Getting to "yes" in a world of "no"…

Archive for the ‘Bootstrapping’ Category

The Unwritten Lean Gospel…

To my eyes, the whole Lean Startup thing seems to be little more than a nicely crafted piece of contemporary rhetoric, that sings an alluringly timely song engineers desperately want to believe is true… that through the magic of fast iteration, their crappy little startup can prosper despite knowing nothing about positioning, sales, marketing, buyer psychology, or indeed human nature.

Essentially, Ries sells a kind of techno-pipedream that Yes You Too can build a purist company that doesn’t need to sully its hands with all the grungy, old-fashioned business kruft (that every other business book ever insists you need to have as some kind of grounding), because by experimenting fast on eager early customers, you (supposedly) get to find out what works.

Put it all like that, it should be clear that this fetishizes incrementalism (i.e. ‘if made rapidly enough, many small steps can carry you far‘), and is in fact the opposite of (software and hardware) engineering as a discipline, sales as a discipline, marketing as a discipline, pretty much anything as a discipline… it’s anti-every-other-kind-of-knowledge. Put “The Lean Startup” on your bookshelf, and you should surely be able to throw all your other books away. Beguiling, isn’t it?

However, there are many other foolishly impractical messages I suspect The Lean Startup implicitly preaches, but which may not be immediately obvious:-

1. Hope big, dream small.

2. Fail fast, learn little.

3. Self-fund till you die. (For who on earth has a Sugar Daddy rich enough to fund such open-ended stuff?)

4. Alienate lots of early customers by testing lots of rubbishy iterations on them.

5. Don’t trust anybody’s goddarn theory, just iterate instead.

6. If you can’t A-B test if something works, don’t do it.

7. Customers are test subjects for your experiments, not people you have business relationships with.

8. Keep on iterating while the market changes around you (invalidating all your earlier tests).

9. It’s not a product business or a service business, it’s an iterating business.

10. Oh, and don’t forget to A-B test people on your team, that’d be a great way of [mis]managing people, right?

Have I missed any?

Why ‘Until’-scripts lead to startup death…

Unless you have heard of Transactional Analysis (‘TA’), you probably don’t know that an “until script” is a behaviour (anti-)pattern with the (somewhat damaged) subtext “I can’t be happy until [insert unrealistic condition here]”. Basically, this is a fake justification people use on themselves to try to avoid taking responsibility for their own happiness, e.g.

  • “I can’t be happy until I get some kind of parental approval” – just about every child ever
  • “I can’t be happy until I get to the end of my degree course” – just about every student ever
  • “I can’t be happy until this project has finished” – just about every programmer ever
  • “I can’t get a proper contract until my probation period ends” – just about every employee ever
  • “We cannot prosper without an extended period of austerity first” – just about every government in 2012

Of course, you don’t have to dig very deep to find the entrepreneur version of all this…

  • My startup can’t prosper until it gets funding

I suspect that this points to something deeply broken in the contemporary entrepreneurial psyche. For at heart, the damaged emotional neediness of pitching for angel funding is nothing less than a über-until-script, i.e. Entrepreneur X can’t be happy until he/she has put together a funding round.

At its most excruciatingly awful, then, entrepreneurs pitching to business angels are pretty much on a par with unhappy children trying increasingly desperate measures to get attention from grossly neglectful parents. Realistically, in neither case is there a strong likelihood of a heart-warming outcome: however hopeful or optimistic you may be, positive thinking ain’t going to shift that particular mountain.

So… if “until scripts” (such as pitching for funding) aren’t any good, what’s the alternative?

Well, I think all of this points to one simple (yet brutally unfashionable and no less hard to swallow) truth: that any business plan that involves raising funding as a necessary step to operating success is inherently broken. Bust. Cracked. Dead In The Water. NBG.

Rather, the best paths to business success all steer their primary routes through self-reliance and customer-focused organic growth – your primary focus should be on building modestly self-sustaining businesses, yet ones that also have the capacity and vision to grow and scale rapidly in a best-case scenario. Is this do-able? Gosh, yes! But you’ll first need to unlearn the business school “lesson” that external funding is the only way to build a successful business – when in fact, it may well be the worst.

Startups 3.0, The Lean Startup, and business angels…

OK, as with nearly all blog posts, the following is an outrageously reductionist simplification. But for all that, it remains a genuine and honestly held point of view that might just change the way you look at things…

Essentially, I believe that the modern financing history of “startups” divides into three overlapping generations or waves:-

  • “Startups 1.0” were bank-funded, back in the days when banks had money to lend.
  • “Startups 2.0” were angel-funded, back in the days when angels had both wealth and liquidity.
  • “Startups 3.0” are self-funded, trying hard to move to customer-funded at high velocity.

Right now, I think that most startups are stuck in a limbo between 2.0 and 3.0 – we’re smart enough to see lots of practical problems with angel funding, but not self-confidently ambitious enough to honestly believe that we can bootstrap what we do from basically nothing all the way to a billion dollar company without angels’ alleged assistance. My advice? Have faith – you can do it, honestly you can. All you need to do is to devise a way of making it happen. Given that you solve every other problem you run into, why not try to solve that one too?

Interestingly, one common reaction to my popular post Lean Startups suck. Here are 10 reasons why… is that I must be some kind of Lean Hater. In fact, the single biggest thing I hate is seeing clever, ingenious and otherwise well-informed people suckered into following a course of action that will suck every last penny out of their pockets (and often out of their friends’ and families’ pockets too).

Unfortunately, I believe that this is what Lean will do to you if you trust it for financing. Angels don’t ‘get’ Lean, simply because Lean startups are encouraged not to make claims or promises that might have value, whereas angels are fundamentally looking for things of value to invest in. So the core issue I have with Lean is simply that we’re living in the decade before angels find a way – a ‘contract of mutual expectation’, if you like – of coping with Lean. In short, we don’t (and indeed we may never) have Lean Angels. That would be “Startups 4.0”, but we’re a long way from there just yet. 😦

Overlaying Lean onto the three startup financing generations described above, my argument would be that Lean conflates the two very different dynamics of Startups 2.0 and Startups 3.0, but ends up with the worst features of both. That is, Lean promotes the emerging incremental self-funded-to-customer-funded mindset (of Startups 3.0) but tied up with the need to expensively surrender control of most of your company to angels in order to scale (of Startups 2.0). It’s not a good mix at all.

But… “what’s so wrong with angels?“, you may ask. The awful truth is that here in 2012 we’re living at the tail end of the angel funding revolution: over the last decade, angels’ thinking has become so polluted by the “10x home-run” nonsense spouted by VCs (who have since moved en masse to far later-stage investments anyway) that angels’ overall level of ambition, expectation and – let’s face it – raw greed have all been inflated beyond the ability of any genuine startup to meet them, except purely on a vapourware or slideware level.

Lean does not fix this: in fact, Lean promotes angel funding at a time when the gap between startups and mainstream angels is widening year on year. I dramatized all that here back in 2010 as the Venn diagrams of death (and the world is still waiting for virtual angels), so it’s not exactly shocking news… but it seems to me that very few entrepreneurs get any of this at all. Don’t mind me, though, please feel free to carry on drinking that angel Koolaid all you like. As I said when I got cut up by a hearse the other day, “whatever, it’s your funeral“.

I know that bookshop shelves are filled with zippily-titled easy ways to start up your company (of which Eric’s book is merely one of many), but the reality is that these simply don’t work any more. In business terms, they’re all as outdated as 18th century encyclopaedias. They promote a gospel of financing harmony and collaborational positivity that simply doesn’t match the East End barrow-boy hustle that actually passes for angel investment.

Ultimately, I believe that the only genuine way that people can deliver the kind of low-risk-yet-hockey-stick-shaped returns angels demand is through armed robbery or Enron-scale fraud. So go ahead, pitch all you like, knock yourselves out: your so-called best case endgame scenario is that you’ll end up grinding out one ridiculous, abusively one-sided offer from a ragtag set of barely-liquid angels who will then be more interested in finding tricky ways of mitigating their downsides at your personal expense than in growing your splendid company together.

Alternatively, you can start small and find ways of getting to customers and growing fast. You know which option I recommend! 😉

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!

The ‘Inventor Script’ 2.0…

Next week [21st March 2012], I’ll be giving a talk at the Kingston Round Table of Inventors, a thoroughly lovely local inventor group that meets once a month or so at Kingston University, chaired by the well-respected Bob Lindsey. Feel free to come along, everyone’s welcome & there’s normally lively discussion in the Grove Tavern afterwards (a mere couple of hundred yards away), all highly recommended. 🙂

Here’s a link to my slides for the evening – feel free to check them out beforehand, that’s perfectly fine by me. 🙂

The Inventor Script – v001

Essentially, what I’ll be discussing, with copious examples from my own security camera company Nanodome, is something that really bothers me: the widely held notion that an Inventor’s quintessential path is to progress linearly from…

  • [Invention] (i.e. devising a new way of doing something, or a way of doing something new), to…
  • [Innovation] (i.e. turning it into something real, forming a business plan, getting funding, turning it into a business, etc), to…
  • [Success]

This simplistic three-step programme is what I call the ‘Inventor Script‘. Yet if you look at the way things actually work out in practice (such as the James Dyson story), you find extraordinarily different paths being followed, and in a vast variety of ways. Moreover, all three ‘steps’ are much more subtle and nuanced than people generally think. What is invention? What is innovation? What is success?

But even if you accept this as a model, the key problem it has is that startup funding (in the UK) is now just plain broken. It’s not just that the banks have left the stadium, or that grants have been rarer than hens’ bicuspids, it’s that angels have become hopelessly unrealistic, with their 10x ‘home run’ exit dreams yanked from US Venture Capital jargon handbook. Even Dragons’ Den has had a substantially negative effect on the whole sector. (And don’t get me started on Venture Capitalists, bless ’em.)

So, with no serious access to ‘adventurous funding’ on offer (even with the SEIS), I think you can only sensibly conclude that the traditional Inventor Script is also broken. But what comes in its place? Basically, what does the ‘Inventor Script’ 2.0 look like?

I’ve got a fair few ideas about this which I’ll be discussing at the talk. The main one is that to bring inventions all the way to market, you need to be a bit like Superman, insofar as you need to bring a wide variety of business ‘superpowers’ to bear on the challenge to stand a reasonable chance. As a parallel, funding is (loosely speaking!) a lot like Kryptonite in that, as with Superman, it has the power to weaken, control, and destroy you if it gets too close.

So, funding is not only nearly impossible to get, but it can be very bad for your health even if you do get it. And the amount of effort you have to put in to raising funding would – in nearly every case – be much better spent on getting something to market. As a result, I truly believe that you should aim instead to apply your inventive mind to finding ways of building your product-exploitation company without any funding at all! Yes: zero, nil, none.

Anyway, feel free to have a look at my slides and leave comments here. They may well change a bit before the presentation, but the spirit will probably remain intact. 🙂

Looking back, I can see now that my startup funding timing was maximally bad. That is, I arrived on the startup ‘scene’ too late for the bear market party, too early for (what is slowly shaping up to be) the Lean Disco. But it is what it is, I am where I am. Hope to see you on Wednesday! 🙂

Nick’s “Startup Handbook”, version 0.1…

For a while I’ve been putting together my “Startup Handbook”, a realistic and practical guide to funding startups in the UK. In it, I introduce the idea of Minimum Buyable Product: whereas a ‘Minimum Viable Product’ has come to mean a stripped-down late prototype you hope you can get away with selling, a Minimum Buyable Product is instead an alternative (typically much smaller) way of building into your target market. Basically, it’s a small ‘stepping-stone’ product you use to get your company self-sustaining, so that you can internally fund your real world-beater without needing external funding.

Anyway, here’s a link to the first release, please let me know what you think!

Fred Destin miniseedcamp lecture, ohhhhh dear… :-(

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! 😦