with fundraising because your business appears more unique in the eyes of investors. But the air cover likely won’t last for more than a year or two if you are doing something interesting

You don't need to be the first placed company in your sector in order to succeed

  • But it’s better to be top 2-3 to be investable