To know whether a startup will thrive, think of it as a line

Founders Supporting Founders: Iterative is accepting applications for the Summer 2021 (S21) batch that takes place from July to September 2021.

Photo by Isaac Smith on Unsplash

There’s an obvious but overlooked difference between founders and investors. While founders are concerned with how to make their startup successful, investors are concerned with how to tell if someone else’s startup will be successful.

As a startup founder who’s now an investor, I find that thinking of each startup as a line (i.e., the equation y= mx+b) is a helpful mental model for assessing whether a company will thrive.

The first time we meet with a startup is x = 0. Think of x as representing time, and the company’s traction at that time is the y-intercept. The interesting question is, what’s their slope?

It’s not an easy question to answer. The entire venture capital industry is dedicated to figuring out this one question after all.

Before attempting to answer it, let’s talk about why it’s important.

Take the following example:

• Startup A: Has 10,000 users at Week 0 (y-intercept) and is adding 100 users every week (slope)
• Startup B: Has 1,000 users at Week 0 (y-intercept) and is adding 300 users every week (slope)

Plotting the lines for both yields this plot:

Week 0: Startup A is 100x larger than Startup B
Week 52: Startup B surpasses Startup A in size
Week 104: Startup B is 1.57x larger than Startup A

(Note: There’s another type of startup we like even more, but we’ll discuss that at the end.)

Founders

Market

Non-linear