The normal or Gaussian distribution has a bell-curve shape, one that should be familiar to nearly anyone who has been exposed to a little practical maths along the way: given that this is where ideas such as standard deviation ultimately come from, it’s a pretty crucial bit of conceptual kit to have access to (even bearing in mind its many limitations).
When I think about tech startups pitching for funding, I see this curve playing out its binomial magic in a painfully visual way:-
On the right-hand side here, what I am claiming is that only about 2% of tech startups are externally fundable – i.e. that it would genuinely make good business sense for angels to fund them. Which is not to say that 2% of startups get funded (they plainly don’t), or even that all the startups that get funded fall on the right side of that line (they plainly don’t)… in both cases, life isn’t that simple.
Similarly, on the left-hand side here what I am claiming is that only about 2% of tech startups can self-fund themselves – that they can reach their market and be self-sustainable without needing significant external funding to get them there. Which is not to say that this happens to all those companies, but rather that it could if their principals saw it as their best option, rather than putting all their money into chasing funding.
What this leaves in the middle is something terribly depressing – the unfundable mountain, the pile of startup proposals which don’t stand any real chance of working. Nearly every business school pitch you’ll see falls here, along with almost all high-concept business plans from any source. Some would also argue that anything with the word “virality” (or indeed “synergy“) probably deserves to go here too, and to be perfectly honest I’d find it quite hard to disagree with them.
So far, so depressingly pragmatic: but I think the curve has many more stories to tell. For example, I strongly suspect that a lot of UK business angels now spend their time looking for businesses that are on the wrong end of the curve – i.e. innately self-sustaining businesses that don’t need external cash, but whose principals have convinced themselves that they can only function with angel funding. The huge problem there is that the practical costs – in time, money, and just plain hassle – involved in getting funding can very well cause such companies to go bust in the short-to-medium term. Really, how can you call needing lots of money in order to get over the shock of being funded anything apart from disastrous?
Also: I suspect that many people don’t satisfactorily understand the implicit difference in strategy between the two ends. I think that the left-hand end is all about increasing the (reward/risk) ratio by reducing the risk part to nearly zero, while the right-hand end is all about increasing it by increasing the reward part hugely, making the perceived outcome too mouthwatering for angels to turn down.
What, then, does bootstrapping actually achieve? And how can you square this curve with the entire Lean Startup thing? And is “pivoting” anything but upgrading your startup’s ambition to a level so stratospheric that it makes angels nearly choke on their own saliva?
With my own startup, I used to think that the whole point of bootstrapping was to reduce the risks to the point that there wasn’t any good reason not to invest: and this is essentially what I spent five years doing. However, in retrospect it seems as though all this achieved was to inch my company closer to the left (unsexy) end of the curve, though never actually close enough to be self-sustaining. If I had wanted it to be externally funded, I perhaps should instead have focused on finding ways of upping its reward factor, making the proposition more aligned with the right (sexy) end of the curve.
Hence it could reasonably be said that the biggest lesson to be learned here is simply that startup funding is more about amplifying greed than assuaging fear, i.e. that when it comes to investing, greed trumps fear. Personally, I don’t know for sure that this is true: the hundreds of UK angels I’ve met over the past few years have such a wide variety of motivations and issues to do with money (not all of them good, and not all of them bad) that generalizing is always going to be problematic. But… maybe there is a seed of truth there. You decide!