The Sadness of Startups, and Pirate Bones…

People like to invest so much time looking at the upside of entrepreneurship that there isn’t really much of a vocabulary for the downsides: not only for the collapsed companies, but also for the sadness of startups that do get funded. Because of the lack of competition for deals, one dirty little secret here in the UK is that many startups get funded under such abusive terms that personal disaster for the entrepreneurs involved is almost inevitable. But nobody wants to mention that, let alone coin a phrase for it.

Anyway, one fine September 19th I held a party in my garden to celebrate International Speak Like a Pirate Day: and so went looking for pirate-themed music to entertain my guests. One track in particular – Pirate Bones by Natasha Bedingfield – really stood out for me, and has done ever more so as life in my shady corner of Startup Land has developed (I hesitate to say “progressed” with a straight face).

I couldn’t find correct lyrics for it anywhere on the Internet (and having written over 200 songs myself, I should point out that they’re technically high quality stuff), so here they are. Do they describe your experience as an entrepreneur?

Pirate Bones – Natasha Bedingfield
[From “Pocketful of Sunshine” (2007)]

What if I squeeze myself into any shape / And I still don’t fit?
What if I bend myself so much that I break / And I can’t mend it?
What if I burn so bright that the fire goes out / And I can’t stay lit?
What’s the point in it?

I could get good at crying crocodile tears / Just to get along
I could carry on telling you what you wanna hear / ’til my voice is gone
But if I finally get to the place that I think is home / And I don’t belong
What’s the point in it? / Where’s the benefit?
When I’m gaining all but I’m losing it

[Chorus:]
It’s not worth having / If it’s too much to hold
You can dig so deep / That you’re left with a hole
Thirsty in a desert with a bag full of gold
Don’t wanna end up like pirate bones
What I thought was treasure’s just a pile of stones
I might have had the treasure but I’d be laying alone
Just a pile of pirate bones
If I forfeit my soul it ain’t worth having
If it’s something I stole it ain’t worth having

What if I stake everything I am on a dream / And it’s counterfeit?
If I reach the end that justifies the means / Could I live with it?
And if it’s true that having too much of any good thing / Can only make me sick
What’s the point in it / Where’s the benefit
When I’m gaining all but I’m losing it

[Repeat Chorus]

It’s not worth that much to me / If losing out is what it means
To swim in shallow victory / Is empty, empty
It’s just not worth the price / It’s only a fool’s paradise
If it’s draining every drop of life till I’m dry like pirate bones

[Repeat Chorus]

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The antidote to startup funding: customers!

I’ve just come back from being interviewed at an Innovation Warehouse meeting room by London OpenCoffee advice-meister Iqbal Gandham and ex-ZDNetter Andrew Swinton. Basically, they wanted to video my take on topics such as SEIS and startup funding, to act as a kind of antidote to the unwarranted ra-ra positivity that all too often fills the UK tech startup press.

It was a lot of fun to do, and I hope it does rapidly emerge onto the web in some form or other. Oh, and if you’re asking, I’m not bald, I get my hair cut that way. 🙂

Anyway, the big themes that emerged were:-

• For a ‘typical’ UK tech startup, the basic cost of getting funded – in terms of research, travel, lunches, networking, pay-to-prepare, pay-to-prepare, pay-to-succeed, legals, etc – as of 2012 is surely not far off £25K. Are you surprised? Appalled? Both?
• Worse still, the basic cost of not getting funded isn’t far off £15K, never mind the opportunity cost of that 9+ months of work you’ll never recoup. So… why not take your £15K – £25K and go out and do actual business with it instead?
• Look, presentations aren’t sexy. Pitch decks aren’t sexy. Elevator pitches aren’t sexy. The only sexy thing is having customers.
• Use your ingenuity and persistence to build up a real business, one brick at a time, where each brick is a customer.
• Being an entrepreneur is 90% sales, 10% everything else. Tech entrepreneurs use phrases like “virality” to kid themselves the proportions might be the other way round, but they’re simply not – and they never have been.
• So, unless you can actually demonstrate – to yourself, never mind to anyone else! – that you can sell stuff in the real world to real people, you’re basically a nontrepreneur. Yes, it’s a nasty, horrible word, for sure – but if thinking about it helps you to get real, then it’s also a bl*%dy great word.
• In a nutshell, work out what you’re selling, physically go out and meet people who want that kind of thing, and sell to them.
• Stop kidding yourself that tech trickery alone will be sufficient to get you to a huge market, it won’t.
• Forget about emulating Facebook, Twitter, Google, LinkedIn, and eBay – if their ‘secret recipe’ for success could be bottled, we’d all be drinking the stuff. But there is no secret, so it can’t, so we’re not. So get over it!

Probably not what you wanted to hear, but there you go, it is what it is! Live long and prosper! 🙂

The Unfundable Mountain…

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!