Hello 👋

Martin here. Welcome to another edition of Founders’ Hustle!

I write newsletters containing actionable insights and insider knowledge across the full spectrum of company building from inception to exit.

Today, I’m shining a light on a key component within the decision framework many early-stage investors use to evaluate startups—founding team competitive advantage.

At my first startup I didn't fully comprehend the significance of this. Both in terms of the likelihood of closing a round and building a successful company.

These days, I put a lot more time and thought into it from day one.

In recent years the term unfair advantage has been thrown around a lot by early-stage investors.

From what I can tell it’s pretty much synonymous with competitive advantage but is more specific to people — founders — than a company holistically.

It’s widely known companies with sustainable competitive advantages deliver the best returns for investors. For example Facebook with network effects, Amazon with economies of scale, Google with technology and brand.

These competitive advantages compound over time and generate exponentially increasing value. The companies eventually become monopolies within their markets as competitors’ fail to compete against the unstoppable momentum.

The advantages are easy to see in hindsight, but, at the earliest stages of a startup’s journey, investors have relatively little information to make an informed decision with.

This is amplified in scenarios where the startup is pre-launch or pre-product.

Assumptions can be made about what sustainable competitive advantage or defensible position a startup may create, but, these often change due to pivots, market changes, or other factors. Visibility is murky.

So, early-stage investors often look for competitive advantage within an element of the company that’s known to them at the time and is likely to remain a constant for the foreseeable future — the founding team.

This desirable trait is often referred to as ‘unfair advantage’ but also comes under other similar but not identical guises that are pretty much proxy terms for the same thing.

For example, when investors say they back companies with ‘founder-market fit’, ‘amazing founders’, or ‘world-class teams’, etc, they are generally referring to unfair advantage.

If you’re planning or actively raising an early-stage funding round you may have a bunch of questions regarding unfair advantage.

• What exactly is an unfair advantage?

• What are real-world examples of an unfair advantage?

• Do investors perceive that my team has an unfair advantage?

• If my team doesn’t have an unfair advantage do I absolutely need it?

• How do I increase my unfair advantage?

Unfair advantage is an opaque component of the early fundraising process that investors assign a lot of weight to when making a decision whether or not to invest.

They’re often vocal about it publicly but rarely detail the methodology used since it’s subjective in each circumstance (fair enough).

As such, there’s no transparent mathematical or formulaic framework underpinning to the decision. It’s subject to the experience and unique cognitive bias of each particular investor.

Some unfair advantages are easy to spot on the surface. Others are more nuanced or subtle to the degree they can easily be overlooked, in which case investors may pass because they didn’t identify them.

Rarely will you be turned down and given the reason lack of unfair advantage, but, the fact you have been turned down could be an indicator of that.

You can utilise certain data points and investor signals to make a fairly reliable assessment if that is the case, which I’ll go into below.

Why does it matter?

If a perceived absence of unfair advantage is a blocker to you closing a round, there are levers you can play with that can change this. These are:

• Highlighting a subtle unfair advantage.

• Increasing your unfair advantage.

• Proving you have an unfair advantage.

It’s also helpful to think about your team’s competitive advantage outside of a fundraising context.

This may help highlight skill or asset gaps that you can work to close, which can increase your chances of success.

There’s a reason investors deem it so important — doing this is not just an initiative to satisfy their appetite.

In hindsight, I wish I’d done this more consciously at my first two startups.

What exactly is an unfair advantage?

Here’s how notable angel investor Jason Calacanis frames it:

There’s a couple of things to unpack here. The first is ‘uniquely qualified’.

This has a pretty broad remit. But, basically — what skills, experience, or assets give you an advantage over the competition?

There are general themes that virtually all investors like to see no matter the industry. Examples are fast execution speed and rate of learning, industry expertise, domain expertise, technical expertise, persuasiveness, resourcefulness, and tenacity.

The bar is high. Merely possessing some or all of these attributes to some degree is not enough. 

An investor generally needs to feel comfortable you are performing at the top-level across most of them compared to your peer-set, or, at least, have the capability to in areas where you may be falling short. 

For one or two, you should be exceptionally good at — like a ‘superpower’. 

A unique qualification does not have to be skill-related. It could involve utilising a network or strategic relationship you’ve previously established to give you an edge over competitors who don’t have it. Other examples are holding a critical patent or owning a social media account with lots of relevant followers.

The second element to unpack is ‘secrets’.

This can manifest in a number of ways. It could be as simple as a hypothesis you’ve formed, based upon your own observations or research, that runs contrarian to a popular belief. It’s not so much a secret but a contrarian view.

This was brought into vogue by Peter Thiel in his book Zero to One:

For example, it used to be widely believed personal computers would not have a serious customer base outside of nerdy hobbyists. But, founders like Steve Jobs and Steve Wozniak held the opposite view and acted upon it.

Preferably, secrets are grounded in evidence-based knowledge. Maybe you’ve conducted an experiment and proven your hypothesis to either be true or, at least, the results have enough merit to warrant further inquiry.

For example, Airbnb’s model was at one time considered absurd by many. But, they kept testing with customers and proved there was a market through the best validator there is — sales.

Or, maybe you’ve just quit working at a big corporate or startup and your time there exposed you to customers, trends, or insight that helped you form your contrarian view that very few others had access to or identified.

For example, Peter Thiel co-founded Palantir based on learnings from his time at PayPal fighting fraud.

What are real-world examples of an unfair advantage?

I was recently emailing Jesper Buch, founder of Just Eat, on this topic.

For context, Just Eat is an online food order service and one of the most successful startups to come out of Europe — worth many billions today.

They are an example of a company that built incredible value through a defensible two-sided marketplace.

I asked him:

His initial thoughts:

This can help, but, for me, this doesn’t get down to the truth of it.

Someone else could have moved first but executed poorly and failed or faded away, as has happened many times before.

Facebook was not the first social network. Google was not the first search engine. The iPad was not the first tablet computer.

When you peel back surface explanations (like this) on why companies were successful there are always specific abilities, assets, or circumstantial factors that made the real difference lurking underneath.

I circled back to Jesper, probed further, and learned some interesting details on what gave the Just Eat team an unfair advantage.

Unfair Advantage #1 — An invaluable connection and investor. Before founding Just Eat Jesper previously worked at Crazy Daisy, a national Danish nightclub chain. As a bartender he briefly caught the attention of owner Carsten Mikkelsen.

Later on, when Jesper was raising an angel round for Just Eat (then FoodZoom) he landed a meeting with Carsten Mikkelsen, who remembered him. Jesper pitched him hard and he closed the deal.

Although not involved in the day-to-day operations, having Carsten onboard became an unfair advantage for the company. He provided additional capital on an ad hoc basis when it was needed in the early days, saving the company from having to go into full on ‘fundraising mode’ for months at the risk of productivity.

Carsten was also instrumental in using his position to originate strategic deals and dispense other resources that had a meaningful impact:

1. A pre-launch deal with Carlsberg (the no.1 beer brand in Denmark)

2. An early merger between FoodZoom & Just Eat.

3. An intro to Bo Bentsen, which incepted Just Eat UK (became the largest market by far).

4. Use of numerous workspaces (that he owned) around Denmark. One, The Factory, became Just Eat HQ.

Unfair Advantage #2 —Food industry experience. Prior to founding Just Eat, Jesper had experience in the food business. Originally, as a teenager serving burgers to nightclub goers at a takeaway owned by his parents, The Grill. And, later on, at a restaurant that he co-owned with his father.

It’s easy to disregard this advantage, but, I’ve found through personal experience if you’ve worked across the other side of the table and have direct experience of your customer’s market you develop an invaluable knowledge framework of their challenges, concerns, and motivators.

This effects how you communicate with your customers and how you go about solving their problems. It can enable you to do it a whole lot better.

Unfair Advantage #3 — Team skillset. Jesper and his business partner Henrik Østergaard had outsized skillsets that were conducive to the early days of Just Eat.

Why? With a two-sided marketplace, you have to acquire two sets of customers.

Jesper had a talent for growing their consumer base (buyers of food) cost-effectively. Henrik was exceptional at sales, signing up and continuing to onboard B2B customers (pizza parlors) at a phenomenal rate.

Jesper was also extremely resourceful and a fantastic problem solver, particularly in times of existential crisis — ‘there’s always a move’ in Ben Horrowitz speak.

He also had a persuasive personality, which was instrumental in closing numerous landmark deals (financing, launching Just Eat UK) and hiring awesome people.

Jesper and Henrik were also childhood friends, which can often be a huge advantage for startups because the founding team is instantly in-sync in terms of communication and culture.

Here are some more examples of unfair advantage, shared by Jason:

I have experienced it firsthand, too. At my second startup, we had an advantage over others in that we used the learnings and network from our first startup to incept, test, and iterate product concepts for our second.

This testing and iteration lead to a product that grew from $73.20 to $17,448.11 daily revenue in one year.

Without our unfair advantage it would’ve been a lot more difficult to pull off.

In fact, we wouldn’t have pursued the opportunity in the first place.

Do investors perceive that my team has an unfair advantage?

I’ve found the best way to figure this out is to listen to their questions closely.

• Who is in charge of X?

• Who has domain expertise in X?

• Where have you worked before?

• What have you built before?

• How do you know each other?

• How will you grow X?

These questions are probing for experience-related unfair advantage.

Let’s translate a little bit…

• Do you have all bases covered? Product, tech, marketing, hiring, etc.

• Did you learn your trade at a breakout company like Uber or Airbnb?

• Do you have expertise in the market you’re entering?

• Have the founding team previously worked together on something meaningful?

• Do you have a unique relationship that will help you distribute your product cost effectively?

If you have all of these, investors will likely perceive you have an unfair advantage. The more you don’t, the more likely it is an investor will perceive you don’t have an unfair advantage.

Experience is an easy unfair advantage for investors to assess quickly. What is harder, and often takes time, is skill. Particularly if you’re a first-time founder without much hands-on experience.

If there’s nothing for an investor to assess they can’t perceive you have an unfair advantage. You may be highly skilled in certain areas like marketing or product development, but this may only be demonstrable through results.

That being said, there are exceptions. For example, like Jesper Buch, if you have a persuasive personality this will shine through.

You can try articulating your skills to investors, backed up by case studies, but, without convincing demonstrability, the only real solution is to push forward with your plans and update investors on progress as you go along. Don’t wait.

This doesn’t necessarily have to involve building and taking a product to market straight away.

It could start off as a splash page experiment to show off your marketing skills. Or, build something really fast and achieve an impressive outcome technically or resourcefully. All of this activity should be conducive to your plans.

If my team doesn’t have an unfair advantage do I absolutely need it?

Yes. But, that doesn’t mean you need to have been employee #12 at Google or finished top of your class at Stanford in order to succeed. But, it does help, of course.

You can start with nothing in terms of experience, but you will need to develop skills or abilities that make you a highly effective founder and operator in your chosen market. To the degree they become an unfair advantage.

You may have these skills already which you can build upon. Like, a rapid rate of learning or a natural flare for sales.

At my first startup, I had to both build upon natural skills and develop entirely new ones because doing so was critical to success.

I had zero experience or exposure to startups or the industry we were entering. The skills I developed on-the-fly gave us a competitive edge.

It’s worth noting that sometimes it can be difficult to identify your own unfair advantage, partly because it can amplify from subtle beginnings and make itself more obvious over time.

Or, an attribute you have turns out to be a huge competitive advantage but wasn’t as critical at the start.

This is something Jason also acknowledged:

How do I increase my unfair advantage?

A fantastic way to increase your unfair advantage is to hire talented and valuable people onto your team. This achieves multiple objectives all at once.

If you have a gap in your founding team skillset, experience, or, network, you can fill it with a key hire.

A common example is a technical cofounder. A lot of startups are incepted by one or more non-technical people. Filling this role (paying with sweat equity) will overcome a massive investor concern (if you’re building a technical product) and it’ll also simultaneously demonstrate you’ll be awesome at hiring going forward.

Originally, at my first startup, it was just two people. Myself and a friend from school. We were both non-technical and started off building a website by hiring a freelance developer.

After a few months it became clear we needed to up our game. So, we hired a very talented technical founder onto the team, who became our CTO.

This can work for any role. Product, marketing, operations, etc. Whatever is critical to your company at this stage.

The hire doesn’t necessarily even have to be a member of the core team. If you want to tap into a network to drive sales, you could hire someone extremely well connected as an advisor.

Another way to increase your unfair advantage is to build your experience and network first. Go work in a startup or big corporate in the industry you want to enter. That may seem far off, but, the time will pass quickly.

It doesn’t necessarily even have to be that long in duration. Along the way, you will forge new friendships with colleagues at these companies who may later become pivotal cofounders.

If you just can’t wait (like I couldn’t!) you can increase your unfair advantage with action and results, as I mentioned above. Hone your skills and build a network by taking a product to market.

If you persist and execute well you will naturally build a competitive advantage, and, investors will notice.

Until next time!

- Martin

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