As I mentioned in my I’m Back post, I’ve spent most of the last year with not one, but two start-ups. I was brought in for my engineering expertise; both ventures proposed to provide value through some sophisticated back-end code. I was able to architect and create both the first iteration for their MVP (minimum viable product) and also provide a now-next-later type of roadmap for the future.
Prior to working with these founders, I had tried to get a product idea of my own off the ground, too. I pitched a local VC who was kind enough to provide me with some significant feedback.
The funding didn’t happen for me. At least part of the reason is that the funding landscape has changed significantly in the last five years or so. As much as I just wish somebody had handed me $250K, the truth is that I understand the evolution. And I’m actually kind of happy about it. I’m pretty sure I could have made a good small business out of my idea, but my investor likely wouldn’t have done well. That’s a lot of risk to come out even (or worse).
The Ghost of Fundings Past
I’m not wholly sure you could ever really get funded with a good idea alone. Perhaps some Silicon Valley folks with a solid track record could go back to the well with a mere idea, so to speak. But I don’t really know anyone who got funded by walking in off the street armed with a pitch deck alone.
Nowadays traction is king.
Traction means customers, even if just a handful. And by the way, a customer is someone who has paid money for your product. That implies that you have got to get your product to MVP (minimum viable product) on your own. An MVP, by the way, is a product with the minimal feature set someone will actually pay for.
This is a tough pill to swallow for startup founders who believe there were good old days when VCs were throwing money at companies without any regard for whether they had any actual customers. I’m not sure how accurate that belief really is, but things are certainly not that way now, and startups need to adjust to if they want to survive and thrive in the current climate.
What does this new reality mean for startups?
For one, it means that they need to focus on generating revenue and proving out their business model before they can hope to attract VC funding. You may think you’re developing a product; you’re not. You are actually developing a business model.
The state of investing world now is such that you really need to prove that the business model works, even if only at a very small scale.
If you think about it, this makes sense: Most early stage investments wind up with a value of zero. By filtering out those who cannot find a single customer, investors eliminate a lot of risk right out of the gate.
Granted, that filter probably strains out a few really good ideas, but lots of good ideas fail, too. If founders cannot get a single customer, that is a failure to execute and thus probably means it is right to filter them out even if it is a great idea.
In the new reality, startups need to have a solid business plan and a path to profitability before they can even think about approaching VCs. The path is proven by traction–at least a few real customers.
Startups need to be frugal and run lean in order to achieve profitability. For some of us, this is good news. I am nothing if not frugal and consider the current landscape more hospitable for me. I guess we’ll see.
Read This Book
In the meantime, maybe I can save you some time. I have read a score of business start-up books in the last couple years. I can point you to the best of the lot, Running Lean by Ash Maurya (that’s not an affiliate link–I just really like the book).
This book is enormously practical and provides concrete steps to take at each of first three major life stages of a startup. One of the author’s major thematic threads is that a startup is designing and proving a business model, not a product.
Another important thesis is that engineer-founders like me tend to get enamored with their solution, when in fact they need to focus on the needs of their potential market.
The book also lays out the the Lean Canvas, a simple approach to identifying the important things you need to know or learn for your business model to be successful.
I could go on a lot longer, but the book’s author does a much better job than I ever could. Do trust me on this one, though: If you are or want to be a start-up founder, it is worth your time.
