The founders I collaborate with know that I often reflect on John Coltrane's impact on jazz. Recently, I've been immersed in his revolutionary harmonic progression, famously known as “Coltrane changes.”
Featured on his 1960 album "Giant Steps," Coltrane changes are marked by swift and constant modulations between different key centers. These complex progressions break away from conventional jazz improvisation, urging musicians to explore new scales and patterns to navigate the shifts. This innovative approach profoundly influenced the evolution of jazz.
So, how does this relate to entrepreneurship in 2023? Quite a bit. This year, businesses faced the need to return to foundational strategies while adapting to a turbulent macroeconomic climate. Founders had to rethink their growth strategies, viewing cash on hand as essential for survival, making tough personnel decisions about indispensable talent, and prioritizing expertise over loyalty. In a market grappling with the repercussions of AI, it became crucial to establish their product as an essential offering rather than a luxury.
Investors also experienced a dichotomy. On one side, the AI boom had everyone scrambling to create the next big AI venture. On the flip side, many aspiring entrepreneurs hesitated, either disheartened by previous crypto experiences or daunted by the fundraising process.
I strive to be a voice of reason in discussions with founders, emphasizing that adaptability is vital and that startups are a marathon, not a sprint. Historical downturns often pave the way for outstanding companies and visionary leaders. Just as "Giant Steps" inspired musicians to innovate, this year calls for entrepreneurs to rise to the occasion.
As we approach 2024, it’s crucial for entrepreneurs to harness creativity and build resilience, skills, and discipline to secure their future over the next two decades.
Prepare for the Next Generation of Startups
History shows that during economic downturns, the most innovative entrepreneurs thrive. Consider the leading startups of the past two decades: many iconic companies such as Stripe, Uber, Airbnb, and Square emerged in the aftermath of the 2008 financial crisis. Guided by visionary founders, these companies disrupted traditional markets with their disciplined, focused entrepreneurial spirit—qualities that shine during challenging times.
Take Dropbox, for example. Back in 2008, with just nine employees, Drew Houston raised his Series A funding, driven by an unwavering vision of how cloud storage could revolutionize file storage and collaboration. With a scarcity mindset, Dropbox became highly creative and efficient with its resources, amassing over 45 million users by our Series B investment in 2011, despite hiring only a few additional staff.
In 2024, I anticipate a new cohort of generational founders will emerge, distinguished by strong core beliefs and discipline, committed to their vision, and capable of crafting compelling narratives that attract top talent to their journey.
AI: The Driving Force Behind Tomorrow's Innovations
In 2024, AI will dominate headlines. However, I’m particularly eager to see how entrepreneurs translate AI technology into market-ready products and services, reshaping everyday business applications.
Since the surprise emergence of ChatGPT a year ago, the AI landscape has buzzed with excitement, often muddling practical applications with hype. However, as reality settles in, new companies are emerging with a clear entrepreneurial focus on harnessing AI to create significant value.
This trend will gain momentum as every organization formulates its AI strategy and integrates AI into workflows. This shift will open avenues for market disruption, moving AI discussions from speculative scenarios to actionable innovations.
I am keen to observe how ambitious entrepreneurs will capitalize on this opportunity. Historically, AI innovation stemmed from academic researchers tackling complex problems. While these researchers have paved the way for progress, the next phase will demand not only innovation but also the crafting of commercially viable products that resonate with specific markets.
When we invested in Cohere, we were impressed by the founders’ vision for productizing large language models into accessible applications for enterprise use. I felt similarly when supporting biotech startup Cradle, where the founders not only possess deep machine learning and protein engineering expertise but also identified a robust demand for their R&D products.
We are just beginning to scratch the surface of AI potential. Much like the emergence of Google post-Yahoo or Facebook following MySpace, AI will require time to develop fully. Visionary founders are already studying AI developments in preparation for launching the next wave of transformative companies.
AI Awakens Dormant Sectors
One of the most exciting revelations from 2023 was the insight it offered into previously stagnant sectors, which are now ripe for AI-driven transformation.
Take advertising, for example. It's been years since we witnessed significant advancements in ad technology. With AI enhancing targeting and personalization to unprecedented levels and the untapped potential of predictive analytics and programmatic advertising, expect transformative shifts in this space.
The dating sector also stands on the brink of disruption. While critics argue that AI may dehumanize dating apps, I argue the opposite. Enhanced matching algorithms, personalized suggestions, and even immersive augmented or virtual reality features could enhance human connections, creating immense opportunities for those who strike the right balance.
Additionally, industries like personal productivity applications and gaming are primed for innovation, and I eagerly anticipate how AI will elevate these fields in 2024.
Global Collaboration for AI Regulation
As an advocate for global perspectives, I find it perplexing when I observe nationalistic viewpoints surfacing within startup culture.
AI is a transformative technology with inherent risks. While thoughtful deployment is essential, framing discussions in nationalistic terms detracts from the central goal: ensuring ethical and safe technology use. Achieving this objective demands global collaboration.
AI technologies often transcend borders, meaning their impact is worldwide and regulations must also reflect this reality. Diverging national approaches could result in fragmentation, expose vulnerabilities, stifle innovation, and create a disjointed regulatory landscape.
Navigating the complexities of geopolitical differences will undoubtedly challenge global AI regulations, but a unified approach is vital to establish effective safeguards while fostering an environment conducive to AI innovation. The focus needs to shift from hypothetical fears about AI to addressing real-world applications and potential threats.
Turning Challenges into Opportunities
To thrive, founders must tune out distractions while pursuing their vision. The era of “low-risk, high-reward” initiatives has passed.
Historically low-interest rates led to a false sense of security, convincing many entrepreneurs that risk-free rewards were attainable. This notion is an illusion.
Real entrepreneurship involves embracing substantial risks—those that can yield transformative outcomes. It requires pursuing bold ideas despite the fear of failure, leveraging resilience to learn from setbacks, and remaining committed to untested ventures.
Stewart Butterfield, co-founder of Slack, exemplifies this mindset. He twice attempted to create an online multiplayer game and, on both occasions, had the foresight to pivot when his endeavors faltered. His first venture, a shareable photo platform, evolved into Flickr, which he sold to Yahoo within a year. After realizing his second game, Glitch, wouldn’t generate profits, he shifted focus to a communication tool that became the successful Slack, ultimately acquired by Salesforce for $27.7 billion.
Founders opting for low-risk paths may find themselves outpaced by those willing to take bolder, innovative strides. As an investor, I prioritize backing founders who are passionate about their vision and who are prepared to take the significant risks that lead to exceptional returns.
Failure is part of the journey when aiming high. Embrace Samuel Beckett’s wisdom: “Try again. Fail again. Fail better.”
Prioritize Discipline Over Initial Valuations
In my experience, a company's early success often correlates negatively with the amount of capital raised in its initial round.
Looking at our portfolio, some of the standout success stories began with modest resources. Datadog, now valued at $38 billion, raised just $6.2 million in its Series A. Figma secured $3.9 million in seed funding, while Discord raised only $1.1 million to kickstart its journey. Roblox's Series A funding was a mere $560,000.
These companies exemplify how an early focus on scarcity fosters discipline, a vital quality for entrepreneurs, helping to eliminate distractions and concentrate on what truly drives success.
When we first met Adyen's founders in 2011, their vision for a global payments solution was undeniably ambitious, especially for a small Dutch startup. They were already profitable with customers across multiple continents, demonstrating such discipline that it was up to us to convince them to accept our investment in their Series A.
As investment in 2024 begins to take off, jaw-dropping valuations are on the horizon. However, don’t assume that high valuations automatically equal success. History offers ample examples of companies that falter despite raising large sums due to a lack of discipline, internal challenges, or competitive shortcomings.
Growth Shouldn't Be Sacrificed for Profitability
Wall Street promotes the idea that profitability reigns supreme, but businesses should not be dictated by external expectations. Catering solely to Wall Street is akin to letting the tail wag the dog.
Profitability is indeed critical, but it should not come at the expense of long-term vision. Balancing risk and growth is essential. The most successful companies master the art of growing profitably, enhancing margins, and embracing efficiency.
In 2023, no one would have faulted Figma for hosting a modest developer conference. Yet, following the unexpected attention from the stalled Adobe acquisition, they seized the moment to conduct their largest conference ever, attracting over 8,500 attendees. This successful event repositioned Figma in the market, unlocking potential for future growth.
Embrace the Fundamentals
As humans, we often seek the latest trends, but novelty doesn't always equate to improvement. Growth and innovation are essential, yet simplicity can be powerful.
The pace of change is unprecedented, and 2024 promises to be a groundbreaking year. As founders and investors, we must remain vigilant against hype and stay grounded in the foundational principles that underpin any successful business:
- Visionary leadership
- Clear value propositions
- Well-defined target markets
- Products or services that deliver real value
These principles inspired our investment in Figma back in 2013. When I first met Dylan, then a 19-year-old intern at LinkedIn, there was little to indicate on paper that he or Evan would succeed. However, we believed in their vision and their commitment to creating a pivotal product design platform.
At Index, we prioritize people in our investment strategy. Entrepreneurship is a craft, and the entrepreneur is the master craftsman. Our role as investors is to support and empower them, recognizing that they know what’s best for their businesses.
The companies that will excel in 2024 will embody the true spirit of entrepreneurship, driven by grand aspirations, compelling visions, and unwavering dedication. I’m excited to witness the emergence of these leaders and to support them on their journey.
Ranking
