THE ROLE OF LUCK

March 2023 | Simon Hopkins

Photo by Edge2Edge Media on Unsplash

I was recently speaking to one of our newer members at NYA, discussing what I had learned over the past 14 years of as an angel investor. I was surprised that I found myself admitting that luck had played a huge role in both the successes and failures of my investments - a company that sold at the top of the market before a strong competitor (and ultimate winner) appeared, or the property company unable to raise funds during the current funding squeeze. In many cases, what I had described as “luck”, or “bad luck” had played a significant role in the outcome of the investment.

Maybe this is not surprising, since unlike other asset classes, there is no historical data, analyst reports, or expected results, for early-stage companies, only the diligence that we as angel investors perform. Small changes in the economic landscape, competitor activity, or new technology can have a dramatic impact on the viability of a startup. There is a theory that had Facebook started either a year earlier or later, it would never have been successful. Clearly such an idea can't be proven, but without the “luck” of the timing, half of a trillion dollars of shareholder value may never have existed.

My characterization of “luck”, may have actually been something different. After analyzing decades of portfolio investment and performance data to assess the returns of Venture Capital companies, researchers from Harvard, Yale and Imperial College concluded in the their report, The Persistent Effect of Initial Success: Evidence from Venture Capital:

“Our results suggest that the early success of VC firms depends almost entirely on having been ‘in the right place at the right time’” Nanda, Samila, and Sorenson

Effectively equating “in the right place at the right time” to “luck”.

So, is it purely by chance that companies end up in “the right place”?

If that is the case then are angel investors simply better dressed Las Vegas gamblers? I certainly hope not. I think that this may be best illustrated by a story familiar to many golfers: Gary Player, the famous South African golfer, was playing in an event and managed to chip in from a bunker. Amid the applause, he faced one taunt from the gallery that his shot had been “lucky”. His legendary response was: “Do you know, the more I practice, the luckier I seem to get”

Similarly for startups and investors alike, if a company concentrates on getting the basics right, it can put itself in the best possible position to be “lucky”. Conversely, by ignoring the fundamental principles of running a company, a positive outcome will be completely reliant upon luck, in which the odds of success decline.

Photo by Keenan Constance on Unsplash

So, what does this mean in practice? There are five basic principles that management teams of early-stage companies should follow to improve their chances of success. Even if the company executes effectively in these areas, success is by no means guaranteed, however, the organization will be able to capitalize better on opportunities that arise and will be more resistant to adverse changes in the market.

1.  Stay Focused

Every company should have a vision, but as Thomas Edison once said, “Vision without Execution is hallucination”, and focus is needed in order to effectively execute.  I have written before on what I believe a lack of focus can do to a company (“Can” Can Kill You), but in this context, focus is about making sure that the company is “in the right place at the right time”, as referenced above. The companies that I have seen succeed, knew when something special was happening and were sufficiently focused to double-down on what was working. I would contend that with focus, the company will have a far better chance of recognizing when they are in “the right place”, and therefore increase their chances of being “lucky”.

By trying to do too much, taking too long to deliver a product or attacking disparate markets, leaves a company open to unexpected changes, inviting the excuse that “we were unlucky”. I have seen a company lose the opportunity to be acquired by one of the largest names in tech, because (in my opinion) they were guilty of this and lacked focus. They were not “unlucky”.

2.  Listen To Everyone

I believe that one of the key responsibilities of a CEO is to listen. Without listening to customers, employees or the market, you cannot fully understand how your customers are using your product, how your employees are feeling, what your competitors are doing or what technology could disrupt your market.

Recently I have become a mentor for the National Science Foundation’s I-CORP program, which promotes the commercialization of technology from universities. I have been very impressed by its almost obsessional focus on customer interviews as a way to validate products (based upon the work of Steve Blank). The theory is: the more you know, as opposed to what you think you know, the less of a role luck can play in the outcome.

I simply do not believe that you can build a product without significant customer input – hence the need to progress to an MVP stage as quickly and cheaply as possible. There was only one Steve Jobs, but the number of aspiring entrepreneurs I meet who believe that they are his reincarnation (probably incorrectly) is truly striking. There is a thin line between confidence and arrogance, and I believe that it is far more arrogant than confident to tell an investor "people don’t know what they want yet, because they haven't seen my product." Being deaf to customers’ needs in this way does not make you a visionary, and it certainly does not make you “unlucky” when you fail.

3.   Be Reactive

Everyone is familiar with the old adage; "When you are in a hole – stop digging". However, for startups, I think that the mantra should be “When you are in the right hole – dig, dig, dig, and you will find the treasure”. Of course, the problem is, knowing if the current hole is the "right" hole… This requires the company to be agile, flexible and responsive to customer needs, changing course as needed.

Einstein is credited with saying “insanity is doing the same thing over and over and expecting different results”, by this principle it is logical to expect early-stage companies to experiment until they find a successful product/market fit. By way of example, a successful VC friend of mine told me: “of my 10 investments, 8 have already pivoted in some way, and I believe that the 9th is close to doing so.” Being focused on what you do, shouldn’t mean that you can’t change anything – on the contrary, it should make you more sensitive to signals that will allow you to refine your approach.

When a founder claims that sales were disappointing because “we were unlucky”, in my experience, this is generally that they either didn’t listen to what the market was telling them, or didn’t act on it.

4.   Play as a team

One of the things that I have learned, after running several startups, and investing in over 40 others, is that for anything worth doing, it is going to take a team. This is a message that solo founders, particularly those with an engineering background, initially find difficult to grasp.

Any successful venture must become more than a collection of people, and consequently one of the primary responsibilities of a CEO is to assemble the correct team (as I have written about here “The #1 Reason Why Startups Fail”). I witnessed first-hand and have seen many early-stage companies flounder after a poor senior hire (that in one case precipitated a near-death experience).

Unfortunately, too often the excuse is “We were unlucky with our hires.” What I believe the CEO should be saying is that “We got lazy with our hiring.” There should be no excuse for a thorough hiring process to make sure that the company adds the right people, as the salary cost each month on the P&L of a startup is simply too big a number to ignore. (As an aside, my rule of thumb here is to hire for character and potential as opposed to experience. Skills can be taught more easily than attitude.)

5.   Keep Good Metrics

The final principle is one that many first-time founders will roll their eyes at, but I believe that it is the single most important. As a CEO, let’s assume that you agree with my previous four points regarding company operations. I would argue that unless you have accurate/timely metrics, it is impossible to know when you are in that “sweet-spot”, or if you need to pivot, or how different parts of your team are performing. You are flying blind.

My favorite quote on this has been attributed to many people (including Vince Lombardi and the tennis player and CEO Jan Leschly):

“If you’re not keeping score, you are only practicing”.

I accept that keeping good accounts, an accurate sales funnel and meaningful staff appraisal data takes time and focus. Time, which I have heard argued, is better spent “developing our product” or “with our customers”. However, if you don’t measure something, how can you improve it?

I had previously invested in a CPG company that had been “unlucky” to be cut from a major retailer because the new buyer “didn’t like us”. It turned out there were two issues. The first one was quality. The product received poor reviews, but this “bad news” was never formally collected and ultimately ignored (and certainly hidden from investors). The second was that they were making horrible margins on each item – but did not have the clarity in their accounting to compute an accurate product cost and determine where marketing spend should be targeted. So, they were not “unlucky” that people were not buying their product, or were not making a decent margin, or were cut from the retailer. They unfortunately just didn’t know.

To quote Jalen Hurts, the quarterback of the Philadelphia Eagles after his recent Superbowl loss, “You either win, or you learn”. Applied to angel investing, every time a company fails, its investors must take a financial loss, but is also an opportunity to analyze what went wrong and learn from it. Too often failures are blamed on “bad luck”, when upon analysis, one or more of the fundamental operating principles I describe above are being ignored.

I believe that investors do have a role to play in this. As board member, observer or informal advisor, an experienced investor (yes, even one who has seen more “learning” than “winning”) can help the CEO focus on the operations of running a company. While this may not guarantee success – it will certainly improve the odds.