Getting to "yes" in a world of "no"…

Posts tagged ‘business angels’

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! 😦