The Importance of Multi-Stage Thinking for AI-native Startups
Multi-stage thinking is important for any startup, but even more so for an AI-native business
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In 2006, Elon wrote a blog post called "The Secret Tesla Master Plan".
While the article is detailed and reasons through a few arguments against EVs at the time, he concludes with the following:
So, in short, the master plan is:
Build sports car
Use that money to build an affordable car
Use that money to build an even more affordable car
While doing above, also provide zero emission electric power generation options
In 2006, the challenge for Tesla was the need for capital to execute on the broader goal: Make EVs mass-market and affordable.
To do so would cost billions, which Elon didn't have at the time. Fast forward 18 years, Elon and Tesla have largely executed on this master plan as planned, albeit supported through grants and subsidies.
It's pretty basic business strategy and not really that revolutionary.
At Rampersand, we're in the business of backing abnormal founders who are visionaries in their own right. We like to back founders who have a clear goal in their mind about what they want to build and the impact this will have on the world.
More recently, I've come across numerous founders who are building AI-native startups and experiencing incredible growth. These are easily some of the fastest growing startups that I've come across as a VC. While that's awesome, unfortunately, many of these businesses are hard to invest in and are better as bootstrapped companies.
The main reason for this is largely a lack of multi-step thinking and business strategy. Many of these founders have identified step 1 and scaled to about $1M in ARR in record time. However, they find it incredibly hard to grow from there as they are unable to decide or figure out what the next valuable step would be for their company.
As a result, these founders end up burning through a lot of money without much progress to show for it. Without a well-defined strategy, it becomes challenging to allocate resources effectively and make informed decisions about product development, marketing, and sales. Founders need to show that they can think beyond the initial wedge and consider how they can sustainably grow their business over the long term. Founders should be able to answer the following questions:
How does what we're building now enable us to achieve something bigger in 6-12 months time?
For vertical AI startups, owning the workflow is important. What can AI replace with high fidelity and what other complementary features are required to build a robust product?
What are the logical steps that can be proven out or derisked over time to show that you're on the right track?
Why is this the right wedge product/market? What unfair advantage does this give you?
The benefit of taking a systematic approach is twofold:
You'll be able to build a more durable business over time. Quick successes are great for a dopamine hit, but without any clue for what's next, it's not really worth the time or effort to keep a business running.
Having a clear vision and steps to reaching it allows you to accurately track and measure the amount of resources required to get to the next stage. It's natural to have the mindset of needing some large amount of cash to achieve something, but capital on its own very rarely leads to success. Instead, it should enable you to execute your strategic vision properly.
To sum up, I'll leave you with another classic business strategy tale - Walt Disney's famous napkin.
In hindsight, it's pretty incredible to look at, but in 1957, Walt Disney sketched out his vision for what the Disney empire would look like.
In his article, The Disney Recipe, Todd Zenger writes that the napkin contains three distinct components:
First, there is foresight about an industry’s evolution, including relevant technological change or evolving consumer preferences.
Second, there is insight about the distinctive and valuable assets and resources of the firm.
Finally, there is cross-sight the ability to identify adjacent assets uniquely valuable to your firm or assets with value that others are simply unable to perceive.
So with that, I challenge you to come up with your own version of the Disney napkin for your startup.
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Abhi