In a previous post we discussed a lean startup philosophy vis-à-vis a typical VC-funded startup. Here lies the classic conundrum of an investor who is (supposedly) omniscient and omnipotent, and hence would direct the company in his/her supreme wisdom. There lies the challenge of many “funded” startups, since they are essentially at the mercy of a supposedly “know-it-all” VC whose goals are often at cross-purposes with that of a startup as we discuss below.
Recently, a trusted adviser (and an entrepreneur with a decent exit) mentioned that VCs often have very divergent interests from those of the average entrepreneur. A typical entrepreneur is happy with a 5x or even a 2x exit from a startup. An institutional investor– who is typically invested in several companies simultaneously - is looking for one or two big hits with little heed for the rest. To use a baseball metaphor, an entrepreneur is OK with a double or single, but a VC is looking for a walk-off home-run, and they want everyone in their portfolio to swing for the fences. To them, any startup in their portfolio is expendable in the hope of getting a large payback overall. They want to bet big and win bigger, if some fail “oh well! Too bad”. However to an entrepreneur, their one-and-only bet is their startup on which s/he has invested their blood, sweat and tears.
We think any entrepreneur should consider this proposition very carefully before considering any institutional investment.
Here is yet another fabulous slidedeck from Eric Ries that expounds further about “lean startups”
Thursday, May 21, 2009
"Lean" Startups
A friend and fellow entrepreneur recently sent along a fascinating talk about the “lean” model of entrepreneurship. The author describes applying the lean model – which was popularized in the manufacturing sector by eliminating “muda” (waste) – to startups.
The company showcased in the presentation IMVU.com proposes an idea we very much subscribe to: that startups must learn by experimentation. We believe “trial & Error” is the ultimate judge of any business-plan. To that we might add they are “useful”, inasmuch one actually learns from the experience.
As the author points out, with lean startups “the problem is unknown and the solution is unknown”, thence the need for a constantly adaptive approach. We posit that virtually all startups are in this situation, even the ones who have a so called well-defined problem-space and solution. We argue there is no such thing as a "well-defined" problem, much less a "well-defined" solution. Most entrepreneurs have a vague, fuzzy idea of what they want to tackle and look at it through foggy glasses. It is only through iteration that the problem gets into focus. As the classic adage goes “all plans are wrong, but all are useful”. The businesses that succeed are the ones who adapt and iterate constantly.
Eric points out startups must “learn to learn”, and do so constantly.
The Lean Startup
View more presentations from Venture hacks .
The company showcased in the presentation IMVU.com proposes an idea we very much subscribe to: that startups must learn by experimentation. We believe “trial & Error” is the ultimate judge of any business-plan. To that we might add they are “useful”, inasmuch one actually learns from the experience.
As the author points out, with lean startups “the problem is unknown and the solution is unknown”, thence the need for a constantly adaptive approach. We posit that virtually all startups are in this situation, even the ones who have a so called well-defined problem-space and solution. We argue there is no such thing as a "well-defined" problem, much less a "well-defined" solution. Most entrepreneurs have a vague, fuzzy idea of what they want to tackle and look at it through foggy glasses. It is only through iteration that the problem gets into focus. As the classic adage goes “all plans are wrong, but all are useful”. The businesses that succeed are the ones who adapt and iterate constantly.
Eric points out startups must “learn to learn”, and do so constantly.
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