What startups can learn from Brexit

Jun29, 2016

As a startup investor, I am pro-trade because my companies benefit from selling software anywhere in the world. I am pro-immigration because my companies need the best talent no matter where it may be found. It’s not hard to figure out where I would land on Brexit were I a Brit. But I’m not, so who cares?

In the past few days I’ve been asked by several people what Brexit means for Hyde Park Venture Partners’ portfolio. With all of our investments either in the US or Canada, we really don’t see much upside or downside from Brexit itself, but I’ve come to see Brexit as allegory for certain pitfalls of decision making we see in startups. We can learn from it:

“Anything but this” is not a strategy

What surprised me the most about Brexit was not the win itself but the lack of definition of what a Brexit win meant as citizens were voting on it. As we’ve all learned, it will take the EU and UK two years to negotiate the exit and possibly another two to effect it. The UK voted on and elected to do something largely undefined. I call this the “anything but this” approach to decision making. “Anything but this” is quite common in personal relationships. Most of our adolescent and early adult lives are littered with romances ending with an “anything but this” decision, but in business and startups it is dangerous.

“Anything but this” happens in startups when things aren’t going well – a company is missing plan and running short on runway. Investors blame the management team, management team blames investors, and each board member blames the others. This often leads to a cursory decision to try something, someone (eg, CEO), or anything new. In a way this is rational: If what you’re doing isn’t working, and you have enough cash runway to try something different, then by all means roll the dice. But ask yourself, are you running from something or to something? The latter is better. It’s good to have a destination or at least a route.

Small changes have non-linear impacts

The Bloomberg chart below is breathtaking. With polls showing “remain” well above “leave” for many months, only at the very end did Brexit emerge as likely. Decades of Britain in the EU and only in the proverbial last hour did a difference of ~600K votes change the course of history. Why? One strong explanation is the Brussels attacks. After the attacks on March 22, the undecided vote declined steadily and shifted to “leave”. That one event may have changed the course of Europe for decades to come. For history buffs, you will appreciate that this seems to be a habit in Europe.

Brexit Polling Trends – Bloomberg

Brexit.png

Source: Bloomberg, Brexit Poll Tracker

In startups, we see both the good and bad sides of non-linearities. The right hire at the right time – for example an amazing VP of Sales or VP of Customer Success – can triple revenue and halve churn in a year. Collectively that might triple the valuation of a startup in turn. This is what makes startups so exciting; any team member can have a non-linear impact by creating a new feature or winning a big customer in a few weeks or months. On the other hand, the loss of a key customer or key ecosystem partner often scuttles startups, as we saw in the wake of LinkedIn shutting down its API. This is to say that, like politics, startups are unusually susceptible and reactive to idiosyncratic risks – they are fragile – but also uniquely benefiting of opportunities.

Beware the tragedy of the commons

The smaller the ownership piece something is carved into – a pasture into grazing rights, a country into citizens’ votes or a startup into shares – the greater the risk that a tragedy of the commons occurs. Very loosely defined (more precise see here), a tragedy of the commons is when individual “piece” owners do what is in their immediate personal interest but opposite to system health, resulting in system decline in the long run. In Brexit, this is exemplified by a London construction worker voting for Brexit to reduce labor competition he sees from immigrants. His vote is arguably system sub-optimal because Brexit likely reduces GDP growth and so construction and occupancy. In the long run this probably hurts the construction worker, even if immigrant labor is stemmed.

In a startup, shareholder (eg, voter) alignment is critical to company growth too. In the most direct sense, you need different thresholds of votes/signatures to raise capital, elect a board, sell a company or take other corporate action. While thresholds can usually be met with a few votes of larger shareholders, new investors and acquirers like to see any long-tail shareholder base consenting as well to avoid shareholder problems later.

Separate from the technicalities of voting, it is not unusual for a few small shareholders to create problems for a company due to personal differences with management, investors or strategy. The ensuing calls, politicking and “getting people on board” may satisfy the concerns or needs of the small shareholder(s) but also distract management and the BoD from increasing the value of the whole company… a sort of tragedy of the commons. Of course large shareholders create problems too, but you probably really needed them at some point. In most cases, startups can forgo or aggregate the tiny checks.

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