How to Build a Startup & Understanding Venture Capital

Many first-time founders seek advice when thinking about what ideas would be great for a startup company and receive the wrong advice that you need to focus on a billion-dollar idea.

There are very few ideas that are obviously a billion-dollar idea from the start. So what should you do?

I advise founders to focus on what I call “basecamp,” which is the first level of success or validation at a startup. Raise only the money you need to arrive at basecamp and build only the team required to make it there. The advantage of basecamp is that once acclimatized you can look for the right route up the mountain and from that vantage point you know a lot better what your options are.

If you look up and don’t see any obvious trails then perhaps it’s time to find an early soft-landing for your business and focus on the next idea. Most people will start the ascent with the goal of getting to the next local peak and from there traversing the mountain. The higher you climb the more your realize how high your goal can be or whether you climbed some false peaks.

Think about it: Do you think Uber knew when it started how big the potential of the business was? I can tell you from insider knowledge there’s no way. They started as an elite black-car service and only once they saw Lyft doing well in the peer driving market did they launch UberX. And Lyft? Nah. Started as Zimride, a way for people in Palo Alto to share a ride into San Francisco and vice versa.

Facebook was just about college campuses. Twitter was a podcasting company. And so forth. There are exceptions. And his name is Elon Musk. But unless you are prepared to compete with NASA for space exploration set your goals on planet basecamp.

In picking your market you should focus on “deflationary economics” or lowering the price, functionality and margin of your business but targeting ever-increasing market sizes afforded by Internet scale. If you have a great idea and you don’t focus on deflationary economics — somebody else will and you’re forked.

And if you do happen to be lucky and find the right mountain to climb, if you find that you’ve started ascending the peak before others have found the right trail — then venture capital is for you.

But you need to understand venture economics. Venture capitalists raise money with a goal of returning 4x the amount they raise to their Limited Partners (LPs). And unless they have enormous outcomes it’s nearly impossible to hit this goal.

I wrote this presentation below that gives you a little more visual sense of what I mean. You can scroll through it or download it directly from SlideShare. I hope you enjoy it. And if you want more daily startup advice follow me on Snapchat (msuster).