Matt Clifford is the co-founder and CEO of Entrepreneur First, one of Europe’s leading talent investors. Along with his co-founder Alice Bentinck, he is the author of the new book How to be a Founder (Bloomsbury, 2022). He is also the Chair of the UK Government’s Advanced Research and Invention Agency (ARIA). Matt recently joined McKinsey senior partner Andrew Goodman to share his perspectives on building Entrepreneur First, what it takes to be a successful founder, and how the European start-up ecosystem is evolving. Their edited conversation appears below:
Investing in start-up talent more than ideas
McKinsey: Tell us about Entrepreneur First. What does EF do?
Matt Clifford: Entrepreneur First (EF) is a new kind of organization trying to increase the supply of great entrepreneurs globally. Our starting point is that the world is missing out on some of its best founders, and there are lots of places where there are brilliant people who could and maybe should be entrepreneurs, but the path into entrepreneurship in a lot of the world is not straightforward. There are cultural barriers, there are practical barriers, and there are financial barriers.
At EF, we try and remove all those barriers by finding great people before they have a company. We’re not a traditional VC, where we take pitches from start-ups that have a team and an idea. We start with the individual—we call it “talent investing.” We run a structured program for individuals to come together, find a co-founder, test, and validate an idea, take some money from us, and then go out into the world, ideally to build big and important companies.
McKinsey: The start-up and investing landscape has evolved significantly since EF launched in 2011. How do you distinguish yourselves in an increasingly crowded market?
Matt Clifford: It’s fantastic that there’s been this explosion of options for entrepreneurs. But most of the infrastructure for entrepreneurs—incubators, accelerators, venture funds—all assumes that the company already exists. It is almost as if they believe the supply of entrepreneurs and companies is fixed. At Entrepreneur First, we don’t think the supply of entrepreneurs is fixed. We don’t think the supply of great companies is fixed. The point of EF is not to fund things that already exist. It’s to go from zero to one. We like to say that our mission is to make companies happen that otherwise wouldn’t exist.
The people that EF is right for are very ambitious and talented, and they know they want to have impact through entrepreneurship, but they still need to get someone in their network who’s the right co-founder. They have an idea but are unsure whether it’s the right idea or even a good one. All these things are yet to be crystallized. So, you can think of EF as catalyzing entrepreneurship right at the beginning rather than taking something already working and giving it rocket fuel.
People choose EF to join a peer group of people that do want to go on that journey. Over the last decade, we have devised a methodology for helping people start companies with strangers. That’s the core value proposition of EF.
McKinsey: Tell us more about that journey to building EF and what you have learned.
Matt Clifford: When Alice Bentinck and I started Entrepreneur First, one of the guiding principles was that betting on talent early was not just an important thing to do but the foundation of an entire ecosystem.
We probably didn’t realize how contrarian the idea was at the time. We didn’t know that one of the mantras of Silicon Valley was, “Don’t start a company with a stranger.” And so, building EF has been a journey of gradually producing proof points to show that this was not only possible but perhaps a better way of building companies.
We started with very little funding. We then built a first cohort. It looked quite promising, and so we raised a small amount of money and ballooned from there. Today EF has raised close to half a billion dollars. Our companies have raised over a billion dollars of venture capital. And in that time, we scaled a lot. Today Entrepreneur First is 120 people across six countries, producing about 120 companies a year. And one of the great things is that the journey Alice and I have been on as founders very much mirrors the process that entrepreneurs we back go through as well.
Looking for ‘edge’ in a future founder
McKinsey: You and Alice have just written a book, How to be a Founder. What does it take to be a great founder?
Matt Clifford: The first thing I always think about when asked what a great founder looks like is to start from the opposite perspective and say, “What isn’t it?”
One of the big myths is that great founders are genetically different, some breed apart, and it’s so obvious to them that they should be an entrepreneur that they don’t consider anything else. That’s not true at all. A lot of the things that you would look for in a great founder are like what you would look for in a great executive in a bigger company, a great consultant, or really a great anything.
The main things we look for are, “Can this person be a highly effective leader? Are they determined and resilient? Are they a great problem-solver?” These things are quite relevant across domains.
Now, what makes a founder a founder as opposed to being an executive at a larger company? Well, again, a few things that it’s not. I don’t think it’s risk appetite. It’s hard to be a great exec if you don’t have risk appetite.
But one thing that great founders do have is a desire to create something from nothing. There are different phases that founders go through, and the phase we specialize in at EF is the zero-to-one phase. We are looking for very smart people, who have a natural bias to action, are very determined, and have a track record of making things happen. But we’re asking, “Can they make things happen in conditions of A, uncertainty, and B, almost no resources?” Some people are wildly successful but need certain resources and clarity about what they’re doing. Entrepreneurs must be able to thrive without either of those.
McKinsey: In the book, you discuss the idea of ‘edge’ in founders. What is ‘edge,’ how do people develop it, and how do you assess it?
Matt Clifford: Because EF has to make an investment decision ‘pre-company’ before we know what the founders will work on, we have to approach selection differently from a typical VC firm. Most VC firms are assessing the founder, but they’re also asking, “How big is this market?”, “What are the margins likely to be?”, “What is the competitive environment?”. We don’t know any of that. We select people before they have an idea, which means we have to try and find some signal of what sorts of ideas they might be well-suited to work on.
As a result, when assessing people, we look for what we call ‘edge.’ And by edge, we mean a personal competitive advantage. We are fast forwarding six months and saying, “What in this person’s background, skills, experience, maybe even hobbies and interests, could six months from now be the foundation of a plausible story about building a big company?”
An edge might be that you understand a particular technology well. For example, some of EF’s most prominent companies are built on a very deep understanding of machine learning and how to apply that knowledge. Edge can also come from domain experience. An individual has come out of a particular industry, for instance, where they’ve observed a big problem for which they think technology provides an answer.
Start-up roles that do and don’t scale
McKinsey: You are now at the point where you have invested in many companies over the last decade. What have you learned about what it takes to scale a start-up over that period?
Matt Clifford: One interesting thing is that some roles within a start-up scale quite well as the company grows, and some don’t. Prospective entrepreneurs should try to be clear-eyed about that.
For example, this is probably obvious, but a great founding CEO can go all the way. And that’s because a CEO’s job is primarily communicating a vision and a strategy and hiring great people.
On the other hand, there’s almost no way a company will scale if they don’t upgrade the executive team over time. This reality is sometimes hard to confront when you’re a band of brothers and sisters in a basement. But when your company is only made up of five or ten individuals, they won’t be the same people as when you’re a company of 100 or 1000.
Founders often have to reframe that kind of change as positive. Each stage, with each order of magnitude, requires a particular skill set. Running an engineering team of 1,000 engineers is very different from being a CTO as an individual contributor.
What we’ve learned over time is that self-knowledge is vital. Founders have to realize which bit of the journey or job they like. Some people want to go all the way through. But it’s OK if a founder says, “We’ve got to 100 people, we have leaders in place that are ready to go from 100 to 1,000, and it’s not me.”
Hard choices: How Europe’s fastest-growing start-ups become unicorns
Lessons from start-up failure and technology success
McKinsey: Like any early-stage investor, you have also seen many companies fail. What lessons have you learned about why that happens?
Matt Clifford: I think it’s worth dividing failures into two categories. Sometimes the founding team do mess things up. They fail to execute, disastrously hire, or build a terrible culture. But this doesn’t happen most of the time. There are very few companies in the EF portfolio that failed because of the way they executed. Much more common is what I would call ‘fundamental risk.’
The whole point of a start-up is trying to do something that has yet to be done. But that means that a founding team’s job is to progressively de-risk the assumptions baked into the idea. And successful startups are effectively the ones that find their assumptions were correct.
You can think of the different rounds of financing that start-ups go through as various stages of de-risking different kinds of risk. What kind of risk is the one that most often kills companies? Well, early on, it’s, “Is this a thing at all?” Is the value proposition that you have in mind for the customer one that truly resonates with the customer? Will they pay for this thing that you think is valuable? In most cases, companies fail early on because the answer to those questions is no.
And that’s why both at EF and in the book, what we emphasize most is talking to your customers. I’ve never met a company that failed because it talked to its customers too much. I’ve met many that failed because they assumed they knew what their customers wanted and were wrong.
McKinsey: You’ve also now invested in founders across various sectors—from deep tech to food delivery. If you look out over the next five years, what sectors or specific technologies are you most excited about?
Matt Clifford: One of the joys of talent investing is that we don’t have to be too smart. People often ask, “Oh, you see so many ideas; what ideas do you have?” The answer is that at EF, we’re very good at identifying talent—and the talent comes up with the ideas. That said, we must decide where to look for talent, so it’s true that we do have some thoughts on this.
EF has been very lucky throughout the last ten years to have been early to the idea that machine learning would unlock significant capabilities that would be relevant across both consumer and enterprise applications. We started investing seriously in machine learning back in 2013. We are nine years from that, and it feels like machine learning is still the most important thing we care about today.
There’s that wonderful Marc Andreessen phrase, “Software is eating the world.” You can now say, “Machine learning is eating the world.” And that’s going to be true not only in the obvious ways but across sectors we might not see today as amenable to that approach. Machine learning is eating biology in interesting ways. Machine learning is eating energy in interesting ways.
But in general, we’ve learned that we should be prepared to be surprised. Whenever we’ve tried to get too clever about thinking we can predict the future rather than identify the people who can predict the future, we’ve messed up.
Europe’s start-up ecosystem: Catching up in due time
McKinsey: Switching gears, the European start-up ecosystem has developed significantly over the last decade, but most people still believe it lags behind Silicon Valley. What is holding Europe back, and what is needed to overcome those challenges?
Matt Clifford: It really is an extraordinary explosion. When we started Entrepreneur First in 2011, I think one fund in London was dedicated to seed investing. I don’t know how many there are today, but when we run Demo Days, we get hundreds, if not thousands, of people, which wasn’t the case when we started.
Still, however bullish you are on the European scene—and we obviously are, with three sites in London, Paris, and Berlin—there is still a gap with what you see in Silicon Valley.
Both the bullish and bearish answer is that the missing ingredient is time. People forget that Silicon Valley is not a ‘90s-born phenomenon; it’s a post-war phenomenon. The reason that’s important is the power of the generational effect.
Vibrant ecosystems recycle not only capital but talent. Once you have run a 1,000-person engineering team, not only can you do that again, but you’ve probably trained ten people that can do that as well.
And so, if you look at where Europe is still lacking, a lot of it’s just about the scaling infrastructure, which is both talent and to some extent, capital. The good news is that the generational effect is already happening in Europe. Ten years ago, nearly every venture investor in London had a pure finance background. They had come out of investment banking and private equity. There’s nothing wrong with that. Some of the great investors are from that background. But if you look at Silicon Valley, most well-known investors there, particularly more recently, are founders; they’re operators. That’s happening in Europe now. So, I feel optimistic that most of what we need to see change will happen organically with time.
Focusing on the micro more than the macro
McKinsey: The last decade has been an unprecedented period of global growth and relative stability. How would you advise start-ups to prepare for a possible period of economic turbulence ahead?
Matt Clifford: It’s true that a nontrivial part of the venture capital boom of the last decade or more has been driven by the ahistorical, close-to-zero interest rate environment. And it’s certainly true that capital allocators look to things like start-ups as a source of yield and growth in that kind of environment.
However, concluding that this is a bad time to start a company would be wrong. For a seed-stage start-up, the source of risk is rarely the macro environment. Your source of risk is, “Can you convince one person they should be a customer?” When you’re just starting and looking for five customers, the general propensity among consumers of businesses to spend shouldn’t be the thing that makes or breaks your company.
Similarly, while late-stage financing has slowed down massively since last year, I see that much less at the early stage. Seed investors today are assuming that when those new companies eventually graduate to become big, established companies, the macro environment will be very different from today.
I think we are going to see a period where some of the, let’s say, exuberant valuations of 2021 get corrected rather quickly for startups that built unsustainable businesses that assumed capital would be abundant at low cost forever.
But for entrepreneurs starting their journey today, the macro environment is not that relevant. The most relevant thing is to talk to your customers and make sure you’re building something people want; then, hopefully, in six or seven years, when you need to raise that pre-IPO round, we’re in a very different world.
The long-term value of technology and optimism
McKinsey: Like many other early-stage investors, you are an optimist. As we approach a potential period of economic turbulence, where are the ‘green shoots’ to be optimistic about?
Matt Clifford: When I first started EF, I realized very quickly that, one, it was very easy to pick holes in every start-up idea that I saw and, two, that there was almost no value in doing so. If you predict that a start-up will fail, you’re likely to be right, but there is no benefit to being right.
One of our friends and investors at EF is Nat Friedman, who used to be the CEO of GitHub, and he has this great line, “Pessimists sound smart. Optimists make money.” Most things do fail. But what’s special about venture capital, what’s special about start-ups, is that the winners are so big that it pays for everything else many times over.
I would say that however pessimistic you are about the economy today or the fate of any given company, the real question to ask is, “Do you believe that the technologies that are emerging today are going to be more or less important ten years from now, and do you think that importance is going to manifest in the real economy or not?”
It’s hard to imagine that the sorts of things that we’re starting to see, particularly in AI, will not be important ten years from now and that they won’t filter through to the real economy. Many things will fail, but it’s hard not to believe we’re heading for a more productive and abundant world.
