Walking On a Tightrope
The tricky balance between being rational or irrational that all startup founders face
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This article is shorter than normal. I’m currently working on a larger piece of work so experimenting with different styles of writing - hope you enjoy it!
Nothing important has ever been built without irrational exuberance.
In the world of startups, founders are often faced with the daunting task of navigating the delicate balance between irrationality and rationality. The very essence of entrepreneurship is rooted in the irrational belief that a single person can change the world, disrupt industries, and create something extraordinary. However, the success of a startup heavily relies on the founder's ability to make rational, data-driven decisions and adapt to any curveballs thrown at them.
After chatting to hundreds of founders over the last few years, this is probably the one thing that creates the most confusion. Founders are actively told by VCs to push the boundaries in everything they do and think outside the box. Yet, when it comes to fundraising, VCs try to put founders in a box and categorise them with labels that likely discount whatever it is they are trying to do.
It’s an interesting paradox.
Irrationality is the spark that ignites innovation. It allows founders to think outside the box, question conventional wisdom, and come up with creative solutions to complex problems. However, rationality is the fuel that sustains it. Founders must be able to balance their irrational vision with rational decision-making and execution. Founders must be able to adapt to changing circumstances, pivot when necessary, and make tough decisions based on facts and data rather than emotions.
For every investor who craves an irrational founder, five others want to back more rational founders. Yet, this is a piece of feedback that founders will never receive from a VC.
I’ve touched upon the importance of this balancing act before in my past articles here and here. When fundraising for an early-stage startup, meticulous planning, forecasting, and testing serve as vital indicators of a founder’s capability to manage the rigorous demands of a startup. Yet, for many visionary dreamers and thinkers, these tasks can feel almost intolerably tedious.
Finding the right balance is primarily predicated on two factors:
Maturity: In the early stages of a startup, irrationality may take the lead as founders focus on developing their vision, building their team, and creating the initial product. However, as the startup gains traction and attracts customers, rationality becomes increasingly important. Founders must be able to demonstrate a clear path to profitability, backed by data and sound business fundamentals.
Market: In some industries, arbitrage opportunities can only be extracted if a founder is willing to be irrational (e.g., Travis and Uber). In other industries, a more rational approach is required to navigate the market and build trust with customers.
The ability to recognise when to be rational or when to embrace irrationality is an underrated talent that the best founders possess. Investors want to see a founder’s ability to embrace their irrational side but also actively fight against it. Doing so induces curiosity and excitement, whilst also building trust and credibility. It is a tough ask and is easier done when there are two (or more) founders.
Regardless of whether you are a solo founder or have multiple co-founders, the best way to showcase this thinking is by going through the following:
Experiments and early hypotheses: By methodically compiling a register of your early experiments and how you’ve thought about MVPs, you’re documenting your thinking and earned insights over time. As a bonus, it’s also a clear demonstration of your ability to pivot and persist in the face of adversity.
Intimate understanding of potential/actual unit economics: Especially in the current market where (some) VCs are scrutinising (some) startup’s unit economics, it’s important to be all over the numbers related to your business. The easiest way to do this is to turn it into a game and get quizzed on them daily.
Post mortems on important decisions: Throughout the life of your startup, you’re going to be making several important decisions. It’s incredibly valuable to make time to conduct and record post-mortems on these decisions to ensure you have a tight feedback loop on your ability to make tough calls.
Indeed, there are other ways to prove your rationality, however, I am not a fan of doing random busy work just for a VC to not even open it in your data room. The activities above are designed to be valuable outside of a fundraising context as well. Being well-versed in the numbers that drive your business and having tight feedback loops are crucial to running a well-oiled ship!
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Abhi