Bret Waters, Author at Miller Center for Social Entrepreneurship

Bret Waters

Bret Waters has been in Silicon Valley his entire life as an entrepreneur, CEO, investor, and academic. Today he focuses on helping other entrepreneurs and innovators succeed and thrive — teaching entrepreneurship at Stanford, running the 4thly Startup Accelerator, and coaching startup CEOs at Miller Center for Social Entrepreneurship. Bret has been mentoring at Miller Center since 2008.

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Bret Waters - February 5, 2024

Startup Land 2024: The new year looks a bit different for entrepreneurs, innovators, and investors everywhere.

Forward from Miller Center…
In January, we had the pleasure of hosting long-time Miller Center mentor Bret Waters for an event in our office. He spoke to a packed house of Santa Clara University students, faculty, and staff about his new book, The Launch Path, and shared invaluable insights about launching a successful venture. After a long Silicon Valley career as an entrepreneur and executive, Bret settled into a new passion: supporting new entrepreneurs. We’re excited to share his New Year’s blog here.

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For startup founders and their investors, 2024 is a whole new enchilada. Last year marked the end of a decade-long run of crazy market conditions, the end of ZIRP, and we’re now in the new normal. Here’s my list of trends to be aware of as we enter this new era.

Eggs are shipped by the dozen, and so is this list. Note that this is not a dozen “technology trends” (you can find plenty of those elsewhere). This list is about the new operating environment for entrepreneurs and how it may affect success strategies for startup founders, innovators, and investors.

Capital light is the overarching trend for 2024. The entire venture capital industry is in retrenching mode. Pitchbook reports that over a third of all VC firms went dormant in recent months, and the numbers are pretty stark: In 2022, VC firms created 1300 funds raising $160B, and a year later, it was 311 funds raising $40B. And it’s not just that the cost and availability of capital has dramatically changed, it’s also that there’s growing evidence that startup outcomes are better with a capital-light approach. As Sam Lessin has written, the era of the factory-farmed VC unicorn is over. In 2024, startups that embrace capital light are more likely to win.
Startups with 2021 cap tables will be collapsing all around us. Roughly 1,200 private companies will exhaust their financial reserves by the end of 2024. Some will be bought for parts by new private equity firms that specialize in this, and some will be subject to acquihires dressed up as M&A transactions, as VC try to prop up their portfolios without down rounds. For new startups in 2024, this will create opportunities to come in where over-funded pandemic-era ventures failed.
Increasing regulatory scrutiny makes life difficult for the tech giants. In the US, FTC commissioner Lina Khan has been on a mission to suppress monopoly power, as her agency has blocked several large M&A transactions. The CMA in the EU and UK also are increasingly uncomfortable with the market power of the global tech companies. Meanwhile, the recent court ruling against Google in the Epic case will have wide ramifications on the tolls charged by digital gatekeepers (including Apple). All of this is bad for the giants but opens up a wealth of new opportunities for entrepreneurs and innovators in 2024.
It’s a whole new global landscape. Last year, India surpassed China in population and is now headed toward the #4 spot in the list of global economies. China, which led the way for the past two decades, now has some demographic and economic problems, and the Biden Administration has been busy issuing executive orders that restrict investments into and out of China. Meanwhile, there are emerging unicorns across Latin America, the Baltics, and the Middle East. All of this means that it’s a completely different global landscape than it was a decade ago.
There’s a 5-person unicorn somewhere on the horizon. An operation that once required a team of 50 can today be one founder on a laptop. Your marketing department is HubSpot and Canva, your finance department is Airtable and Xero, your integration engineer is Zapier, and your design team is Figma. Imagine being able to run a company with 5x the agility and a 10x reduction in payroll. Welcome to 2024.
Sales automation moves to the next level. Most of what a traditional sales team does is identifying prospects, reaching out, following up, answering questions, and sending additional information. That can largely be automated today, which can pretty dramatically change CAC for many startups. Twenty years ago, AWS completely changed the infrastructure business by taking something that was once sold by an expensive, slow direct sales team and turning it into something that could be sold with a low-friction self-serve sales process. We will see additional sectors transformed by sales automation with the new tools available today.
The productivity of one engineer building software products goes up by 5x. Github Copilot and other gen-AI engines are completely changing how code writing and code refactoring happen. Four years ago I wrote a piece called The Rise of the Stack Stitcher, and in 2024 a good engineer can develop an entire new application in record time by spending less time writing code and more time stitching together existing code. All of this drives the trend toward decentralized engineering resources, which allow teams to move faster and be more empowered. Having marketing dependent on engineering in order to run an A/B test, for example, is now dinosaur behavior.
Cross-cultural leadership becomes a critical skill for startup founders. The most successful startups today have diverse teams from diverse cultures, often living in diverse geographies. It once was that it was a total deal-killer to tell an investor that your CTO was in Poland, your CMO was in Mexico, your ops team was in India, while you work out of an Airbnb in Sonoma. Today, that’s considered normal. But this means the skills required for cross-cultural leadership of a remote team are absolutely essential (and not everyone has them).
Good governance is a good idea. If you look at the most well-publicized startup disasters in 2023 — SVB, FTX, and OpenAI — they were mostly all due to bad governance structures. 2024 will see a return to good governance practices. Investors will insist on it, and founders should embrace it.
Moats and network effects become harder to come by in this new era. This is an important trend. It once was that raising $100M from a16z provided a moat, but that ain’t happening in 2024. It once was that proprietary technology developed by your 100-person engineering team was a moat, but now your engineering team is 3-guys stitching together open source and gen-AI code. It once was that investors would fund your plan to just buy a million users in order to get the flywheel going, but that ain’t happening no more. Without moats and network effects, building a successful new venture requires startup founders to be more agile and more creative. Your moat is much more likely to be the unique relationship you have with your customers.
The startup world becomes more place-agnostic than ever. It once was that a tech startup needed to be in Silicon Valley. This is where the capital, talent, and connections were. Today, Zapier (valued at $5 billion), was founded in Missouri and is operated as an all-remote company with 500 employees spread across 38 countries. Startups in Latin America are raising money from Sand Hill Road investors. Startups in Estonia are launching in the North American market. In 2024, opportunity becomes place-agnostic.
All software becomes “smart”. We’re in the middle of a huge hype cycle for AI, obviously, but moving forward, users will simply expect all software to be smart, and the new AI engines will become platforms that allow entrepreneurs to bring new smart software applications to market quickly. Meanwhile, AI-on-a-chip will create a whole new generation of smart devices across many sectors. AI is an overblown trend entering 2024, but it will become the underlying platform that drives the big new wave (just as social, mobile, and web were the platforms that drove the previous three waves).

And the one key thing for startup founders in 2024? Storytelling skills matter more than ever. Storytelling skills are the key to fundraising in a difficult market. They are necessary for recruiting and managing small-but-mighty teams. Developing successful products requires writing user stories that accurately reflect what customers care about. Attracting and keeping loyal customers is about storytelling skills. Storytelling matters, more than ever. It is the one indispensable skill for entrepreneurs and innovators.

That’s it. Here’s to a great 2024 ahead, for all of us.

Guest Blog

Bret Waters - January 5, 2023

Defining Entrepreneurial Mindset

Guest blog by Bret Waters, Miller Center Executive Mentor

I was recently asked to give a lecture on “Entrepreneurial Mindset”.

So I did a little research for my lecture, beginning with the Google gods. The definition that Google responded with was: “Entrepreneurial mindset refers to a specific state of mind which orients human conduct toward entrepreneurial activities.”

Boring, and not very helpful (plus, it’s kinda recursive, Google).

Then I decided to turn to some friends of mine who are very successful Silicon Valley startup founders and venture capitalists. I figured maybe they’d give me some interesting definitions of an entrepreneurial mindset.

Here’s what they said (emphasis in bold is mine):

Olivia (VC): “An entrepreneurial mindset includes excitement around building something new, and perseverance to navigate the many obstacles that come up in that process.”

David (Founder): “An understanding that the world is both mutable and imperfect coupled with the resolve to improve it.”

Tim (VC): “Folks with outsized smarts, goodness, and grit who can’t imagine not spending their life solving the unmet need about which they care most deeply.”

Kent (Founder): “It never occurs to me that I might fail at starting a company, which is kind of crazy given the low probability of success of biotech companies. Perhaps obvious, but you cannot have any fear. It doesn’t mean you are oblivious to what can go wrong, but you have confidence that you will find a solution.”

Jeremy (Founder): “A relentless dissatisfaction with the status quo that drives you to build novel solutions that others will value.”

Bob (VC): “An entrepreneurial mindset is one which takes risks others won’t take to achieve a vision others don’t share.”

Jason (Founder): “Seeing what others don’t, and having an unstoppable will.”

Danielle (VC): “The entrepreneurial mindset is one consisting of grit and perseverance while being realistic enough to know when to adapt and change course.”

Chris (Founder): “Entrepreneurial mindset is all about efficient hypothesis testing and grit.”

Thane (Founder): “I believe there is an entrepreneurial mindset or spirit: creating shared value.”

Oh, there’s some great stuff in there! Let’s take a look at some of the patterns in these answers:

Grit, Perseverance, Unstoppable Will, Relentless
This is pretty obvious — being an entrepreneur is hard. The successful ones have a mindset that makes them relentless at pursuing passions. In fact, Steve Jobs himself said “I’m convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance.”
Hypothesis testing, a willingness to adapt and change course
This is a key point because the reality is that for most startups, the original idea fails. But great entrepreneurs are always testing their assumptions and pivoting their way to success, even when the original idea fails. YouTube thought their main use case would be video dating, Instagram began as a mobile check-in app called Burbn, Slack began as a video game studio, and Uber’s original idea was a fleet of company-owned cars called “UberTaxi”. In all of these cases, the original idea failed but the team was agile enough to test their assumptions, realize where they were wrong, and pivot to success.
Driven by a desire to solve problems worth solving
As Paul Graham wrote, the best way to get startup ideas is to look for problems. Great entrepreneurs fall in love with a problem worth solving, and that passion then creates the unstoppable will that drives a startup to success.
Creating shared value
Being an entrepreneur is a team sport. Successful entrepreneurs are great at recruiting team members, customers, and investors to join their valuation-creation mission. Not everybody is passionate about creating shared value — but every single great entrepreneur I know is.

So now I felt like I was making progress on my lecture. But I still needed to weave this into a concise definition of entrepreneurial mindset. The definition of “Entrepreneurship” that I like to use is from Howard Stevenson at Harvard Business School, who defines it as “The pursuit of opportunity without regard for resources currently controlled.” I love this definition because when successful entrepreneurs see opportunity and decide to pursue it, they are never deterred by a lack of resources — they know they can put the resources together.

So if we use that definition for Entrepreneurship, then the definition of an Entrepreneurial Mindset must be something like “A set of mental habits that optimize the successful pursuit of opportunity.”

Now, by adding the input I got from ten smart friends, we can expand this to:

An entrepreneurial mindset is a set of mental habits that tend to optimize the successful pursuit of opportunity. These include a passion for solving problems worth solving, a willingness to test assumptions and change course, and a relentless desire to create shared value.

There you go. Stay safe, stay healthy, stay focused, my friends.

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Photo: The author with entrepreneurs Angela Juliana Odero and Nixon Shikuku, founders of Rio Fish at Miller Center for Social Entrepreneurship’s In-Residence program, April 2022.

Guest Blog

Bret Waters - November 10, 2022

Climate Tech is Hot with Investors! And Social Entrepreneurs

Last month I worked with Chris Zaw (pictured), an entrepreneur at Miller Center for Social Entrepreneurship, helping him to refine his investor pitch. Chris is CEO of Warc Africa, a startup in Ghana that helps small farmers in West Africa use regenerative agriculture, which improves their crop yields and their livelihoods. But it also helps to save the planet from climate change — regenerative agriculture helps to draw-down greenhouse gases and capture carbon dioxide. So it’s good for the company, the farmers, and the planet. #winning

Climate Tech is hot with investors right now. Silicon Valley Bank reports that VC investment in climate tech was up 80% from 2020 to 2021, and 64 new climate funds were formed last year, worth a combined $37B, plus there are funds aimed at adjacent sectors (Convective Capital, for example, is focused on technology for wildfire resilience). And more and more existing venture capital firms are listing Climate Tech as one of their investment areas.

The cynics, of course, will remember that for a hot second 15 years ago, “Clean Tech” was a big buzzword in the venture capital world, encompassing solar and wind power, biofuels, grey water, recycling, etc. But then the recession hit and many of these startups died because the products didn’t materialize, natural gas prices changed the economics of alternative energy, and public subsidies were withdrawn. Clean Tech fell out of favor with investors as they went running off toward some shiny new thing (There’s an old joke that a venture capitalist is what you get when you cross a sheep with a lemming).

But I think the current Climate Tech today is more than just a re-branding of Clean Tech. There’s a realization today that climate change truly is an imminent existential threat, and that all our other environmental concerns really roll up into climate.

But investors, of course, need more of an incentive than just saving the world — they also want to make money. Many Climate Tech startups are working on things that have a very long time horizon and no clear path to market at this time. That can be a tough sell for investors, especially those who are used to the rapid gratification of many software investments.

But there are plenty of climate change technologies that have a proven ability to make a difference right now, and agriculture provides lots of low-hanging fruit (pun intended). The World Bank says that nearly a third of the planet’s greenhouse gas emissions come from agriculture. So investing in regenerative agriculture can have a substantial impact on climate change while improving crop yields and paying dividends to investors. It seems to me that we need to accelerate investment in these areas while also investing in Climate Tech which has a longer time horizon. All of these things will be necessary if we are going to win the climate battle.

In all of this climate stuff is lots of opportunity for entrepreneurs, innovators, and investors (and the planet, hopefully).

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Bret writes a weekly newsletter for entrepreneurs and innovators. You can subscribe here (and unsubscribe at any time).

Photo: Chris Zaw, CEO of WARC Africa at Miller Center for Social Entrepreneurship’s Fall 2022 In-Residence

Guest Blog

Bret Waters - July 25, 2022

Avoid This Leading Cause of Startup Death

I’ve taught CAC<LTV to my students at Stanford and to social entrepreneurs at Miller Center for more than a decade. In that time, it’s gone from being a little-known concept to being an often-misunderstood concept. So here are a few updated thoughts.

A quick review of the concept:

A business is an engine that attracts customers, delivers something of value to them, and then extracts that value in the form of profits. That’s what a business is. And so it logically follows that the cost of attracting a new customer needs to be less than the value we can extract from that customer. If it costs us $15 in advertising to get a customer, and we can only make $7 from them, then Houston, we have a problem. But if it costs $15 to get them, and then once they are a customer, they make a bunch of repeat purchases that yield $75 in profit, then we are happy. Ultimately every venture of every kind has to have a Customer Acquisition Cost (CAC) that is less than the Lifetime Value (LTV) of a customer. It’s a simple, self-evident concept.

Yet it’s a leading cause of startup death.

A high percentage of startups die because their cost of getting customers turns out to be higher than they can make from them. Partly this is just because we’re all optimists — we all think our startup is so awesome that people will flock to become customers and they will remain customers forever. But eventually, that optimism fades as we realize that marketing is expensive and no customer stays forever. The immutable laws of economics set in, and at some point, many startup founders find that their LTV/CAC ratio is slowly draining the bank account. To paraphrase Ernest Hemingway, Startups go broke two ways: gradually, and then suddenly.

Investors tend to obsess on the LTV/CAC ratio.

Obviously, investors care about your LTV/CAC ratio because it’s the essence of a successful business. But it’s also a proxy for the potential ROI of their investment. If you have proof that you can spend $1 on customer acquisition activities and get $5 in value back (a LTV/CAC ratio of 5.0), investors will want to shovel as much money as possible into that engine. As a VC friend of mine says, “What I’m looking for is a just-add-money opportunity.” Having a business with a LTV/CAC ratio of over 5.0 looks like a “just-add-money opportunity” to investors.

But it’s a blunt tool that is better if sharpened.

Let’s say that during the quarter we spent $10,000 on sales and marketing and got 1,000 new customers — a CAC of $10. But probably some of those customers came through word-of-mouth, some came as referrals, some came from our PR efforts, and some came from paid advertising. So we had a blended CAC of $10, but that doesn’t tell us anything about the relative effectiveness of each of our different customer acquisition efforts. Which leads me to the next point:

Not all customers are created equal.

With every business I’ve ever run, I’ve realized at some point that 80% of our profits were coming from 20% of our customers. It’s amazing how this tends to be true with almost all businesses. So if we look at LTV (Lifetime Value) of our entire universe of customers, we’ll probably see that 20% of them have a much higher individual LTV than the rest. Wouldn’t we want to focus our CAC efforts on getting more of the high-LTV customers? Yes, we would.

Therefore, cohorts matter.

The two points above would indicate we really want to track LTV/CAC ratio by customer cohort. For example, what’s the ratio for customers acquired through Facebook advertising vs those acquired through Google advertising? Knowing that would tell us a lot about how we should allocate advertising dollars. What’s the LTV/CAC ratio for customers acquired through our referral program? Knowing that would tell us how much we can afford to offer in a referral fee. Knowing your company’s blended LTV/CAC tells you the health of the overall engine, but it doesn’t tell you how to optimize the engine’s performance for next quarter. Tracking customer cohorts tells you that.

Also, velocity matters.

One afternoon recently, I sat in the backyard of longtime Silicon Valley venture capitalist Tim Connors as he drew graphs for me on his whiteboard (only VCs have whiteboards in their back yards). He explained that he doesn’t care about the LTV/CAC ratio, per se. What he cares about is the velocity with which invested CAC comes back in the form of LTV. So he’s developed a metric he calls CACD — the D is for “doubled”. CACD answers the question, “If we spend $12 in customer acquisition activities, how long does it take for us to get $24 back?” As an investor, he wants to see a business with a CACD of less than eight months. Tim’s formula gets to the heart of an inherent flaw in the LTV/CAC ratio: it doesn’t include a time factor. A business with an LTV/CAC ratio over 5.0 might seem good at first, but if you have to service a customer for 10 years before you make back the money you spent getting him, then it doesn’t seem so good, right? Velocity matters. So think about how you can measure CACD for your business. Putting $12 somewhere where it returns with a high velocity will accelerate your engine of growth (and make Tim happy).

Summary

The CAC<LTV concept applies to every business of every kind. Every venture must have a sustainable way to get customers at a cost less than the venture can make from them. It’s an immutable law of economics. Ignoring the formula (or misunderstanding it) remains a leading cause of startup death. As legendary venture capitalist Bill Gurley once wrote in “The Dangerous Seduction of the LTV Formula”, “The formula can be confused, misused, and abused, much to the detriment of the business.” So don’t do any of those things, or it will make Bill mad.

Sharpen the tool by tracking customer cohorts, improve the formula by adding a time factor, and remember that not all customers are created equal. If you do those three things, you will have an engine of growth that makes you happy, and investors eager.

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Bret writes a weekly newsletter for entrepreneurs and innovators. You can subscribe here (and unsubscribe at any time).

Photo by Antoine Dautry on Unsplash

Guest Blog

Bret Waters - May 2, 2022

Here’s to keeping the magic alive.

The last couple years have been tough on everyone as we navigated a pandemic as best we could. For nearly 3 years Miller Center went without having a physical in-residence program, and honestly, I was sort of wondering how much longer I would stay engaged. Miller Center just became yet another set of Zoom calls on my schedule that already had too many Zoom calls on it. For me, it just didn’t have the feel that it once did.

And then Monday night happened. Brigit invited us upstairs for Thai food, I walked into the room and could immediately feel the magic – it was back again! Louis was talking wine. Jose was holding court talking about ops. Steve A. was in the corner helping an entrepreneur with his spreadsheet. Ed was talking strategy. The brainpower and passion in the room was giving off the unmistakable smell of magic being forged.

For me, this has always been the essence of Miller Center. Silicon Valley’s smartest women and men, huddled in a corner, investing themselves unconditionally in social entrepreneurs from around the world. Innovation has always been the result of moments of serendipity. And those moments of serendipity happen when a group of ridiculously smart people are immersed together on campus.

Monday night was it. Thank you for reminding me that the Magic of Miller Center is still alive.

Finally, I know that putting together a program like this takes so much more work than anyone realizes. You all labored hard to make the past week happen. Karen had a thousand details to organize, Lynne and Sharon had to wrangle recalcitrant mentors, Alex had to play money matchmaker, and probably a thousand other things that we never actually saw.

You all worked very hard to make the past week happen, and I want you to know how much we appreciated it. Truly.

So thank you. Here’s to keeping the magic alive.

-Bret

Guest Blog

Bret Waters - July 15, 2021

Become a Master Storyteller

If you walk into Warren Buffett’s office, you might think you’d see his framed diploma from Columbia Business School. But you won’t. Instead, you’ll see proudly displayed on his wall a 1952 certificate for completing a $100 course on public speaking. It was while he was a 22-year-old at Columbia that he saw an ad in the paper for a Dale Carnegie public speaking course. “I went to Midtown, signed up, and gave them a check. But after I left, I swiftly stopped payment. I just couldn’t do it. I was that terrified,” he recounts now.

Fortunately, he went back, overcame his fear, and today he credits that $100 course with having changed his life. “In graduate school, you learn all this complicated stuff, but what’s really essential is being able to get others to follow your ideas,” he says.

And so it is for entrepreneurs. Every great entrepreneur has the ability to tell a crisp, clear, and compelling story about what she’s working on, and why it matters.

“In the modern world of business, it is useless to be a creative, original thinker unless you can also sell what you create.” —David Ogilvy, founder of Ogilvy & Mather and “Father of Advertising”

In the world of startups, one often hears of “pitch decks” — a set of slides used for a pitch. And while most people think of this in the context of fundraising, the fact is that successful entrepreneurs are pitching all the time for all sorts of reasons. Entrepreneurs are pitching customers, recruiting employees, convincing partners, telling the landlord why he should give them a discount on the rent. Pitching skills matter.

At Stanford, I make my students give a 3-minute pitch on their startup idea. I do the same with social entrepreneurs at Miller Center. They usually grumble about being given so little time, and tell me that their idea is so amazing they need more time to properly explain it! I respond by telling them that if they can’t sell it in 3 minutes they won’t be able to sell it in 30.

Telling a short story is hard. But it is so important. It’s important because it’s a powerful tool for an entrepreneur to have, but it’s also important because figuring out how to say it short helps you to develop clarity yourself on what it is you’re working on.

“If you can’t explain it simply, you don’t yet fully understand it.” —Albert Einstein

I once met an entrepreneur at a social event and asked him what he was working on. “Well,” he said, “there are a lot of grocery stores in the country,” and then he took a long sip from his glass of wine. “Their biggest facilities expense is cold storage,” he continued before having another sip of Zinfandel. Now I was intrigued. “We make a device that cuts that cost in half.”

Boom! I wanted to invest! In three short sentences, he told me the size of the market, the problem to be solved, and that he had a solution!

An inexperienced entrepreneur might have described the exact same startup this way: “We’ve developed a cloud-powered IoT device that uses proprietary algorithms to analyze operational data for mercantile customers, generating paradigm-changing results…..” I would have walked away from that guy.

Learn to tell the story crisply and clearly. Watch videos of Warren Buffett, or of Steve Jobs, or of Elon Musk. Take a public speaking course. As an entrepreneur, the ability to tell a crisp, clear, and compelling story is a skill that will serve you well.

Originally published on Medium.