Just read a very interesting article on Steve Blank’s blog (link tweeted by @ericries) called “When It’s Darkest Men See The Stars“, but which left me with a curiously bittersweet aftertaste.
The title of his post is taken from Ralph Waldo Emerson (though to be precise, Emerson wrote “When it is darkest, …”), because Blank wonders – at length – whether this coming decade might be both the darkest hour for the American economy and the moment that startups & entrepreneurs lead it out of recession / financial stagnation into a bright new future.
So, not only do startups have to (somehow) get funding, (somehow) grow rapidly, and (somehow) be hugely successful, they now have to (somehow) fix the global economy too. It’s a pretty tall order for a tiny bunch of spirited renegades working outside the system, however bright and connected in to their target market they happen to be. 😦
All the same, even though I take his overall point, I then left a comment to the effect…
Great, great post. If only it were true…
Outside the writhingly empty froth of social media and the short-term buzz of ‘hot’ sectors (geolocation, etc), now is actually a lousy time to be an entrepreneur. The vast majority of plays I see being pitched are simply value chain optimization rather than innovation – sure, people are daring to dream, but most of their dreams are stultifyingly mediocre.
Surely the right question to be asking is how best to channel entrepreneurial spirit and angel finance into things that actually produce new wealth rather than just optimize old wealth? Otherwise the distinctive feature of the decade will turn out to be a glut of sub-par entrepreneurs and fallen (broke) angels.
Really, what I’m saying is that I think we should politely pre-disqualify (if not actually kill) startups that don’t dare to dream that they can produce dramatically new wealth in the world economy. Such companies don’t (usually) serve society particularly well, and leave themselves wide open to being cut out of the loop by other (typically more cut-throat) value-chain optimizing companies slightly further down the line. Dress up their core marginality in Web 2.0 clothes all you like, but you can’t really hide the fact that raw optimization is very rarely a dramatically new form of good. I’d say that the biggest millstone being carried around right now by entrepreneurs is a failure to dream – and arguably the much-talked-about business ‘bootstrapping’ culture merely helps minimize the scope of those few dreams that do still get dreamed.
And what is worse is that the finance problem here is that extraordinarily few angels now seem to have a grasp of the difference between money extraction (i.e. reslicing an existing pie in a financially creative way) and wealth creation (i.e. creating something genuinely new that can then be sold). Perhaps this is simply a hangover from the curse of financial services – that, having spawned a generation of angels who have got rich off (what are essentially narrow variations on) marginal financial service plays, it is only natural that they seek to replicate their successes by investing in yet more marginal financial service plays. Really, why should people unskilled at investing in the physical ever be expected to invest in physical startups?
Interestingly, one particularly thing Blank points out (which has exercised my mind for the last four years, but which very few people seem to have fully worked through) is that Chinese manufacturers have created a two-year replacement cycle for consumer (and even semi-pro) electronics, based around the triple play of volume production, narrow margins and limited life-span components. It’s simultaneously a market position and a self-reinforcing mindset, which (together with all the MBA apologists for universal outsourcing) has served to define the world economy for the last 10-20 years (depending on which sector you’re looking at).
Bucking that whole flawed global system (as Nanodome valiantly attempts to do) comes down to a sustained exercise in engineering for reliability (which only a handful of German manufacturers seem able to do) and local manufacture (or, at least, late local assembly). However… having now pitched ‘reliability-by-design’ to a long succession of angels, I can tell you that regardless of how much this is good for the National Debt and rebalancing the global economy, it is almost impossible to make it sound like a ‘sexy’ or ‘hot’ play to anyone. Oh, I do my best, but… sorry, Steve, it’ll need both switched-on startups and switched-on angels to make a macroeconomic difference to that imbalance, and right now we’ve only got a tiny handful of the former in play.
(In many ways, all of this means that arguably my startup’s spiritual home is in Germany: perhaps I should properly learn German and go pitch there? Something to consider…)
Funding Startups (& other impossibilities) 
Comments on: "Failure to dream, failure to launch…" (6)
Great post Nick. Bit late to be commenting on it, but I’m going to anyway – at length!
It’s rare and refreshing to read any commentary on start-up/funding culture that questions the casino dynamic of most VCs/founders. Most solid German mid-scale manufacturers were likely built by two generations of prudent, thoughtful managers whose ambitions didn’t extend much beyond middle-class lifestyles and financial independence. They created genuine, sustainable wealth for a community of employees and customers/suppliers usually sustained for several decades.
It’s a million light-years from the start-up/entrepreneur dynamic that fetishises exponential growth and the ‘exit’. 90% of Anglo-Saxon angels, banks and VCs would have no interest in getting involved (except, perhaps, to viciously leverage the acquisition of plant or working capital).
The thing is , in the tech space, or at any rate in the field of consumer oriented web services that Blank focuses on (where the winner takes all, and the devil doesn’t just take the hindmost, but the entire field bar the podium finishers), the casino mentality mirrors the risk profile; so it makes a sort of sense.
The honor roll of recent tech-investment darlings (Zynga, Groupon, etc.) have only marginal, trivial impact on real quality of life and make practically no contribution to the durable commonwealth. That said some do reduce friction in the purchase funnel, so perhaps they increase the velocity of money, and have some sort of positive external effect.
While I think there’s little prospect of a investor funds chasing ‘physical start-ups’, on a scale that could impact national economies, I do think that physical start-ups usually have a better income dynamic than consumer web services and as a result have better prospects for self financing and conventional credit. The question is, assuming they have to self finance or meet costs of capital from slowly-shrinking pools of consumer spending in ailing western economies, are they going to struggle to make any kind of meaningful economic contribution?
Your distinction between money extraction and wealth creation is right on the money, but it isn’t just economic: in many minds it’s a commercial and possibly moral distinction. Rentier and agency commercial models, PE plays on leverage, etc. are all massively attractive to investors whereas sustainable value-adds? Not so much.
On the flip side, if you’re a politician/public-spirited individual responsible for/concerned about trying to raise/sustain living standards, or make economies resilient, etc. the ascendancy of these commercial models is at best a hindrance and at worst a menace. If you can place yourself as agent for a zillion small businesses like Groupon or Google and tax their revenues to the benefit of capital that’s increasingly located outside the local and even national economies they serve, then your money extraction isn’t just opportunistic, it’s potentially damaging… all though railing against it is a bit like railing against the weather!
In his post, Blank takes the position of public-spirited individual. I’d love to know if he ever worries whether or not the investment mentality he’s most familiar with is compatible with the greater goals he’s promoting in his post.
On another front altogether – good luck with Nanodome!
Johnathan: thanks for the thoughtful comment, much appreciated! Indeed, I wonder whether the entire VC template simply reduces to “high velocity marginality, zero CapEx“, with Groupon its poster child (and how ironic is that – a company whose business model is based around persuading its supplier clients to lose money in a bid to increase customer volume). So you’re absolutely right, it’s hard to see how notions of the commonwealth could ever dovetail with this kind of financial engineering nonsense.
I find Blank a bit of an enigma: though I completely agree with him that customer development and rapid iteration are hugely important pieces of the overall startup jigsaw, why does he not grasp that the picture is far larger than these two? For example, he’s happy to laud the brilliant but mercurial Billy Durant over the controlling but dull Alfred Sloan: but for an entrepreneur this is not an either-or intellectual parlour game, these are simply roles you play (or De Bono-esque ‘Thinking Hats’ you wear) to meet different needs at different times to get your company to its next growth milestone. By the way, have you seen my recent post on Blank’s famous book?
Thanks for the good wishes, too! If only they could fund companies… =:-o
I have read your recent post on Blank’s book. We’ve learnt the hard way that iteration and customer feedback are imperative although our ventures are consumer focused and usually second guess consumer needs, so the approach works well for us. We’re now 2-3 months from conception to public prototype, not 18 months like our first venture (which was developed in ‘stealth mode’ – a term that gets a hollow laugh whenever we hear it used now.).
Achieving a good fit for public demand by iteration is pretty hard for new manufacturers with a longish product cycle, especially if their customers are consumers, I would have thought. Mittlesand fund their R&D with revenues, and test their assumptions in cooperation with their customers. In fact if you’re a machine tool company, then half the time I bet the customer comes to you with a product spec.
Paraphrasing your ‘high velocity marginality, zero capex’ axiom, the VCs I’ve met in the UK are typically seeking ventures whose profile is growing virally and whose product is as intangible as possible (ideally just bytes).
They want an instantaneous network effect and the fewest possible staff and working assets. Spend on customer acquisition and plant, infrastructure and personnel are turn-offs. As a result they could never build an Apple Computer, and they’re likely to be extremely impatient with the friction that R&D, manufacturing, physical sales and distribution, etc. present.
You could probablly distill your axiom further to ‘Viral, intangible’. Both qualities are short hand for minimal capex.
Johnathan: I hear that same hollow laugh with the word “viral”, normally startup shorthand for “we can’t afford proper marketing”. Stealth mode remains workable solely for startups with big IP hurdles to get over (it took me 18 months to get Nanodome’s patent side really locked down, but that was central to its whole curve going forward): if not, I’d agree stealth is a liability in almost all cases.
As for UK VCs, I don’t believe they genuinely want to invest in startups any more: the whole intangible/viral thing is probably no more than an alibi to reduce the shoal of applicants to a mere plateful. Yum!
However… if you genuinely can get from conception to public prototype in 2-3 months, I have to pose the question (which was the whole point of the article): are you really daring to dream big enough?
I guess we’ve forsworn grand ambition for now. We’ve discovered that just like good wishes don’t fund companies, we can’t eat hubris!
We’ve met with a variety of angels and VCs and the message has tended to be get traction and then we’ll talk (so you’re right: ‘we’ll invest in you when you’re no longer a start-up’), but one ‘pseudo-angel’ (he occasionally dabbles in seed rounds that his friends lead, but isn’t active in assessing/investing himself) took a generously long time (a couple of days all added up) reviewing our concept and revenue model with us. He made his money selling his venture and IP to a competitor, for stock, which in turn became pre-IPO Google shares when Google bought his competitor for stock.
His IP ended up in the hands of a competitor because his funders/backers ‘bottled it’. He pointed out that the backing he got seemed like a lot of money at the time, but divided by the number of months it was intended to support the venture for, it wasn’t actually a great deal. Turning it into a monthly revenue target and self-funding would have resulted in a better outcome for him. As we already have the revenues that meet our Ramen-requirement, he felt we’d be smarter to focus on revenues not investors, and in all honesty we’ve made way more technical progress since we stopped chasing investment, with user uptake and media interest also growing at heartening rates.
Our 3-month-gestation, revenue-centric add-ons are intended to fund our more cash-burning ambitions and let us bootstrap indefinitely. It’s a new strategy for us and may not work. Will let you know how we do…
Most angels and VCs aim to fund things that don’t need funding: it’s not a paradox, it’s just a signal that they only want to meet exploitable entrepreneurs (the word ‘coachable’ falls dangerously close to this).
Many startups continue to chase equity funding even though they’ve silently crossed the line when it ceases to be relevant to them, when they should instead be looking (for example) to debt-fund individual ring-fenced projects. Just something to think about, thanks for your comments!