How To Build a Disruptive Startup, w/ Hamid Shojaee, Founder @ AZ Disruptors

Tell us about your mission with AZ Disruptors .

AZ Disruptors looks for companies that really change the world. They’re usually bringing in some kind of disruptive technology, or a disruptive way of doing things -- even if it’s just a disruptive pricing model doing something that’s already being done.

AZ Disruptors makes investments in startups and founders that are doing disruptive types of technologies for companies.

My personal background is in software development and technology. I was a software developer by trade, I studied computer science and started a software company right out of college. Learned a bunch of things, failed, then worked for microsoft for a while.

Then, I took another stab at it in 2002, and left Microsoft in 2004to focus on my software company on a full time basis. 18 years later, I sold my primary company Axosoft and a spinoff company, Purechat.

Now, my focus is on investments.

Can you share your experience with dealing with failure? 

You have to view failure as part of the journey. You learn a lot more from failure than you do success. Success can make you overconfident and make you think you're better than you actually are, while failure can make you think you’re worse than you actually are.

Like with anything, you’re wrong a lot more times than you are right. As an entrepreneur, you have to embrace that and not be paralyzed by it. If you’re wondering whether you should do X and you’re not sure if it will make your company more successful, it might be kind of risky, you can actually predict that it will most likely be a failure 9 out of 10 times.

So, you just have to do X , rather than contemplate it and try to predict its success rate. But you go into it with the idea that if X turns out to be a failure I’ll just tweak it, or fix it, or try Y then Z and keep trying until it does work. 

You don’t have to be right most of the time, because when you are right, it makes up for all the times you were wrong in business.

If you embrace failure and embrace being wrong, and don’t let it paralyze you, I think it’s a good strategy for living in general.

Do you think that innovation and disruption in a field often comes from unexpected places?

That is exactly right. 

Once you start ideating, and getting input, the idea starts to take a life of its own. 

Even then, it can still fail. There’ve been so many times I got excited about something, thinking that when we just execute on it, it’ll change the world. We take weeks planning for it and executing it, then it ends up making a non-noticeable dent in terms of revenue growth or user adoption, which are two great metrics for the success of software products.

The thing is, we don’t need to look at that and say, “We’re just dumbasses who can’t figure things out”. We just move on to the next idea that we get all excited about, and rally the troops and try to make another product improvement or website improvement. It’s surprising how many of them don’t workout the way you expect, but you do enough of them and some of them will work and propel you to the next level.

That’s what you need -- some of them to move you in the right direction. It’s super rare for any of them to take you in a negative direction, which is what’s great about trying new ideas(except for the opportunity cost of not trying something else).

Trying different things with the expectation that most of the time you might be wrong but you won’t know unless you try, is a great way to execute on the strategy of implementing a company, business, product, marketing plan etc.

As long as you have this idea that “I’ll probably be wrong more than I am right, and I’ll just correct it and/or do it again”, you’re set.

There’s a great phrase from the first Incredibles movie -- Edna mode (who’s the best character in the movie) is showing this suit she built for one of the Incredibles’ kids that can blast through fire and machine guns and all this crazy stuff. And the mom says “what do you think my baby’s gonna do?!”, to which Edna replies “I don’t know darling, but luck favours the prepared!”

That’s my favourite line because luck totally favours the prepared. If you do nothing, luck cannot find you or favour you. But if you do something, and try different things, eventually luck will find you. And luck is an important aspect of success that, oftentimes, is diminished.

So, as a founder, the goal is not to be inflated by your successes or crushed by your failures, but to strike a balance and strive for a great product that makes you prepared for luck to find you. At what point, then, do you decide it’s the right time to raise funds?

Just to be clear, raising funds shouldn’t be the goal. Just because you want to start a company doesn’t mean you have to raise funds. Oftentimes, i’s not even an option for many people, depending on where they are. 

I think that much of building a company is about, “What do I need to solve this problem or bring this idea to life?”.

The first step is building the team, then you break it down just like an engineering problem. What does it take to have this team work on the problem on a full time basis? If the team can be just you initially, you don’t need to go raise money, you might be able to just build it out yourself, especially if it’s a software product. You might be able to get things off the ground on your won.

In order to convince investors to commit money to your product, you need a good story of solving a problem that others would be excited about, and the team to execute on it. If you have these two things and you pitch enough times, you’ll beagle to raise money

Pitching enough times is critical, because you’ll get a lot more ‘No’s than ‘Yes’es and that’s part of the territory.

I pitched to several hundred people in order to get 25 ‘Yes’es for a software company that I raised $1.5 million for.

Be prepared for doing a lot more than you expect. But also be aware that you don’t have to raise money, it depends on the type of company and the sort of expertise you bring to it, as well.

It’s definitely true that looking for funds is by no means the be all and end all of building a company. How, then, can you balance keeping your head down and focussing on building a good business that you believe in, with keeping an eye on the market and what’s in demand with VCs and accelerators? 

Microsoft and Apple couldn’t be more different than one another. 

Back in the 90s, Microsoft was very obsessed with its competition. It would identify the #1 competitor in the marketplace and try to destroy it by making a product that was largely the same, maybe slightly better, and just going after them in a very focussed way. They always had their head up, looking around, seeing who was doing something interesting, copied it and then used their leverage of their operating system to dominate that space. They did a phenomenal job at that and that’s what allowed them to build a now 2 trillion dollar company. 

Apple, on the other hand, was always head down, aware of what was happening in a particular industry but asking “If we were to solve this problem, how would we solve it?” Not “How is it being solved right now? Let’s do that but make it a little bit better”. Rather, “How would we solve this problem ourselves, looking at it from scratch as a blank canvas? And then let’s just stay heads down and work on this problem”. 

I, personally, prefer the Steve Jobs strategy because it allows you to create something unique. That doesn’t mean don’t be aware of the competitors, but it allows you to create something that’s more innovative, that might be a little bit more old, and builds a stronger connection with users. 

How do you decide how to value your company and what your ask is?

Valuation of a company is one of the toughest parcels for a founder, especially if they are optimistically viewing the market. Investors are usually the opposite of that. One of the greatest inventions is safe notes, that would valuate things based on later outcomes. The valuation can come down the road rather than at the very beginning.

Do you think issuing SAFE to Angel investors is a good idea?

The SAFE is a good option for angel investors because they don’t have the ability to value companies long term. SAFE solves a lot of value problems because at early stages it can be hard. Clubhouse, in less than a year, grew their value phenomenally. As an investor, I am more concerned with the problem being solved and the team working on solving it.

Can an idea be too early for investors to be interested?

The short answer is yes, ideas can be too early and too late. The most challenging part is trying to determine that. You are in the worst position to determine that. 

Most ideas will fail anyway, hence trying to determine if your idea will fail is not a wise choice. You need to try it out and let the market decide. Many ideas were ahead of their time, but then COVID facilitated their growth.

Something unexpected might always happen and change the pace of things. Allow yourself to explore. I suggest you don’t dwell on the early or late narrative. It is better to do things in advance than too late. You will find the right time and right place for it.

How do you know when the right time is?

Looking for what the market needs can be a good indicator. If you are going after a “well established” market, you need to have a disruptive technology that tries to solve the same problem but in a different way. Evaluate the problem, and try to solve it in your own way. 

At what stage does AZ Disruptors invest in companies?

Our investments with A to Z disruptors are pretty early, pre-series A or potentially a series A type of investment. 

When founders have created a prototype and are really convinced that it could be something but might not have any customers yet, we would invest as early as that stage. That would be an investment of, maybe, $25,000 or possible a little bit more. The raise would be anywhere from $100K to $1 million. Then, if they get a good response, they might raise $1million + where we might contribute $100K of that.

Then, we might participate in the 3rd stage where they’re showing consistent growth and just need to raise another few millions to build out the sales and marketing team and round out the development team. They might be raising 4 or 5 million more, and we might be participating at a quarter or half a million at that stage. 

While we won’t be the majority of each investment we aspire to be a meaningful part.

What do you think about post investments? As an investor, surely you would like to know how a company’s doing, if they’re pivoting etc. What have you seen in the past few years? Do most company’s stick with their original idea, or pivot? Do you like to be informed of these changes as an investor?

As an investor, I don’t actively try to modify the execution plan of any company that I invest in. I’ve decided that the founders are who I’m investing in and they should be the ones in charge of running them. I like updates quarterly or sometimes monthly, but I understand that it’s a lot of work to try to summarize how things are going on a monthly basis.

With regards to whether most companies execute on the original idea or often pivot, it basically comes down to the details of execution. Every company when you fast forward a year or two or five down the road from where it started, the product, its marketing strategy, its pricing -- everything -- is going to be largely different from where it started, but generally speaking, they’re still solving the same problem. 

The experimentation mindset is important, you have to be willing to try different things to see what works, but you can keep the goal of solving that specific problem the same.

During the pandemic, has the funding process changed?

There is no specific answer to that, it largely depends from founder to founder and idea to idea. Things can change very quickly and investors can adopt in any environment. 

Obviously, Clubhouse has taken off largely thanks to the pandemic, and also having big names back it. What role does that positive signal play for an investor? Does the fact that a company connects with another reputable, respected investor impact your decision to invest? It seems like its a combination of luck, capital, effort, social connections etc., which feels out of the hands of founders.

I think that goes along with the idea that “luck favours the prepared”. Look at Clubhouse for example. They’ve done things really well, their users experience is excellent. They’ve kept it pure, it’s audio only, you can’t chat even though they could have done that -- they could have done a lot of things.

That concept of multiple people in an audio room has been around for a while, but Clubhouse has had the most perfect user experience, and then, with luck favoring the prepared, they got someone who’s a Tier 1 VC completely embrace it and have weekly shows on it. So all the stars aligned for it.

Take a look at somebody like Twitter, though, who should have been in a perfect position to launch something like Clubhouse, and is trying to do that with Twitter Spaces, but their execution of that is extremely poor. I don’t know why it’s so poor, but it’s just terrible in comparison. As a clubhouse user you notice the flaws.

So, it’s all about the details of the execution, not just about the problem or the potential solution. All of the details matter. Clubhouse put it all together, their timing happened to be perfect, they got embraced by a tier one VC and it all came together.

Twitter could still dominate in this exact same space if they could get their product together in a good way, but they haven’t been able to do it.

A lot of factors come into play for products or companies to be a success, and it’s hard to predict what all of them will be, which is why we try to leave it to the founders and hope for the best.

Is it always a matter of execution, or do you feel that when people know a certain company for certain services, they’re reluctant to embrace, or even accept, other dimensions to their product?

There definitely is some element of truth tothat. You see a company as solving a particular domain of problems and outside of that domain they would have just as much difficulty as any startup would.

What these companies have going for them, though, is reach. If facebook tries to incorporate dating, their reach is a couple billion people, so they can try to promote that product fairly easily. I would argue that the reason for the failure of their dating apps is probably, if I had to guess, because they did a poor job in the execution of the product. 

Or, because they tried to copy someone who is a leader, which rarely works well unless the space happens to be growing fairly rapidly. In Which case, you could potentially get more of the new people coming into the spitch but not necessarily get people to switch.

It is a difficult thing for even established companies to do well, which is why the biggest ones -- microsoft, google, facebook -- go out and buy the leaders in a particular space, as opposed to trying to build their own.

Those start-ups that outperform the big-players with infinitely more resources, I guess they could be defined as disruptors. What, to you, defines a disruptor company? 

There isn’t anything unique about my personal strategy. A company needs to have a target and understand the problem area. Founders need to be experts on the problem and be able to execute solutions. That’s already a big challenge - you have to pick something exciting where you see a shift happening, then you have to be able to actually execute on the solution to that problem area.