Getting to "yes" in a world of "no"…

Archive for the ‘Eric Ries’ Category

Your new job title: Chief Opportunism Officer!

Opportunity is rather a strange thing. In many ways, it’s the life-blood of business: but what kind of entrepreneur would have the cojones to pierce the pretence of business strategy and put their job title down as “Shameless Opportunist“? [To be honest, I did try it for a while, but got bored and moved on].

Perhaps we collectively need to kill the stigma attached to “opportunism”, to rescue it from the shadowy depths business theorists have relegated it too, and instead declare: I’m proud to be an opportunist. I’d say that Steve Blank and Eric Ries don’t go nearly far enough with iteration and customer development: the real point of running a startup is not to pivot until you get motion sickness, but rather to do everything you can to prepare it to grasp with both hands whatever near-workable opportunities come its way.

In fact, I’d go so far as to say that luck in business is perhaps more of a skill, comprising extensive scenario preparation and a certain kind of glinty wide-eyed-ness quick to alert you to analogous chances you can take advantage of. Yes, ‘business luck’ is 50% preparation and 50% opportunism – the new reality of startups.

Might this also point to what is so wrong with the implicit contract between angels and entrepreneurs, that foolishly seems to assume (as business schools like to insist) that sheer force of intellectual will can bend reality sufficiently to force a commercial opportunity to come into being? Strategy is dead, long live opportunism!

Similary, the high failure rate of startup investments is often explained away in terms of eventual market luck. But rather, isn’t the real point of seed stage research is not to find a single mega-opportunity (i.e. a single ostrich egg to put into your creaky basket, VC-stylee), but to instead make sure that the proposed venture is sitting squarely in the middle of a field vigorously blooming with multiple opportunities? (Not knowing which one will ultimately work for you goes with the territory)

All in all, if you were to be brutally honest about what what you actually need to do to succeed as an entrepreneur, the real job title on your business card would be Chief Opportunism Officer, no more and no less. So march over to the nearest window and shout your new mantra to the world outside: Opportunity-Ready Is Investment-Ready!

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TSB funding workshop / pitch day…

And so it was that eighteen startups bearing £100K TSB promissory match-funding notes came to London to stand before a roomful of people (a good few of whom were genuinely angels) and have their eight-minute pitches evaluated for investability. On the same bill was the comic relief, the twenty nearly-but-not-quite-funded startups – myself included – whose two-minute pitches were abutted together to form a kind of weirdly psychedelic blur, intended to be some kind of mashed-up Powerpoint speed-dating session.

I love catching up with old faces, putting faces to email addresses, meeting new people and watching new pitches, and I thoroughly enjoy the inevitable rush of pitching (getting a big message across in two minutes is a great writing and performance challenge), so I had a thoroughly great time: and as far as the Technology Strategy Board goes, “I love it when a plan comes together“, regardless of whether David Bott and his crew did or didn’t shave a few corners to push through to the 128-day end line.

But putting all the adrenaline aside, though, the real issue is what to make of the whole event: and as I sat on the train coming back, I have to say that I felt a little bit of sadness. Even though a £100K TSB promissory note could well have been a wonderfully positive thing for my particular company, I do wonder whether it will genuinely help even half of the 18 grantees. For a start, the grim reality is that £100K doesn’t buy you much in Old Street: there’s a kind of implicit £20K “Tech City tax” (in terms of living, commuting, overheads etc) imposed on you just for the, ummm, privilege of working there, rather than (say) Croydon.

For another, because the TSB is only technically allowed to help companies back free-standing loss-making projects (to the point that if you make short-term money from the grant money, they probably won’t cover the payment), all you’re really allowed to do with the grant-plus-match-funding is learn stuff. Yes, in its own curious way the TSB forces grantees to run projects as learning-based “lean startups”, where the important outputs are all intangible, and the most important thing is failing fast, and then pivoting / iterating as a result.

Ultimately, this makes each TSB Tech City funding tranche contingent on finding one or more angels who would be happy to lose invest £100K in something entirely intangible as long as the TSB also loses invests £100K. And I have to say that I have met very few active UK angels who have pockets deep enough to make such truly conceptual calls: as a rule, they don’t yet get Eric Ries’ whole “lean startup” movement. For all the talk of digital media, most social media pitches are just short-term hacks: truly intangible angel investment has fallen drastically out of fashion over here (if it ever was in fashion, for some would loudly argue not).

However, arguably the biggest structural problem of all is that UK angel investors are, by and large, attuned to investing in tangible profit-making companies rather than free-standing intangible loss-making projects: and I suspect most of the angels who eagerly attended yesterday will have felt rather caught in the middle. This was perhaps best exemplified by the Somethin’ Else people, who essentially said: Option A is to invest in our high concept £200K 3d audio game project, while Option B is to invest in our £6.5m turnover (I don’t remember the precise figure) international audio production company from which Option A came. It’s no big secret that most angels are looking for something between the two, that somehow manages to extract the best of both worlds: I can see how presenting such a sharply polarized smorgasboard may end up getting neither (for all the individual merits of both Options A & B).

I don’t know: I suspect the TSB may (wrongly) believe that giving money to startups can only be a good thing for them, when everything comes at a cost. It all reminds me of a short story that popped fully-formed into my mind a few days ago:-

Once upon a time, a boy inherited a box of ancient Arabian junk. While polishing an eerily familiar lamp, out popped a genie. “Thank you immensely for releasing me from the magical prison in which I have languished these long millennia“, pronounced the genie, with more than a hint of Brian Blessed. “I therefore grant you two contingent wishes.

The boy was puzzled. “What on earth are ‘contingent wishes’?“, he asked.

My goodness – don’t schools teach you anything these days?” boomed the genie genially.

No, not really“, sighed the boy.

Well“, the genie heaved, “they give you what you want, but at a matching cost. For example, receiving great wealth would plunge all your friends and family into abject poverty and debt.

The boy sat and thought for a while. “My first contingent wish“, he said eventually, “is to be just a little luckier in everything I do for my whole life.”

Ah, a good choice!“, said the genie. “I grant you your wish, but with the contingent cost that if you tell anybody that you are the recipient of magical aid, you will instead be just a little less lucky in everything you do.

Then my second contingent wish is easy“, said the boy. “I wish to forget that I ever met you.

“No!”, exclaimed the genie, “that means…

But it was too late. With a loud squelch and a flash of green light, the genie was yanked sharply back into his lamp prison for another millennium. The boy stood there blinking blankly, with just a tarnished old lamp in his hand. What had he just been thinking about? He couldn’t remember. All the same, he did feel like it was going to be a good day…

Basically, there’s no such thing as a free lunch, or indeed a free grant. Just because you cannot immediately see the cost doesn’t mean that there isn’t one.

Business Plans v2.0… what would they look like?

As I blogged here a while back, there’s broad agreement amongst the startup chatterati that traditional business plans are dead. MBA thinking is (allegedly) useless for entrepreneurs, bootstrapping (and low-end funded) companies are stuck at the front end of the [necessity—–strategy] spectrum, everyone is talking about Eric Ries’ “Lean Startups” (even if nobody yet knows how to fund them, grow them, or exit them) while Steve Blank’s customer development allegedly beats out old-school product development, etc etc. So far so loosely consensual.

Yet the problem with this is that nobody has stepped forward with an alternative – really, what should Business Plans V2.0 look like? As per normal, pointing out that something doesn’t work is a pathetically easy game to play: coming up with a viable alternative is much, much harder.

All the same, this isn’t just some temporary post-credit-crunch glitchette. At heart, a business plan should be designed as a precursor to substantive investment discussion between the parties – so even if you chortle knowingly at its hockey stick graphs and its optimistic market presumptions, it is an object designed to help channel the raw collaborative urge to form a relationship, to ‘get it on‘ (whatever ‘it’ is).

The problem with this is that, though always somewhat wobbly, the arrangement between angels, banks, and entrepreneurs has been pulled so taut of late that it has now has more holes than substance: the parties’ interests have diverged. What kind of business contract could ever equitably cover the post-sales angle of bank finance, the post-traction obsession of UK angels, and the late-prototype focus of UK entrepreneurs all at the same time? And what kind of business plan could possibly lay down a set of guidelines to bring such parties to any kind of agreement, when right now they don’t even seem to be in the same building as each other?

Putting startup theatre to one side, I’ll be honest: this is a difficult question to which I haven’t (yet) got a proper answer. Though I despair of the sub-MBA grandstanding most business plan templates are built on, these remain the de facto standard for the simple reason that they give you a pragmatically dull way of presenting loads of genuinely useful information. The reason I’m thinking about this right now is that I’ve been asked for an up-to-date business plan by some interested investors, but frankly I’m struggling to bring it all together in any kind of traditional format.

However, what I want to say is quite different from what all the templates seem to suppose – what kind of generic template has the cojones to say “if angels don’t invest in the next couple of months, I’ll negotiate a customer-funded deal within my industry instead, because that’s basically how damn close to market my startup is”? It’s all gone so far beyond the “here’s a nice little idea, will you fund it?” stage (you know, the one that government advisors think that all startups are at) that it’s just not funny any more.

So how can a pitch document ever communicate this urgency – how can it manage to get the core message across that “this is your last chance“? Though I’ve met so many great individual angels over the last 18 months, perpetually coming in second (as almost all of them habitually do) is perhaps the most effective procrastination tool yet devised – for with nobody to come in first while EIS is so heavily stacked against other ways of investing, ‘nobody leads‘ means ‘nobody invests‘, period. The single reason angels can even conceive of a 10x ‘home run’ on any startup investment is that they have to come in early – that’s the deal, that’s how it works. It’s not exactly an ISA, is it?

So, how best to present this? As always, I’ve got plenty of ideas: but even so, it’s a tough nut to crack. And yes, I’ve already had a trawl through various “business plan v2.0” sites (such as this one, PlanHQ, and even the rather laconic icon-based business plan summarizer from Rotterdam), but haven’t yet found anything that comes particularly close. Have I missed something really important? Leave a comment below, tell me what to look at!

Some voguey startup things I just don’t get…

A few quick thoughts before I head off to the TechHub seed funding meetup this evening. Note that the following list is neither definitive, ironic, sarcastic, nor even grumpy: it’s just a whole bunch of contemporary startup things I genuinely don’t get, however much in vogue they may be.

(1) Whatever Sweary Dave McClure says, 500startups seems exactly like mentored spray-and-pray to me. Given that Dave’s a self-professed metric fan, talking up the merits of a proposed 85% fail rate before barely any investees have got round to failing seems somewhat, errrm, anti-metric. Perhaps I’m missing Something Really Important here, and bless the Sainted Dave for trying, but… nope, I don’t get it.

(2) Eric Ries’ “Lean Startup” movement. Look, I do truly understand why customer development and iterative engagement are hugely important – if not indeed utterly central – to effective product development. However, as a way of presenting startups to the investment community, I think it is an abject failure, a weighty conceptual millstone placed around entrepreneurs’ necks at the precise moment they’re starting to swim against the external economic tide. Maybe in ten years’ time (when a handful of self-funded lean startups have somehow managed to go big) angels will see it as some kind of “contrarian bandwagon” to jump on and it’ll make sense: but not now, not even slightly.

(3) The UK Government’s bipolar attitude to technology. On the one hand, you have Vince Cable who seems to want to singlehandedly bootstrap a manufacturing technology revolution in the UK (oh, as long as it’s nowhere near the South-East: ta for that, Mr C) – while on the other hand, you have most of the rest of the government for whom “technology” now seems operationally synonymous with “web technology” *sigh*. Either way, I can’t honestly say this makes any real sense to me.

(4) Old Street / Shoreditch / Tech Cities / Silicon Back Alley. Why is anyone seriously suggesting that the UK needs more office space for startups? The UK is full of empty offices – that’s what happens when an entire generation of businesses gets suddenly squeezed by the banks and is forced to downsize just to retain sufficient day-to-day liquidity. What’s so wrong with home offices, shared offices, garages, etc?

(5) Super-angels. To my ears, this phrase always has echoes of Terry Jones saying “He’s not the Messiah, he’s a very naughty boy“: for most so-called super-angels are neither “super” nor even “angels”, but just naughty boys micro-VCs. Can a super-angel represent a group of other angels and still manage to make a £20K investment? Or even a £50K investment? I suspect probably not.

(6) Early stage VCs. Come on – how’s that going to work, then? To make a minority investment of £2m+, an early stage VC would need to find a whole set of early stage startups that it could sensibly value at £4m-£5m. But outside of pharma and energy, startups just don’t work at that scale any more. I don’t get it.

Customer development and “Blank cheques”…

I’m confused and angry: for heaven’s sake, what’s a startup guy supposed to do?

On the one hand you’ve got Steve Blank proposing his Customer Development startup loop, Eric Ries proposing his Lean Startup development loop, and (one you may not have read about) Alex Osterwalder’s Business Model Generation loop. These three dovetail neatly into a kind of ‘zeitgeisty’ continuously-pivoting startup worldview that says: hey, business plans are for MBA robots, building stuff without a business model and customers is a bozo recipe for failure, so just keep looping and eventually you’ll have learned enough to be pretty sure of not failing.

On the other hand you’ve got 99.9% of angel investors and VCs in the world, who say: why on earth do you think I would open-endedly fund your startup when you tell me right from the start that you have no idea what your market is, who your customers are & what your product will be, and that you have no solid plan moving forward, just a deeply-felt desire to iterate and pivot repeatedly until such time as the process of bouncing ideas/demos/prototypes off your customers helps reveal one to you, at which time you’ll need to raise yet more money from me to actually execute things based on what you’ve already spent so long learning at my expense? Do you honestly expect me to fund your University of Me while you “get real”? Since when was I your parent?

There’s a bit of a conflict here.

Why, then, is it only me that seems to see this kind of funding request for (let’s call it) a “Blank cheque” as somehow genuinely unreasonable from an investor’s point of view? It’s not that I’m an apologist for MBAs, business schools and accountants (far from it!), it’s just that I can’t honestly see how focusing on iterative customer development to the exclusion of everything else helps build any kind of workable middle ground between entrepreneurs and financiers, between (in Blank’s slightly pejorative terminology) the worlds of Billy Durant and Alfred Sloan.

Note that it’s really not that I don’t understand the Blank / Ries / Osterwalder weltanschauung: on the contrary, I think I probably understand it better than most, in that their ideas closely match the ways I’ve actively developed my own company over the last three years. However, there’s a hugely strong case to be made that almost all lean startups may well be intrinsically unfundable. Though making a strength out of a weakness is a great rhetorical exercise (often used in job interviews, of course), I don’t think it translates well into the higher-level arena of funding persuasion – for how is a financier supposed to tell the difference between a “learning startup” and a “know-nothing startup”?

Can somebody please tell me why it only seems to be me who has taken the red pill?

Steve Blank’s “Four Steps to the Epiphany”…

Just as Stephen Hawking’s “A Brief History of Time” had an extraordinarily high (buy:read) ratio, Steve Blank’s influential self-published book “Four Steps to the Epiphany” (first three chapters are online here) has an extraordinarily high (cite:buy) ratio – almost everyone relies on online summaries of what it says, rather than actually read it for themselves.

In some ways, this is a good thing because – as even arguably its #1 fan Eric Ries felt compelled to point out – the book is a tad leaden. Yet even so, Blank’s core idea (that customer development-based iteration should be at the heart of nearly every startup’s overall business development, with product development very much a secondary process) is the kind of thing that has swung strongly into startup fashion over the last few years, for the simple reason (I think) that it’s solid gold. The days of “if you build it they will come” are now thought to be long gone: if anything, the business compass has spun right around to Jim Coudal’s (2005) “if they come, you will build it” – basically, build the audience before you build the product. Incidentally, Coudal mentions “design entrepreneurship” as a specific influence here, which is pretty much exactly what I do (though “industrial design entrepreneurship” is arguably even closer).

Without much doubt, for certain industries such as book publishing (I also run my own niche publishing house, so know plenty about that), I’d say this is an excellent model. In fact, for several years I’ve advised non-fiction authors to blog extensively before writing a word, so as to build up their personal audience – it’s as much about your finding out about them as about their finding out about you. As a general rule of thumb, I’d say your blog needs to get roughly a million visits (and to have roughly a thousand people subscribed to it) before the economics of book publishing begin to work in your favour. Doubtless this is true for many other industries too.

But… is it true for tech startups?

I think the root of the opposite position – non-listening MBA-centric business plans, such as the disastrous WebVan roll-out Blank cheerily cites – lies in a kind of mid-century Father-Engineer-Knows-Best industrial paternalism. And that would be a bit of a straw man for Blank to argue against in 2011, as contemporary entrepreneurs (though possibly not business schools en masse) have become very much savvy to the idea that their customers somehow hold most of the important answers.

Yet even Blank doesn’t go as far as Coudal seems to have gone: having got tired of being the work-for-hire mindshare guru (temporarily wedged between the product guy and early customers), Coudal’s personal epiphany seems to have been that mindshare holds pretty much all the value in the equation, and the rest is mere execution. That is, he redrafted the seating arrangement such that the product guys became the work-for-hire gurus working for him.

Plan, execution, mindshare, customers: for Coudal, the mindshare comes first (plan? what plan?), while I suspect Blank is more about execution – ultimately, he just wants customers into the overall loop to help iterate the plan right. So, to me Blank’s epiphany seems more about looping, which is the part Eric Ries seems to have taken most on board for his Lean Startup ideas.

But does this tell the whole story? In the end, I suspect that Locard’s exchange principle (from the field of forensic science) is even more revealing. Edmond Locard theorized that “with contact between two items, there will be an exchange”: its relevance here is that I think every startup should see its contacts with customers as a two-way street. That is, you don’t meet customers in order to change them, you meet them in order to exchange with them. What Blank highlights is arguably only half of the traffic (i.e. what you learn from customers, how they change you): but at the same time, they do learn from you, and their buying behaviour may well change as a result – but not necessarily in the way that you hope.

In many key ways, I’m sold on Steve Blank and Eric Ries’s worldview – repeatedly bumping things up against customers is pretty much the only way to build things that really work for them – but that’s just an industrial design principle, not necessarily a business development principle. The open (and extraordinarily problematic) question remains this: whether Blank/Ries-style learning startups can ever satisfactorily be funded by business angels. Without some best guess as to when you’ll have learnt enough to ship, how can you ever agree a funding arrangement?

Much as I admire them, I can’t help wondering: by encouraging entrepreneurs to iterate and grow their startups through learning, are Blank and Ries unwittingly creating a generation of unfundable startups? Where’s the Lean Funding Movement to match their high principles?

Pivots vs epiphanies…

When a startup hits a market brick wall and has enough cash and investor confidence to change direction radically, it’s a Mike Maples (high level) ‘pivot’. Essentially: a market-driven strategic shift.

When a startup uses early customer feedback to drive its next product/service iteration, it’s an Eric Ries (low level) ‘pivot’. Essentially: a test-customer-driven tactical change.

However, when an entrepreneur suddenly grasps a significantly deeper aspect of the complex relationship between his/her startup, its people, its technology, its market and the underlying societal trends it’s betting on, that’s an epiphany. This may or may not lead to a pivot: but it certainly enriches all aspects of the startup by joining them together in a more connected, thought-provoking way. Essentially: an intuition-driven change of mind and heart.

Having just had such an epiphany yesterday, I can tell you it’s both exciting (because it helps you see your startup’s future roadmap more clearly) and unnerving (because it helps you see what you should have been doing differently in the past). While it’s happening to you, though, it feels as though the ground (specifically the “ground truth”) of your startup is shifting beneath your feet.

The background to my epiphany: having just read a long LinkedIn discussion exchange on latency in IP pan/tilt/zoom cameras (don’t glaze over, I’ll get to the point quickly enough), I suddenly realized why I disagreed with almost every single contribution to the exchange. Informed by 25 years experience developing computer games, I simply could not see how the latency introduced by state-of-the-art video compression techniques (such as MPEG and H.264) could ever be acceptable for interactive control of PTZ cameras. In what I see as an increasingly interactive world, this kind of video compression comes over as anti-trend.

But from there I suddenly grasped how my long background in the computer games industry made me ideally placed to be designing and building a new PTZ camera – for this too is an interactive video system (albeit one without Sonic the Hedgehog and Mario to help sell it). And from there it became clear to me that the tiny board I’m currently bringing to life is at heart an industrial games console. And from there I saw that a key part of Nanodome’s vision should be to make its PTZ cameras more interactive, rather than go anti-trend just to fit into the IP ‘new world order’.

So now I have a brand new set of thoughts to help me respond to the presentation deck provocation: “Why are you so uniquely qualified to meet this business challenge, to take it all the way to market and beyond?” Today’s answer: “because I have one foot each in the computer game and security camera worlds, I’m perfectly placed to design and build properly interactive PTZ cameras”. OK, as answers go this is still a work-in-progress: but you can at least see where I’m going with it.

Have you had a startup epiphany recently?

Is it time to pivot?

Pivoting is an enormous comfort blanket, that warms you with the reassurance you that it’s better to do something – anything – than persist in some perceived wrongheadedness. But… who says that you’re wrong?

Recently, I was lucky enough to have a conversation with an extremely experienced UK security camera principal, who generously let me see a little ‘behind the curtain’ to how things work in his security camera focused organization. He also advised me that though what I was doing was good, he thought I might have slipped a fraction behind the UK market and that I should now make a fairly significant pivot to attack quite a different segment to stay ‘in play’.

I agonized over this for a couple of days: should I follow the numbers I had on my desk and just keep on going, or should I drop what I had been doing and follow his (genuinely very informed) take on the UK market? Persist or pivot? Stick or twist? Should I stay or should I go?

And then it dawned on me that the kind of high-level ‘extreme pivoting’ Mike Maples talks about only makes sense if you haven’t really engaged with your customers from the start. Because if you haven’t built your startup around what your customers repeatedly tell you they need, then you basically deserve to fail: so extreme pivoting is just another way of saying “we failed miserably but still had enough VC money in the bank for another roll of the dice“.

Hence it seems to me that Eric Ries-style pivoting (learning from low-level exposure to customer feedback) is almost antithetical to Mike Maples-style extreme pivoting (learning just after it’s too late from a Game-Over failure case, but having enough credibility or cash to try again). Yes, they’re both “learning”: but Ries tries to learn before the failure (to avoid it), while Maples almost seems to be advocating a Nietschian learning after the failure (so as to emerge, phoenix-like, from the flames) – that which does not kill you makes you strong, etc.

In many ways, they’re both wrong – Ries arguably promotes learning too early (customers often don’t really know what they want, so how much can you sensibly interpret what they tell you when you show them an early version?), while Maples arguably promotes learning too late (failure can be a equally lousy teacher too, if you don’t honestly know why you failed).

In the end, the security camera principal guy was absolutely right, but he’s fixated on competing in his particular corner of the UK market and I decided that I’m looking at quite a different (and much larger) picture. But all the same, I researched and researched until I found a way of adapting our existing security cameras designs cheaply and quickly to allow them to compete in broadly the way he proposed (albeit in a completely different manner).

Demo’ing early product to customers is a kind of statistical sampling, in that you aim to take on board what they tell you to make a better product in the next iteration – but it’s pretty obvious this is replete with potential sampling errors. How did you select your customers? Have you selected enough of them to form a worthwhile dataset? Are they being honest with you? How did you decide what to ask them? How can you be sure that they’re responding in the spirit you think they’re responding in? How are you ensuring that you’re not suffering from confirmation biases (etc)?

In short, just because you can pivot doesn’t mean you should pivot. Something to think about, anyway.

Earl Smith & “The Money Chase”…

Earl R. Smith II has some words of warning for those seeking funding.

Most money chases fail because the founders do not have an investment quality company. […] others fail because they either mismanaged the process or misunderstood how a successful money hunt should be managed. Yet others fail because they are simply not credible as entrepreneurs. This article is about that last group. Experienced angel investors and venture capitalist are always on the lookout for them and seldom take them seriously.

Might – shudder – you fall into one of Earl Smith’s eight entrepreneur antipatterns, his “Crazy Eights”? Let’s see..

  1. “Man Have Got a Great Idea”, i.e. I’ve got a great idea but I need loads of other people to do all of it, and loads of money to fund it. Put another way, “I may be useless but my idea’s fantastic, ok?”
  2. Down the Rabbit Hole“, i.e. delusionary visionaries who very rarely talk with anything so down-to-earth as customers. People who fervently believe in their own hype but rarely (if ever) reality-check it.
  3. It Is Just Me and the Mice“, i.e. Lone Rangers who simply cannot draw any high-calibre people into their team. It almost always takes several people to build a profitable company, so where’s your team?
  4. I Had Some Spare Time“, i.e. part-time entrepreneur, not really interested in the competition, lax on details, not really committed in any significant way.
  5. A Gambler with Your Money“, i.e. a proper entrepreneur is neither an accountant (too dry) nor a gambler (it’s not about hoping for long shots), but someone who does his/her pragmatic best to minimize risk every day.
  6. Implementation is for the Proletariat“, i.e. monetization (and indeed often implementation) is beneath me.
  7. Do Not Know, Do Not Care“, i.e. when the investor knows more about the startup’s competition than the entrepreneur does. Has done no due diligence on his/her own company!
  8. I am Learning All the Time“. With rather less than a nod to Eric Ries’ Lean Startup movement, Earl Smith says that (sure) learning is nice, but that startups are actually about converting what you’ve learned into money.

Are you one of Earl’s Crazy Eights? Though #6’s seem fairly thin on the ground round my way, I must admit that I’ve met a fair few entrepreneurs who plainly fall into one or (often) more of all the other categories.

More to the point, do I fall into any one of them? Certainly, it would be easy to place every entrepreneur pitching a pre-revenue startup (as I am with Nanodome) into crazy pigeonhole #8: but it feels like a bit of an investor cop-out, a bit of a lame, catch-all alibi for not investing. As I recall, roughly 50% of all startups that receive angel investment are pre-revenue, so this is perhaps the only really unfair category of Smith’s crazy eight.

Of course, I would say that, seeing as it’s the only one I think I fall into. But you’ll have to make up your own mind! 😉

Failure to dream, failure to launch…

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…)