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Creating a Culture of Failure with Serial Entrepreneur & AI Investor Paul Claxton

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Paul Claxton profile
Paul Claxton profile

How did spending a decade in one of the strictest military regimes in the world help a young man in his subsequent startup career?

The answer is twofold: Discipline and culture.

Growing and scaling a startup is certainly not designed for the faint-hearted, and the most progressive startup leaders understand that not only do they require a robust set of tools, but also an agile team to perform all the necessary functions of the growth engine.

In order to even get to a point where a business is profitable takes a strong knack of discipline from the builders— it’s day and night to get the ship off the ground. The culture that is created by the first 5 to 10 people in the company is a crucial barometer for what’s to come. And for technology companies in particular, if you don’t continue innovating, you die. Hence, there is no room for fear.

This is why Paul Claxton, a serial tech entrepreneur, founder of Reciprocity ROI, formal U.S. Marine, and now, investor advises startup leaders to create a culture of failure.

Just like in the real battlefield, you want to enlist a group of people that can handle working in the trenches and will have their team’s back in the worst times. If you want to build a winning startup, start encouraging a culture of failure.

The less stunted you are from failure, the more room there is for important lessons brought on by mistakes and innovation. 

Paul shared with us his unique insights on scaling and growing startups and tips for transitioning into investing.

Interviewer: How has your Marines career influenced your career in technology and current path?

The Marines provided me with an extremely well-rounded perspective that allowed the application of psychological, technological, leadership, and operational concepts in both practical (office or urban) and abstract (foreign demographics, extreme cold/hot weather, pitch darkness, barren deserts or jungles) environments.

During my time as a Marine, I worked with complicated missile systems and ground-based communication system radars in some of the most remote, austere corners of the world. I also ran command operations centers that interfaced directly with Pentagon defense entities. 

The command operations I oversaw, managed and reported on drone and combat robotics systems for missions across a 60,000-square-mile area of operations.

I use some of this experience and understanding in my business today. My experience as a Marine gave me a leash into the world of the Department of Defense (DoD) and it is true that funding for the newest and most consequential innovations is facilitated at the government level. As an entrepreneur, I still have my hands in DoD areas where I am able to bridge that gap in the market for my business and for others. 

Interviewer: Can you tell us the most significant learning lessons from your first bootstrapped company and how you replicated the results from that one to create more companies?

RROI banner
With permission, Reciprocity ROI

Some of the most important things I have learned as a bootstrapped entrepreneur are as follows: 

1. Watch where your money is & minimize ambiguity

Money does not solve your problems if the thing that the money is being allocated to is open-ended or ambiguous, that “thing” will always want more money, time, and resources which is not scalable unless the outputs are greater.

You can mitigate ambiguity with conclusive inferences, hypotheses, and projections, but you can never completely eliminate it especially as the business grows larger. By mitigating ambiguity, you can think of it the same as reducing wind drag on a car; you will never get rid of it completely and as you increase your speed, or in this case grow the business, the wind drag (ambiguity for the business) also increases.

Money talks in the form of investors and customers, and understanding that an investor and a customer are really synonymous, can be a life-changing perspective for an entrepreneur. Customers invest in your business to save them time, make them money, or save them money, and investors should be treated as customers because they want you to make them money, or save them time and money by contributing to their investment portfolio of companies.

2. Understand the players

Understand the difference between A players, B players, C players, and D players and that you have to meet people at their level and groom them.

A players will die for the cause and do things like sell their homes if they have to so the business survives and thrives. 

B players won’t do that, but they will do as expected, and maybe even put in some extra hours without being asked if they see something needing to be done.

C players do the bare minimum. D players don’t even meet the bare minimum, but they do provide insights on who to avoid.

Each player fits into different areas of the business. When you are first starting out and scaling,  you have to have only A players on your founding team. As you get into phases of growth, look for A players, or B players that can become A players. You will need the B players to grow as your company grows so they can manage the business within the business.  Repeat for C players that can move into B players. Avoid D players.

3. You will destroy your business by the people you let in it.

Be careful who you let in it. People can either be your greatest asset or your greatest liability.

4. Network like crazy.

Network, network, network. At the highest levels of business, quality relationships are everything. A favorite personal quote of mine is, “Great business happens when you have great relationships”.

5. No one in today’s world is a born entrepreneur

Most things are not invented anymore, they are only recreated with a new spin or improvement. In a report by the World Intellectual Property Organization, the number of patent applications worldwide decreased by 3%  from 3,325,400 to 3,224,200 between 2018-2019. Getting through entrepreneurship successfully is based purely on experience and learning from your mistakes. There is no way someone can be born with the traits needed to survive in this increasingly complex world; the aptitude and fortitude that the 21st century requires is something that has to be developed and honed over time.

6. If you are looking to start a business

You do not need to make $100mm or even $10mm to be hugely successful. Look at  entrepreneurship as a stepping stone. Perhaps build a $1mm dollar business, then your next one could be $100mm. Not every business is primed to be a $100mm dollar business. It really depends on where the industry for the business is at in terms of inflection point as well as how much change the business can create in the industry. 

Just because your TAM – Total Accessible Market Value is $1bn does not mean you will even get 10 percent of it. You may get 1 percent or 80 percent depending on how much innovation your business creates.

In simple numbers, if you can build a $1mm dollar business of an ARR (annual recurring revenue) EBITDA (Earnings Before Interest, Taxes,  Deductions, and Amortization) and a total value of $1.8mm EBITDA as an example, and own 70 percent of it, you can likely sell it for 2x to 3x its total value. At 2x, you can easily make $2.5mm. Businesses sell not just off of their revenues, but off of the value they create in the marketplace and this is why businesses sell for 2x or 3x and sometimes 4x or higher based on their tangible and intangible value.

You can then take that money and reinvest it and build something else. There is no easy way to become a successful entrepreneur; you either build it or acquire it and each one has its pros and cons. Think about that.  

Interviewer: Across the whole technological landscape, which vertical are you currently most intrigued by and why?

Paul: I’m quite fascinated with AI. Here’s why:

I understand market shifts and the human psychology behind them, and I also understand what economic factors drive market shifts and innovation.

If you look at how humans made decisions throughout history and how societies make decisions collectively, it’s the same process of thinking, but just with a different color to it. The basic mechanics of psychology never changed; where things like Maslow’s Hierarchy of Needs (Physiological, safety, love/belonging, esteem, and self-actualization) remain constant in human DNA. I looked at AI and thought, “AI’s going to revolutionize our five senses in terms of how we perceive the world and obtain satisfaction for our needs.

It’s going to revolutionize our ability to interact with each other, as well as expand our mental capacity. Decision-making will be accelerated through new product developments that will help us explore more of the earth and the universe. Economically speaking, it’ll help us navigate the same repetitive economic factors that cause inflation and recessions.

Because of the increased utility around data, we’ll be able to do things not just collectively, but individually that we never even thought were possible. I look at AI similar to the internet or the discovery of fire. It is something that will totally transform every facet of life from every corner of the earth. However, AI will be more than fire and the internet. The internet and fire just simply enhanced our abilities as humans. AI is going to do more than just enhance; AI will help us have discretion, power, and control over how we evolve as humans. This is more than just enhancing human capability, this is a new creation of capability for human ingenuity and ability. 

Interviewer: For emerging technology companies, is there a specific indicator of when they’re ready to move out of the scaling phase into the growth phase? 

Paul: It’s never a one size fits all answer for every single company, but there are several areas to consider. It’s a standard framework that every business has to look at for its overall business operation. Every business has a marketing department, an HR department, etc. Before those businesses can achieve the growth phase, they need to figure out, “How do we create a vision for our departments and how do we build our responsibilities matrix around that?”

Following that, what are the competitive factors for our departments? What’s our vision for the hiring process for these departments? You have to build that out 18 to 24 months ahead, and think about an ideal future, but also think about worse-case scenarios e.g. things like the COVID pandemic, or Russian sanctions. So think about planning for layoffs, customer attrition etc. What are your plans if they happen? Contingency planning is like insurance, it takes time and resources for something that may never happen, but when it does you will be glad you did.

We have to reiterate that as needed on a quarterly basis and fine-tune it. As a predecessor to growth, I would answer those essential questions and plan accordingly. The seven core areas that are critical to a business operation are:

  1. Technology and systems
  2. Relationships and networking
  3. Sales and marketing
  4. Finance / Legal
  5. HR and administrative operations
  6. Innovation
  7. Supply chain (Can lag the business operation if hard materials are not available or too expensive. Can’t enter new markets due to regulatory and security restrictions or hurdles. Even if you are a virtual or SaaS company with no physical product, you still have a supply chain e.g. your vendors, your staff, your contractors etc.)

You need a plan for all seven of those areas ideally.

A scaling startup would need to have a founding team member in place to oversee each area. Ideally, it should not be one person that oversees more than one area, as you need a certain level of dedication, but we all know people have to wear more than one hat in a startup, but this gives a target every startup should look to reach where they have one hat in each role.

In addition to that, what is your core product? Do you have a specified go-to-market plan for it in specific industries, demographics, and geographies? Do you know who your competitors are?

Once you get to that point, it’s just a rinse-and-repeat process; you continue innovating and improving things as you go along.

Businesses are ready for growth at different stages, and the question as to whether a business is at the growth stage is stipulative. Are your core values in jeopardy in exchange for growth? Is there consistency in the business? Have people been brought in for key leadership roles? Does the business have all the resources needed? Are imperative systems and processes documented? Again, look at the 7 core areas of business I mentioned earlier. If you haven’t addressed these, it’s not ready for true growth.

When you are growing you are increasing revenue and market share (outputs) at the same time as you add more resources (inputs). When you scale you are increasing revenue and market share (outputs) exponentially while adding resources (inputs) sparingly. Obviously, you can only scale for so long until you plateau. I would say at this point you have to consider transitioning to the inputs needed for growth. Depending on the type of business you are, resources could vary. As a business focuses on growth it will have to look at scaling again. You typically see businesses go through cycles of scale and growth where they scale up to 1mm, then they grow for a few years perhaps to 2mm or 3mm, and then have to scale again up to 6-8mm, and so on.

Interviewer: How did you transition into VC, and what advice would you give other tech entrepreneurs who wish to enter this space? Are the barriers to entry low or high?

  • Learn the ins and outs of SEC regulations.

Paul: My number one advice for transitioning into VC would be to learn the ins and outs of the Securities Exchange Commission (SEC). There’s a lot that goes into raising capital and it’s a tightrope that you constantly have to watch. I see many people who are simply unaware of the pitfalls of raising capital and the legal implications of it. Whether you’re a VC and you’re trying to raise money from limited partners, or if you’re a startup and trying to raise money from VCs, people need to be aware of that. People need to be aware of who they’re raising money from and investors need to be aware of who they are giving money. There are a lot of people out here that claim to raise money for you, but these people are not brokers many times. These people are improperly soliciting funds. You don’t want to get caught up in a situation where you actually do raise the money and you end up being accused of misrepresentation, illegal soliciting, bribery, and all sorts of stuff. It’s a downward spiral into a black hole.

  • The barrier to entry is high

Paul: The barriers to entry are very high, particularly for minority groups or if you’re a woman, or if you’re both. When the barrier is high, it’s an opportunity to blaze your own path. Be creative, don’t be complacent, and take initiative in getting into what you want. You don’t necessarily have to be in VC to be an investor, there are a hundred ways you can invest. In anything you do that is fulfilling, you will experience many difficulties that seem like pure hell many days, but if you can develop the fortitude that will bring wisdom and help you view people in a whole new light, with more sympathy as well as cautious optimism.

And most importantly, make sure you know why you want to get into VC in the first place. Don’t get into it solely because you want to make a return. Get into it because you genuinely like being involved in companies, building, growing, and scaling them.

  • Study venture capital

I would study the successes and failures of venture capital. For example, failed case studies like WeWork where investors were overly ambitious, and successful case studies like Netflix where investors were dismissive. The barrier to success is pretty steep in venture capital. Most VCs actually do fail in terms of raising capital or making money back for their limited partners. Think about your goals. You’re in this for the story you get to create, not the money.

Interviewer: What is your personal definition of success?

Like everyone, I’ve made many mistakes in my life. There have been times when I have not done right by people, or myself. Because I don’t want to live with regrets, I’ve taken action to rectify those mistakes.

I did quite a lot before the age of 30, to name a couple, by that time I had been around the world five times and was directly involved in a military invasion where my unit helped topple Saddam Hussein’s regime and raided his palace.  

But even with all that, I definitely wasted a lot of valuable time, especially in my early 20s. I decided to get busy living and stop wasting time and go after my dreams with no fear of mistakes or scrutiny because you cannot take those things to the grave with you, you only take your regrets. 

So my definition of success involves making restitution for my mistakes in life so that I can live with no regrets. I cannot fix my mistakes or even prevent them from happening completely, but hopefully, I can provide enough value in this world that it somehow outweighs my mistakes. 

I am looking to add value to the world with my entrepreneurial endeavors as a foundation. I view success as having no regrets and the amount of value we create for others individually, or collectively in society as a whole. We all live by our actions or inactions, so let those be your driving force for whatever you do, and live with no regrets. 

Today my only regret not having 100 hours in a day instead of 24 hours to accomplish all the things I am currently working on or have in the 10-year pipeline; but fortunately I started entrepreneurship in my mid-30s, so I should have plenty of time in the coming years to do some amazing things and write the amazing story of struggle, philanthropy, and ethical capitalism!

If you are having problems dealing with fears that eventually lead to regrets, I recommend extreme sports/activities. It’s a psychological thing that can help you deal with monsters under the bed that is not even really there.

Remember your choices are half chance, and success is subjective based on your opinion of yourself. So why not go for it?

Conclusion

Earning your stripes in the startup world requires expanding your mind to multiple perspectives and altitudes. The higher up you are, the greater the distance you can fall which means you have to adopt the mindset of not being afraid to fall in the first place.

As Paul mentioned, knowledge of human psychology, technology, organization, and, leadership are just among some of the essentials required to lead a company through a growth phase. And no one is born with a full suite of tools to aid them through the long days ahead. 

Entrepreneurs who fail to look at their businesses from a holistic, eagle-eyed view, can miss out on a lot of the crucial elements and processes that are necessary for a business to scale and grow. Paul succinctly listed out what areas require careful attention and delegation. Intentionality and attention to detail become more prevalent as the layers of the company expand, and it’s the entrepreneur’s responsibility to ensure all the moving parts in their business, including the people, are well-adapted to the culture of failure and can acclimatize to their highest potential in the company.