Entrepreneur First CEO Matt Clifford on early stage talent investing

Matt Clifford is the co-founder and CEO of Entrepreneur First, 1 of Europe’s starring talent investors. Along pinch his co-founder Alice Bentinck, he is nan writer of nan caller book How to beryllium a Founder (Bloomsbury, 2022). He is besides nan Chair of nan UK Government’s Advanced Research and Invention Agency (ARIA). Matt precocious joined McKinsey elder partner Andrew Goodman to stock his perspectives connected building Entrepreneur First, what it takes to beryllium a successful founder, and really nan European start-up ecosystem is evolving. Their edited speech appears below:

Investing successful start-up talent much than ideas

McKinsey: Tell america astir Entrepreneur First. What does EF do?

Matt Clifford: Entrepreneur First (EF) is simply a caller benignant of statement trying to summation nan proviso of awesome entrepreneurs globally. Our starting constituent is that nan world is missing retired connected immoderate of its champion founders, and location are tons of places wherever location are superb group who could and possibly should beryllium entrepreneurs, but nan way into entrepreneurship successful a batch of nan world is not straightforward. There are taste barriers, location are applicable barriers, and location are financial barriers.

At EF, we effort and region each those barriers by uncovering awesome group before they person a company. We’re not a accepted VC, wherever we return pitches from start-ups that person a squad and an idea. We commencement pinch nan individual—we telephone it “talent investing.” We tally a system programme for individuals to travel together, find a co-founder, test, and validate an idea, return immoderate money from us, and past spell retired into nan world, ideally to build large and important companies.

McKinsey: The start-up and investing scenery has evolved importantly since EF launched successful 2011. How do you separate yourselves successful an progressively crowded market?

Matt Clifford: It’s awesome that there’s been this detonation of options for entrepreneurs. But astir of nan infrastructure for entrepreneurs—incubators, accelerators, task funds—all assumes that nan institution already exists. It is almost arsenic if they judge nan proviso of entrepreneurs and companies is fixed. At Entrepreneur First, we don’t deliberation nan proviso of entrepreneurs is fixed. We don’t deliberation nan proviso of awesome companies is fixed. The constituent of EF is not to money things that already exist. It’s to spell from zero to one. We for illustration to opportunity that our ngo is to make companies hap that different wouldn’t exist.

The group that EF is correct for are very eager and talented, and they cognize they want to person effect done entrepreneurship, but they still request to get personification successful their web who’s nan correct co-founder. They person an thought but are unsure whether it’s nan correct thought aliases moreover a bully one. All these things are yet to beryllium crystallized. So, you tin deliberation of EF arsenic catalyzing entrepreneurship correct astatine nan opening alternatively than taking thing already moving and giving it rocket fuel.

People take EF to subordinate a adjacent group of group that do want to spell connected that journey. Over nan past decade, we person devised a methodology for helping group commencement companies pinch strangers. That’s nan halfway worth proposition of EF.

McKinsey: Tell america much astir that travel to building EF and what you person learned.

Matt Clifford: When Alice Bentinck and I started Entrepreneur First, 1 of nan guiding principles was that betting connected talent early was not conscionable an important point to do but nan instauration of an full ecosystem.

We astir apt didn’t recognize really contrarian nan thought was astatine nan time. We didn’t cognize that 1 of nan mantras of Silicon Valley was, “Don’t commencement a institution pinch a stranger.” And so, building EF has been a travel of gradually producing impervious points to show that this was not only imaginable but possibly a amended measurement of building companies.

We started pinch very small funding. We past built a first cohort. It looked rather promising, and truthful we raised a mini magnitude of money and ballooned from there. Today EF has raised adjacent to half a cardinal dollars. Our companies person raised complete a cardinal dollars of task capital. And successful that time, we scaled a lot. Today Entrepreneur First is 120 group crossed six countries, producing astir 120 companies a year. And 1 of nan awesome things is that nan travel Alice and I person been connected arsenic founders very overmuch mirrors nan process that entrepreneurs we backmost spell done arsenic well.

Looking for ‘edge’ successful a early founder

McKinsey: You and Alice person conscionable written a book, How to beryllium a Founder. What does it return to beryllium a awesome founder?

Matt Clifford: The first point I ever deliberation astir erstwhile asked what a awesome laminitis looks for illustration is to commencement from nan other position and say, “What isn’t it?”

One of nan large myths is that awesome founders are genetically different, immoderate breed apart, and it’s truthful evident to them that they should beryllium an entrepreneur that they don’t see thing else. That’s not existent astatine all. A batch of nan things that you would look for successful a awesome laminitis are for illustration what you would look for successful a awesome executive successful a bigger company, a awesome consultant, aliases really a awesome anything.

The main things we look for are, “Can this personification beryllium a highly effective leader? Are they wished and resilient? Are they a awesome problem-solver?” These things are rather applicable crossed domains.

Now, what makes a laminitis a laminitis arsenic opposed to being an executive astatine a larger company? Well, again, a fewer things that it’s not. I don’t deliberation it’s consequence appetite. It’s difficult to beryllium a awesome exec if you don’t person consequence appetite.

But 1 point that awesome founders do person is simply a desire to create thing from nothing. There are different phases that founders spell through, and nan shape we specialize successful astatine EF is nan zero-to-one phase. We are looking for very smart people, who person a earthy bias to action, are very determined, and person a way grounds of making things happen. But we’re asking, “Can they make things hap successful conditions of A, uncertainty, and B, almost nary resources?” Some group are wildly successful but request definite resources and clarity astir what they’re doing. Entrepreneurs must beryllium capable to thrive without either of those.

McKinsey: In nan book, you talk nan thought of ‘edge’ successful founders. What is ‘edge,’ really do group create it, and really do you measure it?

Matt Clifford: Because EF has to make an finance determination ‘pre-company’ earlier we cognize what nan founders will activity on, we person to attack action otherwise from a emblematic VC firm. Most VC firms are assessing nan founder, but they’re besides asking, “How large is this market?”, “What are nan margins apt to be?”, “What is nan competitory environment?”. We don’t cognize immoderate of that. We prime group earlier they person an idea, which intends we person to effort and find immoderate awesome of what sorts of ideas they mightiness beryllium well-suited to activity on.

As a result, erstwhile assessing people, we look for what we telephone ‘edge.’ And by edge, we mean a individual competitory advantage. We are accelerated forwarding six months and saying, “What successful this person’s background, skills, experience, possibly moreover hobbies and interests, could six months from now beryllium nan instauration of a plausible communicative astir building a large company?”

An separator mightiness beryllium that you understand a peculiar exertion well. For example, immoderate of EF’s astir salient companies are built connected a very heavy knowing of instrumentality learning and really to use that knowledge. Edge tin besides travel from domain experience. An individual has travel retired of a peculiar industry, for instance, wherever they’ve observed a large problem for which they deliberation exertion provides an answer.

Start-up roles that do and don’t scale

McKinsey: You are now astatine nan constituent wherever you person invested successful galore companies complete nan past decade. What person you learned astir what it takes to standard a start-up complete that period?

Matt Clifford: One absorbing point is that immoderate roles wrong a start-up standard rather good arsenic nan institution grows, and immoderate don’t. Prospective entrepreneurs should effort to beryllium clear-eyed astir that.

For example, this is astir apt obvious, but a awesome founding CEO tin spell each nan way. And that’s because a CEO’s occupation is chiefly communicating a imagination and a strategy and hiring awesome people.

On nan different hand, there’s almost nary measurement a institution will standard if they don’t upgrade nan executive squad complete time. This reality is sometimes difficult to face erstwhile you’re a set of brothers and sisters successful a basement. But erstwhile your institution is only made up of 5 aliases 10 individuals, they won’t beryllium nan aforesaid group arsenic erstwhile you’re a institution of 100 aliases 1000.

Founders often person to reframe that benignant of alteration arsenic positive. Each stage, pinch each bid of magnitude, requires a peculiar accomplishment set. Running an engineering squad of 1,000 engineers is very different from being a CTO arsenic an individual contributor.

What we’ve learned complete clip is that self-knowledge is vital. Founders person to recognize which spot of nan travel aliases occupation they like. Some group want to spell each nan measurement through. But it’s OK if a laminitis says, “We’ve sewage to 100 people, we person leaders successful spot that are fresh to spell from 100 to 1,000, and it’s not me.”

Lessons from start-up nonaccomplishment and exertion success

McKinsey: Like immoderate early-stage investor, you person besides seen galore companies fail. What lessons person you learned astir why that happens?

Matt Clifford: I deliberation it’s worthy dividing failures into 2 categories. Sometimes nan founding squad do messiness things up. They neglect to execute, disastrously hire, aliases build a unspeakable culture. But this doesn’t hap astir of nan time. There are very fewer companies successful nan EF portfolio that grounded because of nan measurement they executed. Much much communal is what I would telephone ‘fundamental risk.’

The full constituent of a start-up is trying to do thing that has yet to beryllium done. But that intends that a founding team’s occupation is to progressively de-risk nan assumptions baked into nan idea. And successful startups are efficaciously nan ones that find their assumptions were correct.

You tin deliberation of nan different rounds of financing that start-ups spell done arsenic various stages of de-risking different kinds of risk. What benignant of consequence is nan 1 that astir often kills companies? Well, early on, it’s, “Is this a point astatine all?” Is nan worth proposition that you person successful mind for nan customer 1 that genuinely resonates pinch nan customer? Will they salary for this point that you deliberation is valuable? In astir cases, companies neglect early connected because nan reply to those questions is no.

And that’s why some astatine EF and successful nan book, what we stress astir is talking to your customers. I’ve ne'er met a institution that grounded because it talked to its customers excessively much. I’ve met galore that grounded because they assumed they knew what their customers wanted and were wrong.

McKinsey: You’ve besides now invested successful founders crossed various sectors—from heavy tech to nutrient delivery. If you look retired complete nan adjacent 5 years, what sectors aliases circumstantial technologies are you astir excited about?

Matt Clifford: One of nan joys of talent investing is that we don’t person to beryllium excessively smart. People often ask, “Oh, you spot truthful galore ideas; what ideas do you have?” The reply is that astatine EF, we’re very bully astatine identifying talent—and nan talent comes up pinch nan ideas. That said, we must determine wherever to look for talent, truthful it’s existent that we do person immoderate thoughts connected this.

EF has been very fortunate passim nan past 10 years to person been early to nan thought that instrumentality learning would unlock important capabilities that would beryllium applicable crossed some user and endeavor applications. We started investing earnestly successful instrumentality learning backmost successful 2013. We are 9 years from that, and it feels for illustration instrumentality learning is still nan astir important point we attraction astir today.

There’s that awesome Marc Andreessen phrase, “Software is eating nan world.” You tin now say, “Machine learning is eating nan world.” And that’s going to beryllium existent not only successful nan evident ways but crossed sectors we mightiness not spot coming arsenic amenable to that approach. Machine learning is eating biology successful absorbing ways. Machine learning is eating power successful absorbing ways.

But successful general, we’ve learned that we should beryllium prepared to beryllium surprised. Whenever we’ve tried to get excessively clever astir reasoning we tin foretell nan early alternatively than place nan group who tin foretell nan future, we’ve messed up.

Europe’s start-up ecosystem: Catching up successful owed time

McKinsey: Switching gears, nan European start-up ecosystem has developed importantly complete nan past decade, but astir group still judge it lags down Silicon Valley. What is holding Europe back, and what is needed to flooded those challenges?

Matt Clifford: It really is an bonzer explosion. When we started Entrepreneur First successful 2011, I deliberation 1 money successful London was dedicated to seed investing. I don’t cognize really galore location are today, but erstwhile we tally Demo Days, we get hundreds, if not thousands, of people, which wasn’t nan lawsuit erstwhile we started.

Still, nevertheless bullish you are connected nan European scene—and we evidently are, pinch 3 sites successful London, Paris, and Berlin—there is still a spread pinch what you spot successful Silicon Valley.

Both nan bullish and bearish reply is that nan missing constituent is time. People hide that Silicon Valley is not a ‘90s-born phenomenon; it’s a post-war phenomenon. The logic that’s important is nan powerfulness of nan generational effect.

Vibrant ecosystems recycle not only superior but talent. Once you person tally a 1,000-person engineering team, not only tin you do that again, but you’ve astir apt trained 10 group that tin do that arsenic well.

And so, if you look astatine wherever Europe is still lacking, a batch of it’s conscionable astir nan scaling infrastructure, which is some talent and to immoderate extent, capital. The bully news is that nan generational effect is already happening successful Europe. Ten years ago, astir each task investor successful London had a axenic finance background. They had travel retired of finance banking and backstage equity. There’s thing incorrect pinch that. Some of nan awesome investors are from that background. But if you look astatine Silicon Valley, astir well-known investors there, peculiarly much recently, are founders; they’re operators. That’s happening successful Europe now. So, I consciousness optimistic that astir of what we request to spot alteration will hap organically pinch time.

Focusing connected nan micro much than nan macro

McKinsey: The past decade has been an unprecedented play of world maturation and comparative stability. How would you counsel start-ups to hole for a imaginable play of economical turbulence ahead?

Matt Clifford: It’s existent that a nontrivial portion of nan task superior roar of nan past decade aliases much has been driven by nan ahistorical, close-to-zero liking complaint environment. And it’s surely existent that superior allocators look to things for illustration start-ups arsenic a root of output and maturation successful that benignant of environment.

However, concluding that this is simply a bad clip to commencement a institution would beryllium wrong. For a seed-stage start-up, nan root of consequence is seldom nan macro environment. Your root of consequence is, “Can you person 1 personification they should beryllium a customer?” When you’re conscionable starting and looking for 5 customers, nan wide propensity among consumers of businesses to walk shouldn’t beryllium nan point that makes aliases breaks your company.

Similarly, while late-stage financing has slowed down massively since past year, I spot that overmuch little astatine nan early stage. Seed investors coming are assuming that erstwhile those caller companies yet postgraduate to go big, established companies, nan macro situation will beryllium very different from today.

I deliberation we are going to spot a play wherever immoderate of the, let’s say, exuberant valuations of 2021 get corrected alternatively quickly for startups that built unsustainable businesses that assumed superior would beryllium abundant astatine debased costs forever.

But for entrepreneurs starting their travel today, nan macro situation is not that relevant. The astir applicable point is to talk to your customers and make judge you’re building thing group want; then, hopefully, successful six aliases 7 years, erstwhile you request to raise that pre-IPO round, we’re successful a very different world.

The semipermanent worth of exertion and optimism

McKinsey: Like galore different early-stage investors, you are an optimist. As we attack a imaginable play of economical turbulence, wherever are nan ‘green shoots’ to beryllium optimistic about?

Matt Clifford: When I first started EF, I realized very quickly that, one, it was very easy to prime holes successful each start-up thought that I saw and, two, that location was almost nary worth successful doing so. If you foretell that a start-up will fail, you’re apt to beryllium right, but location is nary use to being right.

One of our friends and investors astatine EF is Nat Friedman, who utilized to beryllium nan CEO of GitHub, and he has this awesome line, “Pessimists sound smart. Optimists make money.” Most things do fail. But what’s typical astir task capital, what’s typical astir start-ups, is that nan winners are truthful large that it pays for everything other galore times over.

I would opportunity that nevertheless pessimistic you are astir nan system coming aliases nan destiny of immoderate fixed company, nan existent mobility to inquire is, “Do you judge that nan technologies that are emerging coming are going to beryllium much aliases little important 10 years from now, and do you deliberation that value is going to manifest successful nan existent system aliases not?”

It’s difficult to ideate that nan sorts of things that we’re starting to see, peculiarly successful AI, will not beryllium important 10 years from now and that they won’t select done to nan existent economy. Many things will fail, but it’s difficult not to judge we’re heading for a much productive and abundant world.