Getting to "yes" in a world of "no"…


As recommended yesterday by Ben Markland on the London OpenCoffee meetup forum, here’s a video from July 2011 you might enjoy: a 50-minute lecture + Q&A session by Fred Destin at Miniseedcamp Ljubljana. Fred’s a smart guy, and manages to squeeze in the whole lifecycle of startups: founders (the magic number is two), funding, launch, build, the Chasm, scaling, all the way to maturity. As a rapid precis of currently accepted startup wisdom presented by a communicative ex-Euro VC (now in Boston), you’d think it would be hard to beat.

Except that, as a unified body of knowledge, it really sucks – basically, the pieces don’t fit together .

Here’s the paradox: even though Fred really likes lean startups (he lauds Steve Blank’s Customer Development Cycle and Eric Ries’ Lean Startup Movement), he clearly doesn’t believe that lean scales up – at some point, you have to put your lean ways behind you and go “fat”, he says. So do you think smart, well-connected VCs who are anything like him would make VC-scale investments in lean startups while they are still lean? No chance.

So, the lesson to be learned from that would seem to be: Lean Is Good, Except If You’re Pitching To VCs.

But that’s only half the paradox. Here we have a top-flight VC exhorting a roomful of startup people to go lean, even though he personally wouldn’t invest in them while they’re still lean. Clearly, he must be expecting other investors – specifically business angels – to step in and fund lean startups, to build them to the point where they can sensibly exit and pass the equity baton onwards to eager VCs.

But those seed funding rounds are clearly problematic, and Fred is well aware of the problems of getting funding going: he discusses (in the Q&A) the initial “funding no-man’s land” many startups get stuck in , and advises entrepreneurs to “always move the company forward”, and not to get caught in a waiting-for-funding-rather-than-actually-doing-stuff “death trap”.

Yet the problem is that by endorsing Lean as the best startup methodology of the day, I’d say he’s making that initial funding no-man’s land wider. I like lean, but it comes with an implicit set of values, pretty much all of which are antithetical to angel investing principles:-

  • We don’t initially know what to do, but we plan to keep failing fast until the market teaches us
    (Angels want to put their money into building something, not funding your education)
  • We don’t have a business plan, just a set of vague market opportunities we’re trying to incrementally build into
    (Angels want a business plan and cash flow forecast to negotiate the equity value of their investment)
  • We don’t see any division between customer development and product development: we constantly (micro-)pivot
    (Angels like to work with people who put their money to a specific use, not changing their mind all the time)
  • We wear many hats simultaneously, and the business side is tightly interwoven with the development side
    (Angels prefer dealing with non-business-savvy entrepreneurs, who are more ‘coachable’ and ‘malleable’)

How on earth can angels price investment into Lean Startups? In fact, “are there any ‘Lean Angels’ out there?I asked Eric Ries a while back, “And since engineers already ‘get’ Lean so readily [probably because it’s so much like mechatronics development], why are you lecturing them rather than angels?” He didn’t really have an answer then (beyond “well, there are a few… in the US”), and sadly I don’t think he’s got one now. There is no Lean Funding Movement. Unless someone can explain to me otherwise, I assert that Lean is basically unfundable by the current generation of angels (and I’ve met more than 130), unless you dress it up as something that it ain’t.

Fred is right about the importance of the pre-funding quagmire: I suspect this has got worse of late because angels’ and entrepreneurs’ focuses have progressively diverged – angels want more certainty before putting their money in (though still with a 10x return, ha!), while entrepreneurs are trying to find cost-effective ways of managing product/market uncertainties (e.g. Lean). There is – at least in the UK – less shared conceptual ground between these two camps than ever.

Right now, the only lean path to huge growth seems to be patient bootstrapping over an extended period – basically, to self-fund beyond the point that lean is a central part of the business mix. (Sure, feel free to set lean sweat teams in motion later, but that’s the icing on a cake you’ll have already baked by then.) And where do angels and VCs fit into that business landscape? Angels and VCs love evangelists, customers, traction, metrics, virality: but the kind of patient, bootstrapped, self-reliant, compact development that’s at the heart of Lean is a terrible fit for their explosive, percussive business models.

Ultimately, a lean business is not an angel business, nor is it a VC business. What a mess! 😦

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Comments on: "Fred Destin miniseedcamp lecture, ohhhhh dear… :-(" (14)

  1. It comes back to something I find myself repeating more and more. We need more angel investors. The wealthy are mostly still wealthy but seem unaware that with the EIS scheme investing in startups is low risk compared to investing in the stock market with similar or greater upside.

    Come to think of it with the current stock market investing in startups is relatively low risk even without EIS…

    • Chris: actually, I’ve met plenty of people calling themselves ‘angel investors’ out there, but few are actually investing, even with the coalition’s favourable changes to EIS. From where I’m sitting, what we need are (1) visible (but non-Dragon’s Den) role models for angel investors, particularly those who aren’t fazed by uncertainty, (2) more of a culture of active angel investing rather than just going along to networking meetings, (3) more places where startups and angels can meet (there should be a Flagon’s Den in every major city!), and (4) somebody – actually, anybody – talking about why Lean Funding makes sense, and how to do it.

  2. We also need to look at solutions other than money for funding the no-mans land mentioned. Underutilized time and resources – from individuals and businesses – can be used to get through the ultra high risk product and initial market development stages. Angels, banks and later VCs can then focus on ramping up a working model. We’re looking for partners to take our international patent pending, crowd ReSourcing platform to market, so do get in touch about joining the team, licensing our IP or becoming a Joint Venture Hub.

    • Senake: I suspect that the only practical way of getting a lean company funded is to learn enough (while bootstrapping and self-funded) to not be lean any more. But if there are things you need access to that would help you move forward that other people or companies can give or lend you, always feel free to ask – asking’s free, right? 🙂

      • Asking – unless it involves lots of due diligence or other work – should always be free. 😉

        Providing spare time or resource on a pre-agreed payment out of future revenue or unlocked finance basis, should definately not be free. It should be premium priced. But opening up your requirements to providers of skills and assets – as well as finance – significantly increases the size of your potential lender & investor base.

  3. I think you are directionally correct that many angels have yet to embrace the type of company building we are talking about but you are wrong about the fact that we don’t embrace this today and you are generalizing when making this statement: “I like lean, but it comes with an implicit set of values, pretty much all of which are antithetical to angel investing principles”. Also please read: http://bit.ly/oHhB7W

    • Fred: thanks for commenting so quickly. Clearly, you ‘get’ lean startups, and there is bound to be some merit in both of our polar generalizations: but on balance, whose is more representative of angel investing practice? Of the many angels I’ve met, I’d say that less than 5% would be at all comfortable funding a lean startup – I don’t see any evidence of a ‘rush to lean’ outside of the engineering community. Is this different to what you’re hearing? I hesitate to recommend something that ought to be true when the evidence available to me is that it is false.

      Really, the only issue here is whether lean is fundable or unfundable by the overwhelming majority of angel investors. From the many conversations I’ve had with them here in the UK, I’d say it is currently unfundable, and hence that lean only makes sense as a self-funded / bootstrapping pre-funding stage. I have a lot of respect for what Eric and Steve are doing, but I really wish they’d engage angel audiences rather than engineers.

  4. This post seems to have been updated since I first commented.

    You are putting words into my mouth when saying “be lean except when pitching to a VC” that totally misrepresent what we do. Seatwave = incubated. Zoopla = two people and a powerpoint, stayed sub 10 people for almost two years. DailyMotion = 5 people. I could go on. We fund at seed. We like lean. We like low capital intensity.

    It is genuinely hard to know when to scale. It is genuinely a good way to get screwed as a founder to scale too early. It’s a good way to miss a market to scale too late. We can attach any amount of theory to that, but having a rigorous approach to “trying” to understand when a company is ready to scale will likely never be a science.

    Yes I wish there were more angels who get fast iteration startups. Right now, too much misplaced focus on 2-year business plans. Back talent, go after big problem, spend little. Let’s stop trying to over-engineer seed investing. It acts as a disincentive to the REAL talent which moves out West.

    • Comparing the revisions, I did lightly edit this post 12 minutes after first posting, but only for minor issues of style and clarity, nothing major at all.

      Reading it all again just now, though, I should probably have backed it up with a few choice quotes from your presentation, such as at 25:40 where you say: “Sometimes, at some point, you’ve got to go fat. Being lean isn’t mean, it is not a religion, it is not the end game. […] just take it [‘lean religion’] with a pinch of salt“, which I think I summarized reasonably well, if succinctly. 🙂

      I wasn’t putting words in your mouth, I separated my inferences and opinions quite clearly from what you said. Having now watched your whole presentation again to find the above quote (just to make sure I didn’t dream it, *sigh*), I still don’t infer that you truly believe that the VC industry as a whole is set up to fund lean startups. Only a very few VCs (such as yourself) ever fund small early stage teams they primarily happen to trust, and that seems to be regardless of whether they’re Lean or not. This seems to be no less true of the angels I talk with – so why not ask your 30 angel buddies if they truly value lean, or if they just tolerate it as this year’s fashionable nonsense, a bit like a low-rent Jedi cult. 😉

      As to your examples, Seatwave’s Joe Cohen was ex-Match.com and ex-Ticketmaster: Zoopla’s Alex Chesterman and Simon Kain were ex-LOVEFILM; Dailymotion’s Olivier Poitrey was ex-Lycos Europe (though I don’t know about his co-founders), clearly trying to build a big moi-meme business on the back of youtube’s wave. I like low capital intensity too, but I somehow doubt that any passing resemblance to the Lean Startup was the deciding factor with each of these, so much as credible founders gunning for a decent-sized B2C opportunity.

      • It’s really the last time i comment here because your method relies on attacking the credibility of the other person rather than the quality of your own arguments. Alex founded DVDs on Wheels which merger with VideoIsland which merged with Lovefilm. True entrepreneur. Get your facts straight. DailyMotion started before YouTube and the two companies shared insights and product features in the early days; the founders were 25. Goodbye.

  5. Fred: my last paragraph was most definitely *not* an ad hominem attack, not on you and not on the (very good) founders you listed whom I clearly described as “credible founders gunning for a decent-sized B2C opportunity”.

    I’m very sorry if you thought I was being in any way disrespectful to those people your fund has backed and supported – I simply was not, period. For DailyMotion, my recollection was simply that its growth and funding curves significantly lagged YouTube’s, but obviously you feel very strongly that this was not the case, so I apologize.

    At the same time, the whole wretchedly straightforward point of my paragraph – that those people you listed all almost certainly got Atlas’ investment not because of any perceived “Lean-ness” but because they were credible founders – still stands.

    You’ve probably already seen the slide Hermann Hauser showed at Innovate11 this week about how the proportion of serial entrepreneurs in Amadeus’ funds had grown from only 11% in Amadeus 1 to 70% in Amadeus 3 (if I remember correctly). So why on earth is it so heretical of me to say that I think funds are much more interested in funding businesses pitched by credible founders than in funding lean startups?

    • you’re right i partly misread, my turn to apologize. you need credible people no matter what. we have a bias towards first time entrepreneurs though typically, fwiw. we just backed a 19 yr old. sequoia has a well publicized preference for very young first time founders.

      re dailymotion both companies started in april of the same year, one was not a clone of the other. i think dailym was live first. youtube tore away from us thanks to myspace traffic.

      there’s no either/or though. your logic is slightly odd. you can be lean and started by credible people.

      • Fred: no problem, not a big deal. No either/or here, I just haven’t (yet) seen any investments that were driven by Lean, no matter how much sense it makes to you personally (I read your Lean post today) or even to me.

        As I said to Eric last year, I just wish he’d spent 3+ years going round talking to angels rather than to engineers and entrepreneurs: most dev guys I know would surely get the basic Lean ideas within minutes, it’s the angels who need convincing. 😉

  6. […] Lean Startups are unfundable by angels. I estimate that 95%+ of current business angels (oh, and 99%+ of VCs, too) would not currently invest in any lean startup. This is because the Lean Startup toolkit […]

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