Posted: May 15th, 2012 | Author: Ted Rogers | Filed under: Macro Environment, US Venture Capital | 1 Comment »
The venture market in the United States is in a bubble. In the US, including (especially) in SV and NY, valuations for companies at every stage are way too high. Because most of these companies have no revenue, it is not possible to quantify how high but, if you do the math, there will simply not be enough exits at a high enough multiples to provide sufficient returns in exchange for the risk being taken.
Yes, the problem is worse in basic consumer businesses (B2C) than in enterprise businesses (B2B) but the problem is in pretty much all Internet verticals.
I feel more and more like I am re-living Web 1.0 – the Dotcom boom and bust. I was part of building and investing in a VC fund beginning in early 1997 – we caught the wave and the fund did 90%+ IRR net of fees – this is top tier for VC returns. It was useful because I witnessed how a VC fund can be successful. I left for AOL later but my former colleagues – pretty much the same team of extremely smart and talented people – did the same thing with Fund II and it returned $0 because the bubble popped. So I witnessed how a VC firm could fail.
So you can be smart and good but, with a traditional VC fund, timing matters. (Timing matters in all investing but moreso in a fund that must be deployed over a fixed five-year time span.)
Some other indicators of a current bubble: the proliferation of “accelerators”. You had the exact same thing happening during the Web 1.0 bubble – just substitute the name “incubator” for accelerator. Some of these incubators even went public, then became penny stocks, then got delisted, then went bankrupt. They all had promising startups inside which, in retrospect, were interesting ideas or products but not actual businesses, at least not sustainable businesses.
Instead of building businesses, the game was a chase to be acquired or, in Web 1.0, go public. The same is true now.
Economic markets run on fear or greed and we are currently in a “greed” phase. The Facebook IPO will only increase the frenzy. Many people who were at FB at the right place at the right time will believe they are smart and either start new companies or become angel investors, which will make the bubble worse. Again, substitute “AOL” for Facebook and you can see Web 1.0 all over again.
The only difference between the dot-com (Web 1.0) and this bubble (web 2.0) is that web 1.0 included inflated valuations in the public markets. The high prices in public stocks and the ease of going public led to huge valuations in private (VC) markets. When the public market bubble popped, it immediately popped the private market bubble, since the latter’s valuations were based on assumptions of public market multiples.
The Facebook IPO will be the moment when the Web 2.0 bubble officially comes to the public market and it will be the beginning of the end of this cycle. It’s not that FB isn’t an incredibly valuable company – it is – the issue is the psychological impact of the IPO on valuations and exit assumptions in general and, again, on the companies and investors lower down the chain.
Right now, the web 2.0 bubble is “trapped” in the private markets and, because it has been trapped in non-liquid markets, it has been hard to quantify just how big the bubble is. Now, however, the bubble will float up into the public markets. In the full light of the public markets – liquid markets that require disclosure and quarterly updates, etc. — it is a matter of time before valuations correct.
As an aside, many people have argued that we are not in a bubble because the public markets for tech stocks are not inflated. This is ridiculous – just because private tech companies have not had access to the public markets, because they are receiving private financing, does not mean that their valuations are sane. In fact, it is the opposite – a lack of liquidity, transparency and comparables in the private markets leads to the inflation of valuations.
Anyway, since access to the public markets for internet companies has been shut off for many years, we have a huge pent up demand for liquidity in the private venture market. Dozens of tech companies are lined up like trucks in refugee convoy trying to get to the IPO border. Investment bankers are once again at the wheel as the SEC directs traffic and public market investors prepare to dump bags of money off the back of trucks and helicopters.
You can’t outrun reality, however, and every business is a function of its current and future cash flows – at some point, the private and public markets will realize that, for most internet companies, the cash flows don’t currently exist and won’t ever exist.
One might ask why the bubbles hasn’t been worse or faster-inflating. First, a lot of people over 35 remember the dot-com bust – these memories have provided a useful governor on the engine of hype. Second, we are in the worst economy since the Great Depression – which has dragged on growth even in tech investing.
In sum, for all the negativity in this post, I still believe in venture capital, in early-stage investing and in the future of the US (and Brazilian) ecosystems. Markets run in cycles, it is natural. We are near a peak right now — so what?
For entrepreneurs, there will always be a place for creating companies with products/services for which many customers pay. There is as much opportunity to create great businesses as there ever has been in the history of the world.
As for investing: the best advice I ever got in football, maybe in life, was to “Focus only on things you control”. Simple to say, hard to do. The amount we control is far less than we believe moment to moment. The point is: ignore the outside noise, cultivate your core investment thesis and execute against it.
Posted: April 18th, 2012 | Author: Ted Rogers | Filed under: Entrepreneurship, Random Posts | No Comments »
I have long felt skeptical about business books, especially quasi-self-help books that state common sense with an air of discovery.
Typically, even in the best business books, the 80/20 rule applies: 80% is either recycled truisms or common sense, 20% (or less) is new or interesting.
Soft science, e.g., lack of quantitative analysis often damns these books to mediocrity.
In my opinion, one notable exception is Jim Collins. Someone recently gave me a copy of his most recent book, Great by Choice, and it is valuable. Collins and co-author Morten Hanson base all of their writings on rigorous quantitative analysis. Not all of their writings apply to startups but all of their findings are valuable.
Below is an outline of the book that I made for an internal presentation.
Great by Choice
10X Leadership:
Collins and Hanson studied a group of companies that provided shareholder returns at least 10X greater than their industry peers over a long period
Leader of 10X companies (“10Xers”) share a set of behavioral traits—fanatic discipline, empirical creativity, and productive paranoia—all held together by a central motivating force, Level 5 Ambition
Fanatic Discipline
10Xers start with Values, Purpose, Long-term goals and Severe Performance Standards and apply Fanatic Discipline to adhere to them. All of their actions are consistent with those Values, Long-term goals, Performance standards. 10Xers are relentless, monomaniacal
Empirical Creativity
In confused environments, 10Xers do not look to other people but to empirical evidence to drive their decisions
They use empirical evidence to create boundaries, within which they take bold risk
Empiricism as the foundation for decisive action
Productive Paranoia
10Xers practice hyper-vigilance even in good conditions
They believe that events/markets will inevitably turn against them and they prepare for that time
Level 5 Ambition
10Xers channel their ego into something larger and more enduring than themselves
Their ambition is for the cause, not for themselves
20-Mile March:
The 20-mile March is a set of concrete, clear, intelligent and rigorously pursued performance mechanisms that keep the company on track
One set of metrics creates a floor, a lower bound of performance not to go below and another set of metrics create a ceiling, an upper bound not to go above
If they miss the 20-Mile March metrics, 10Xers are obsessed with getting on track, no excuses
Consistently achieving the goals of the 20-Mile March builds confidence in the organization
External environment is impossible to predict and out of their control; the 20-Mile March gives the company an internal locus of control
Fire Bullets, then Cannonballs:
It is not necessary to be more innovative than your peers
Only 9% of pioneers end as final winners in their market
You must be innovative above a certain threshold but beyond that it doesn’t necessarily help
Fire bullets, then cannonballs
Fire bullets to figure out what will work
Once you have empirical evidence based on the bullets, you concentrate your resources and fire a cannonball
[Note: the Lean Startup method follows this system]
Example: The iPod was a bullet, derived from some empirical evidence, that led to more empirical evidence; then they fired a cannonball: iTunes and iPod for non-Mac computers
What makes a Bullet:
Low cost
Low risk – minimal consequences if the bullet goes awry or hits nothing
Low distraction for the overall enterprise (okay to be a high distraction for an individual)
10xers have a much higher rate of calibration before firing Cannonballs (69% vs. 22% for peer group) – example of using empirical evidence to drive decisions and contain risk
Calibrated cannonballs have a 4x higher success rate than uncalibrated (88% to 23%)
There is a danger to achieving a hit with an uncalibrated cannonball: good outcomes from bad process reinforce bad process
10xers make mistakes but learn and return to empiricism; only fire another cannonball with empirical validation
“In the face of instability, uncertainty and rapid change, relying upon pure analysis will likely not work, and just might get you killed. Analytical skills matter, but empirical validation matters much more.”
“That is the underlying principal: empirical validation.”
(Note: Lean Startup Method again…)
You don’t need to be the one to fire all the bullets, you can learn from the empirical evidence of others.
“More important than being first or most creative is figuring out what works in practice, doing it better than anyone else, and then making the most of it with a 20-Mile March.”
Questions to ask before firing a cannonball:
How can we bullet our way to understanding
How can we fire a bullet on this matter
What bullets have others fired
What does this bullet teach us
Do we need to fire another bullet
Do we have enough empirical evidence to fire a cannonball
10xers fire a significant number of bullets that don’t hit anything; they didn’t know ahead of time which bullets would be successful
Failure to fire cannonballs, once calibrated, leads to mediocre results. The idea is not to choose between bullets or cannonballs but to fire bullets first, then fire cannonballs.
Leading above the Death Line:
Productive paranoia 1: 10Xers build cash reserves and buffers before disasters happen
Productive paranoia 2: contain risk; 10Xers took less of these three risks:
- Death Line risk – failure would result in the death of the enterprise
- Asymmetric risk – the downside of failure is greater than the upside if successful
- Uncontrollable risk – risk completely out of the company’s control
10Xers also manage time-based risk – if risk is growing with time they act
quickly
“Sometimes acting too slow increases risk.”
if the risk profile is changing rapidly, then the speed of decision-making must increase.
Zoom out, then Zoom in:
10Xers remain obsessively focused on their objectives and hypervigilant about changes in their environment; they push for perfect execution and adjust to changing conditions
Zoom Out:
Sense a change in conditions
Assess time frame: how much time before risk profile changes
Assess with rigor: do the new conditions call for disrupting plans? If so, how?
Zoom back In:
Focus on Execution of plans and objectives
Not all time in Life is Equal
Some moments matter more than others
SMaC – Specific, Methodical and Consistent metrics
“We’ve found in all of our research studies that the signature of mediocrity is not an unwillingness to change; the signature of mediocrity is chronic inconsistency.”
Return on Luck:
“Resilience, not luck, is the signature of greatness.”
Who Luck – one of the most important types of luck is finding the right people then building a mutual risk your life relationship with them
Summary:
10Xer behaviors - fanatic discipline, empirical creativity and productive paranoia; Level 5 ambition, never relax when blessed with good luck
20 Mile March
Fire Bullets, then Cannonballs
Return on Luck – 10Xers don’t cause their luck, they increase the chance of stumbling on something that works by firing lots of bullets, then using empirical validation before firing cannonballs
Leading Above the Death Line - They manage three types of risk to shrink the odds of catastrophe
Zoom Out, then Zoom In
Posted: April 3rd, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital | No Comments »
LAVCA recently hosted an event at Monashees for venture capital fund managers, limited partners and service providers.
Most of all the VCs currently active in Brazil were in the room, which was cool, and it made for an interesting discussion.
One of the things we discussed was the size of a typical venture fund’s investment portfolio in Brazil, to whit: it’s smaller than in the US. That matters, because small portfolios increase risk (it concentrates the fund in a smaller number of companies, so if one fails it disproportionately impacts the fund.)
Portfolios are smaller in Brazil not just because funds are smaller here, nor because there are less companies per investor. It’s because, on average, an early stage company requires more time invested by the VC. One fact everyone learns in Brazil, the distance from business conception to market penetration is greater here than in the US. It takes more time, more resources, more perseverance.
Add to that the fact that many entrepreneurs are building a company for the first time and you will see that VCs need to spend more time per company than a VC in the US does.
In the US, the VC can make portfolio construction decisions assuming that, for most of his companies, a board seat plus a phone call every couple of weeks provides sufficient support. This allows them to put together a portfolio of investments numbering 30+ companies relatively easily.
In Brazil, if a VC puts together a 30-company portfolio in a short period of time, he will spend his days and nights putting out fires, fielding panicked phones calls and wishing he had gotten a job at Petrobras like his parents advised.
What’s the solution? Time and experience, both for entrepreneurs and investors. Aside from that, for early-stage investors, some form of shared space, incubation, acceleration, etc. is more than an interesting strategy, it’s essential. In the majority of cases, an early-stage investor in Brazil needs to be proximate to his companies until those companies achieve stability. Of course there are exceptions, and thank goodness for them. In general, however, I think early-stage funds will find that some form of shared space with most of their startup portfolio companies is a must.
In a way, that’s cool. At the LAVCA event, an attorney from K&L Gates, who has been in the business for many years, made the point that what is happening in Brazil is “old school” venture capital. In the early days in Silicon Valley, the pioneering entrepreneurs and investors did not have experience or examples to follow. They were joined at the hip in a new, risky, experiment. By necessity, the VC often took quasi-management roles – business development, operations, HR, etc. – to help his companies survive. Things are like that now in Brazil. It’s tough but it’s fun and, in some ways, it’s how early-stage VC should be.
Posted: March 20th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, US Venture Capital | 1 Comment »
In the last post I discussed whether a Brazilian startup should have a presence in the US.
Even if a Brazilian company decides it should have a presence in the US, however, it has an additional choice to make: Silicon Valley or New York?
In the last few years, New York has gone from an interesting but secondary market for startups to a viable and, in some cases, preferable alternative to the Bay Area.
Lots of factors have led to this but, when you think about it, New York is a logical place for a center of entrepreneurship. It might be the most vibrant city on the planet. In the US – think Ellis Island/the Statue of Liberty – NY symbolizes our immigrant roots and the promise of America: come here and make your life. It won’t be easy but, in NY especially, anything is possible.
NY says, “This country, this city, is an opportunity. The rest is up to you.” That is the primary message great entrepreneurs want to hear.
In addition, and this may surprise some people: people from the east coast of the US very often want to stay there. A great entrepreneur coming out of school in Boston, NY, Philadelphia and DC would often – most often – prefer to stay on the east coast. Before, that wasn’t a choice, now it is and many will take it.
What about customers? It is a world center of advertising, financial services, fashion, retail, media and publishing (and other industries that I will remember about two seconds after I post this blog…).
… in the most prominent example of a technology company shifting its focus toward New York [emphasis added]… Google now has about 2,750 employees in New York City, a 38% increase from 2010, the company told The Wall Street Journal. That's faster growth than for the company overall, which expanded 33% from 2010 to 2011.
"Many of the most talented and creative engineers and scientists in our field of computer science want to be here…there's a critical mass in the city," says Alfred Spector, the vice president of research and special initiatives based in Google's New York office.
Google's expansion in New York—once seen as too expensive for tech start-ups—has helped fuel a perception that the city is in the midst of a technology industry boom. It comes as Facebook, Hewlett-Packard and other companies expand their New York presences, and Cornell University moves forward with an engineering campus on Roosevelt Island.
Look, New York will never be Silicon Valley. Only Silicon Valley will be Silicon Valley – an exquisite center of sharing, innovation, mentorship, and technology.
But NY may be the only city that can honestly say it doesn’t want to be: NY doesn’t follow anyone or anything – the world follows it.
When it comes to an entrepreneurial ecosystem, what will NY be? I’m not sure. I only know it will be unique, vibrant, wildly successful… and place that Brazilian startups must consider if moving to the US.
Posted: March 10th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Entrepreneurship | No Comments »
I just got back from a couple of weeks in NY and Silicon Valley. The NY startup ecosystem is booming and Silicon Valley is, well, Silicon Valley – cutting edge, best of class and incessantly innovative.
Several Brazilian entrepreneurs were visiting at the same time and we had some conversations about whether Brazilian startups need to connect with SV or NY.
My thinking has evolved on this issue: several years ago I watched two executive teams from promising Brazilian startups take weeks away from their companies to hang out in Silicon Valley. It had no impact other than to hurt their companies. Maybe they met some people and increased their network but, so what? Their companies lost ground in Brazil and missed a window of opportunity.
Running a startup takes obsessive focus and jaunts to SV or NY can be a distraction. On the other hand, an understanding of trends in the Valley and NY can serve as a competitive advantage for startups in Brazil.
Here are some rough guidelines:
1. For a startup whose partners and customers are in Brazil: monitor developments in SV/NY online and by, maybe, going to one conference a year. But focus, focus, focus on your core market in Brazil. That will determine your future.
2. For a startup that has important partners, e.g., technology providers, in the US but whose customers are in Brazil: take more frequent visits, perhaps quarterly, network with companies/people in the industry and perhaps attend an extra conference. The primary focus, of course, should remain on your customers in Brazil.
3. For startups dependent on customers in the US: you probably need a physical presence in the US, either a satellite office or even your headquarters. I don’t mean a situation where your core customers are in Brazil and you hope to, someday, penetrate the US market. There are many companies like this and my advice is to stay in Brazil and focus. If your future depends primarily on US customers, however, then your company should probably be there. This is especially true for B2B companies as opposed to B2C.
This last point (#3) is tricky: in the first place, why are you building a business in Brazil that serves the US market? Brazil is a large and growing market, one that you know better than the US, so why are you building a business that serves US customers? What is your advantage in the US? You should have good answers to these questions before attacking the US market, much less moving there.
In reality, however, there are no clear rules on this subject. It depends on the specific situation of a given company (and, of course, Visa issues). For example, one of our portfolio companies is a games company that generates over 90% of its revenue from American users, yet they have no need to locate there. Another of our portfolio companies serves game studios all over the world; sooner or later, this company probably needs a presence in San Francisco in order to fulfill their potential.
If you have questions about your specific situation, contact me and I will try to offer feedback.
Posted: February 29th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Macro Environment, US Venture Capital | 6 Comments »
Many experts in VC will tell you that venture capital, like politics, is a “local” business. It’s true, of course: the VC needs to know entrepreneurs face-to-face; they need to know the market into which their companies are selling; and they need to build the local networks that lead to quality deal flow. In addition, it’s difficult to effectively assist portfolio companies that are not nearby.
On the other hand, social media and inexpensive voice/video conferencing services enable effective communication over great distances. That, combined with sufficient travel, makes successful, geographically-diverse venture investing very feasible.
In fact, the world of startups, and thus venture capital, is increasingly global. Online media is melding together various markets into one international popular culture – the same YouTube videos go viral in the US, Europe and Brazil; Jeremy Lin is as massive a cultural phenomenon in China as in the US; people in Lebanon follow the same Twitter feeds as people in NY.
Regarding language, for better or worse, English seems to have become a common language of business and culture. This is not unprecedented – for many decades, French was “the language of diplomacy” – if you wanted to travel in international circles, especially diplomatic circles – you needed to learn French. Perhaps someday soon we will all need to know Chinese or Portuguese – many Americans are currently scrambling to learn one or the other – but right now it’s English.
Aside from that, translation services continue to level the playing field. It’s recently become possible to “get by” in most markets despite not knowing the language. Google Translate functions imperfectly but well enough. Other services like MyGengo increase efficiency and accuracy in translation. US personnel in the Middle East use handheld devices to communicate instantly in Farsi or Arabic. A high-quality smartphone app for the rest of us cannot be far behind.
The most intractable barrier to the globalization of startups/VC is bureaucracy. By that I mean anything from shipping to taxes to trade barriers. (Perhaps “logistics” is a better choice than “bureaucracy” but you get the idea.) These barriers, however, cause problems mainly for companies that require physical fulfillment of goods or services. For a great number of companies, this is not an issue. Facebook, Twitter, Google and Skype serve as obvious examples of companies largely unaffected by logistics/bureaucracy.
In sum, the importance of "local" in startups and VC remains but the importance of global perspective has increased. The pace of globalization is accelerating, almost in the same proportion as the pace of technological innovation — it’s as if there's a Moore’s Law in effect for globalization. As such, VC funds that are built for global investing, such as DST, may have the greatest future success.
Posted: February 18th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital | 3 Comments »
More and more resources exist for entrepreneurs in Brazil. Below I list sources of support in Rio de Janeiro. Some of these sources provide capital, some provide mentoring and some provide both.
I’m sure I am forgetting some people or organizations; if you are one of them, please accept my apology, add a comment below the post and I will add your name or organization. I also know some people/organizations are planning to launch soon and I will add them as soon as they are operational.
Also, many organizations provide support in Rio from a base in, e.g., Sao Paulo. I will try to list them in another post.
Posted: February 8th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, US Venture Capital | 5 Comments »
Myth #1 – Venture Investing is a Good Way to Make Money
As the chart below illustrates (courtesy of Flybridge Partners), unless you are in the top 10% of investors, venture capital is a very bad investment, both in gross returns and especially on a risk/reward basis.
For the top 5-10% of venture investors, VC is a spectacular way to make money… but only for the top 5-10%.
Myth #2– Venture Capitalists are Rich
A few VCs are rich but, again, only the ones in the top 5-10%. Almost all VC make relatively low salaries, especially compared to their peers in investment banking, hedge funds, consulting and other areas in which they might have made a career.
Unfortunately, because their investments will not pay off, that low salary is all most VCs will ever make. Carried interest from funding the next Google just isn’t going to happen.
In the far right column of the slide below, you see that the number of VC firms peaked in 2001 at 1883. By 2009, that number was 1188; in other words, 37% had gone out of business. By now (2012), the failure rate has probably reached close to 50%. How many industries do you know in the last nine years where nearly 50% of the firms have gone out of business? Not many.
If your primary goal is to make a lot of money, you are better off in investment banking or hedge funds, etc. Only do venture capital if you truly enjoy it.
Myth #3 – You Must Connect to Silicon Valley in Order to Succeed
a. Here is a list of several of the most valuable/successful companies in the last several years and where they were founded:
Facebook: Boston
GroupOn: Chicago
Living Social: DC
Demand Media: LA
Tumblr / FourSquare / Twitter: NY
b. The most successful venture fund in the last decade (2000-2010)? GRP Partners. Ever heard of them? Probably not. Know where they are based? Los Angeles.
Myth #4 – These Days it Costs Less to Build a Large Company
Wrong. It costs less to build a SMALL company. It still requires a huge amount of capital, as much as it ever did or more, to build a large company, even in the “capital-efficient” Internet space. The list below shows some recent winners and the amount of private (non-IPO) investment they raised:
Facebook: $2.34 billion
Groupon: $1.14 billion
Twitter: $1.16 billion
Zynga: $800 million
Dropbox: $257 million
AirBnB: $120 million
Myth #5 – Ideas Matter
Ideas are commodities. Even seemingly “original” ideas almost always derive from ideas already in the market and, if the idea is good, probably three or four people already have the same idea somewhere else.
Most great companies are not based on original ideas but rather improve on existing ones. Facebook launched two years after MySpace. Before Google, there was Alta Vista, Lycos, Yahoo and half a dozen other search engines. I could go on but you get the point. As Paul Maeder of Highland Capital Partners points out, even Einstein said he had just one original idea in his entire life.
So what matters? Execution of ideas. Who executes? People. Backing the right person is what matters, much more than backing the right idea. As Maeder says, the most important investment calculation is evaluating the entrepreneur and whether “the Force is strong in him”.
Posted: January 28th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, US Venture Capital | 1 Comment »
Last September, I posted on whether Brazilian startups should incorporate in the US and, if so, whether they should incorporate in Delaware.
This week, the Latin American Private Equity and Venture Capital Association had a definitive post by Juan Pablo, a shareholder in the Greenberg Traurig law firm, on whether to form an LLC (like a limitada) or a C-Corp (like an SA) in the US.
It is one of the first posts I have seen that leans towards forming an LLC (depending, of course, on the details). Most venture capital lawyers in the US will tell you immediately to form a C-Corp, because this is the standard practice in the US. As a foreign business, however, that maybe not be the best advice.
I advise a good read of Juan Pablo's post.
Posted: January 25th, 2012 | Author: Ted Rogers | Filed under: Entrepreneurship | 1 Comment »
Back in the early ‘90s, I had a brief and inglorious career with the Washington Redskins of the National Football League. It officially lasted only two and half years but it was a formative experience and I learned a lot in a short time.
I have found that much of what I learned in sports applies to business. For example, what I learned about the characteristics of successful athletes also applies to entrepreneurs.
Innate talent matters in both cases but less than you think — the most physically gifted athletes are often not the best players. I believe talent comprises about 1/3 of what it takes to succeed in sports or entrepreneurship. Talent derives from genetics and no player or entrepreneur has control over it.
Another 1/3 of success comes rigorous training – physical conditioning, skill development, study of the game and other things that the individual can control. The player or entrepreneur must maximize his potential in this 1/3 in order to have a chance of success.
The last 1/3 of a successful athlete or entrepreneur comes from… I don’t know. No one does. It has to do with energy, belief, destiny, love for their profession… (That last one really matters – how many people don’t love their job but still make it to the top 1%? Not many.)
I can't define this final 1/3 but it often manifests itself in two traits: inner focus and urgency.
By inner focus, I mean that all of the person’s being is directed toward the goal. Even when he is not visibly working toward it, his being is pointed toward the goal. He does nothing contrary to it. All the elements of his life fit into the pursuit the goal (not the other way around).
In that sense, pursuit of athletic or entrepreneurial success may seem to be a selfish endeavor. It doesn’t have to be, but one must surround themselves with people that support the goal and understand the sacrifice needed to achieve it.
Less obvious than inner focus, great athletes and entrepreneurs posses urgency. I don’t mean hurry or imbalance, just urgency. They live a half-step ahead of the world. They anticipate what must be done and do it. Proactively. They don’t wait, they don’t procrastinate.
Sports has a tempo, a momentum. So does entrepreneurship. An entrepreneur’s urgency pushes the tempo and maintains forward momentum in his business.
One can sense whether an entrepreneur has urgency. For example, they ask for help but don’t wait for it. They move forward irresistibly, believing the world with eventually follow. (It often does, proving the old saying, "Move and the world moves with you.")
Of course, inner focus and urgency are necessary but not sufficient traits: you also need the first 2/3 of the equation — talent and training — but inner focus and urgency are unique traits exhibited by almost all high-achieving athletes and entrepreneurs.
