The Gray Zone for Startup Founders

The below was originally posted as a Tweetstorm, and has been modified for this format and expanded a bit. You can find me on Twitter here: @MattLevinson

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At a fintech event recently, another VC bemoaned to me that founders are “lying to me all the time.” While outright deception is never OK, there is something inherent to building a startup where “truth” can be a bit grey, rather than black and white, as the founder attempts to turn an idea into a real company.

This has led me to try and think a bit deeper about this dynamic of selling something before it’s real. What’s the best way for founders to navigate this dynamic — and how do the best entrepreneurs do it the right way?

What’s most surprising about the need to navigate the gray zone is that it persists over time for many top performing companies — well beyond the Seed or Series A.

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At the beginning, building a startup is a bit like building a cult. You start alone, with a vision of what the future should be. With no capital or customers, there is very little evidence the idea will work. In the face of this, the founder must evangelize to early employees, investors, and customers to get the ball rolling.

The choice of these early “followers” to join the evangelist is frought with risk — so charisma and selling matter A LOT, especially early on.

This creates a spectrum of “truthiness” that charismatic founders sit on. Along the spectrum you have Theranos on one end — a seemingly compelling founder, championing a product that never actually worked. 100% fraud. But the other end of the spectrum isn’t pretty either. A founder that’s too self conscious of risk is a turn-off to investors and employees. These founders typically languish.

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But it’s not purely about salesmanship of course. The founder’s thesis needs to be right at the end of the day — and they need to execute on it. Accumulating proof begets revenue, capital, and talent.

But the gray zone — selling a thesis before it’s proven “true” — isn’t a temporary phenomenon — it persists even as the company scales. The gray zone doesn’t end at Series A or B for the best companies. As great founders de-risk the initial vision — they’ll open the aperture, going after incrementally bigger opportunities.

The “bigger vision” and adjacent opportunities continue to be mythical at first — before being de-risked. Initial success gives the founder credibility, and ambitious founders may reinvest that credibility in more vision.

I’m reminded of this by one of our top performers @MoneyLion, which evolved from a lender to a full-on digital financial institution. @Amazon evolved from books to the “everything store.”

Another great company in our portfolio, @Ocrolus, is evolving from analyzing bank statements for lenders (“niche”) — to virtually any financial document, across finance (“infrastructure”).

I suspect that many top decile companies share this trait in common. Identify, evangelize, execute — and then repeat, *under the same company.*

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Some people dismiss early stage investing as luck — citing that most successful companies pivot. But this theory suggests that’s an oversimplification. In many cases, it’s less of a pivot than an evolution.

Great founders will often build on, or even cannibalize, a prior business in favor of the next, which is bigger and better. This might look like a pivot on the surface — but it’s very different. Often the difference between failure and success.