Applying billionaire investor Chris Sacca’s investment advice to starting companies

Chris Sacca is known as the world’s most successful startup angel investor. With early investments in companies like Twitter, Uber, Instagram & Kickstarter, his fund is on its way to become the most successful VC fund of all time, returning somewhere around 250X.

He’s also a bit of a podcast guest rockstar. His episode on This Week In Startups is regarded as the best episode out of 500+ episodes on the show.

Then there’s this.

A goose bump inducing moment from the Startup Podcast by Gimlet. The short clip below starts with Gimlet’s founder Alex, nervously attempting to pitch Chris on his podcast network company. Take a listen.

 

Here is the full episode, it’s my favorite podcast episode of all time.

Sometimes taking lessons from a billionaire investor and entrepreneur can be daunting. The scale at which he thinks and operates isn’t accessible to most of us. But I was inspired by his recent interview on The Tim Ferriss Show, particularly his investment philosophy as how so much of it can apply to every day self-funded founders like you and me.

Chris outlined 6 philosophies he’d picked up over the years that he applies when deciding whether or not to invest in a company. Here is my take on them and how they can help everyday entrepreneurs build better businesses.

Your default response should be “no”

Sacca says when evaluating startup investments, his default response is “no”. Early on he’d jump on every opportunity. But a few years on and a few billion dollars wiser, he now looks for something out of the ordinary for him to want to invest in a company.

I guess he has the luxury of a little thing in the investment world called ‘Deal Flow’. A lot of opportunities end up on his desk. The thing is though, entrepreneurs have the luxury of ‘Idea flow’. Once you start to understand that a business is just a different way of solving a problem, you begin seeing problems everywhere, and therefore opportunities and ideas.

When I get a business idea I usually put it on Facebook in the hope that someone else will implement it. Or I release it as a blog post (see Please steal these 4 startup ideas). I do follow up on some opportunities and I’m not perfect at ignoring ideas, but over the years I’ve gotten better at saying no to most opportunities.

I put together the 7 Day Startup, business idea checklist to help people review ideas and pick the best ones. It’s free (no email opt in) and you don’t have to buy the book).

Can you personally impact the outcome?

When Chris evaluates companies he might find himself turning down great opportunities. That’s because some great opportunities aren’t necessarily great opportunities for him. When he backs a startup he likes to go in deep and influence the outcome. Like when he bought so much Twitter stock he had no way out if Twitter failed, so he started showing up at Twitter HQ to work!

Entrepreneurs should take the same approach. In The 7 Day Startup I talk about the idea of “product founder fit”. How well do you actually suit your product / service? I’ve ran businesses before where the “fit” was way off and they ultimately failed. My web agency was a bit like that. It really needed someone to wine and dine clients and sell them shit they didn’t need. That wasn’t something I was particularly good at and while I did other things right, I couldn’t make the impact I needed to make.

No Hypotheticals, what is real?

Chris rarely invests in “ideas” and doesn’t value pitch decks as much as a working, real product. He values actual execution and proven ability to produce something over a big idea.

This is something that entrepreneurs need to become good at. Everything from evaluating suppliers, to employing people, to learning how customers interact with your product. You have to value actual action over talk and hypotheticals, every single time. I learned this when I attempted to validate my startup idea, based on what people were saying vs what they were doing and the results were disastrous (See Is startup validation bullshit).

Entrepreneurs also need to realize that customers do the same thing. When I visit a website, the first thing I look for is proof. Anything that will prove to me that the claims it makes are real.

Some proof elements can be direct (testimonials that prove you have customers, logos that prove that someone else important has recognized your company). Others can be indirect like poor design will tell me you can’t execute well (or can’t afford a good designer), the presence of ads will tell me you don’t have a good core service etc.

Start with great, make it better

This is a killer insight. Sacca wants to find companies that are improving on an already good market, not inventing a totally new one. Twitter came out after Facebook and provided the kind of real time, public publishing that Facebook couldn’t. Uber entered an already healthy transportation market with a better product. Instagram produced a better mobile photo sharing app, when mobile photography was exploding.

Entrepreneurs would do well to take the same advice. In The 7 Day Startup, I talk about solving problems where people are already paying for solutions. I failed miserably trying to ‘invent’ a piece of software in a space (analytics) where people were mainly using free apps. It wasn’t the world’s worst idea, but convincing people to pay for something that they don’t pay for already is much harder than you’d think.

With WP Curve, people were already paying web developers to fix their websites. I just had to give them a reason to pay me instead.

Give yourself a chance to get rich

Sacca tells a story of making a “successful” investment and after everyone was paid off, he could barely afford to cover the celebratory dinner. This is something that I’m passionate about with entrepreneurs as well. Entrepreneurship is not worth the risk if you are only going to replace the income you would earn working for someone else. I believe entrepreneurs should be aiming to earn significantly more than they would working a job. It doesn’t mean you will straight away, but that needs to be the goal.

The risks you take and the personal struggle you will go through are just not worth it otherwise.

That’s why I think founders should take advice from the startup world when starting a business, not the small business world. When I start a (self funded) business, I want it to have the potential to be a $10m business. Not to say it will be, but I need that to be a possibility.

Related: 10 things bootstrapped founders can learn from Startups

Be proud of every project

Sacca says he wants to be proud of every deal and has turned down deals that didn’t meet that criteria. Not illegal or even especially dodgy ones, just businesses that didn’t feel “right”.

This is a good test for business ideas as well. I’ve seen a lot of entrepreneurs start businesses that don’t really provide all that much value back to society and they eventually burned out. I did the same thing when I started a business selling cheap iPhone cases on deal sites. In the end I just lost motivation because there was really no point to it all.

Start a business that adds value to people or better still, empowers them to add value to others. You don’t have to be changing the world but it has to feel right.

Motivation is a killer for entrepreneurs. It’s amazing the amount of motivation and inspiration I see in founders who are truly following their passion and are proud of their work.

Here is the full interview on the Tim Ferris show.

p.s. If you are interested in building self funded startups, you should join my free 7 Day Startup Facebook group.

  • Good stuff Dan, I love the TWIST episode with Sacca. I agree with starting with a big market, and shooting for a 10M company. I’ve made the mistake of going after too small of a market, and while being a big fish in a small pond can be lucrative, it gives you nowhere to go later.

    • Hey Scott thanks mate, so good. Yeah I think I would get bored if I ran out of room for growth.

  • tobyjenkins

    I loved this episode on Ferriss’ podcast too Dan. This is an awesome summary of his points (I had them in evernote!). Thanks for writing them up mate.

    • G’day Toby his episodes are the best. I’m glad you liked it mate and thanks for sharing.