Sunday, September 03, 2006

Fast + Furious Rocket Fuel Startups Should Gauge Probability of Success


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Originally uploaded by benbarren.
Paul Graham, the partner in Y'institutionalised angel investing, is one of the kings of the upside down, yet so obvious why didnt you get it soundbite.

This one (about a startup needing to get "a lot of subtle, social things just right.") pretty much nails why taking VC too early can set you down a path - business, creative, design and socialwise that limits your flexibility and potential authenticity and success.

The stereotypes of Hansel and Gretel in Web 2.0 goes thus : Alot of (greedy) entrepreneurs talk about dilution like it's a really bad thing and end up failing because they didnt incent enough of the right people and resources to get behind the dream; Then another group (VC) talk about growing the overall pie so as to negate dilutionary impacts; The classic VC/Entrepreneur pig and bacon analogy.

However these archetypes and bed time stories are slightly distressed with the changing financing requirements of a 2.0 venture wanting to demonstrate a successful prototype/alpha/beta. This is the Graham arbitrage : Throw $6k at the next Reddit; Flip the old Kiko onto Ebay, and hope at the end one of them becomes the New New Thing.

I totally agree though that with the lower cost of starting a company now, entrepreneurs should look beyond just dilution and the overall size of the pie perspectives. They need to look at "Probability" - Probablility of their venture being a long term success.

Taking VC if you dont need it, or havent got the business stable enough to know exactly how you will use the money and generate the necessary return in set time frame, can actually mean the probablity of a successful outcome decreases the moment that 7 figures hits the bank. If you take $2m, then someone wants at least 10 times back.

Remember if a suitor does build/buy analysis on your startup and thinks they could replicate it (and its success) for a few million, but it would be easier to buy/partner with you : This option is not available to you if your shareholders already invested in you and want their $20m+

The dependent key variable to probability is time : At a certain point, without significant resources the probability of a huge success (ie bigger than Graham's flickr and delicious examples) a business will require more significant rocket fuel in most cases. Basically bootstrap for as long as humanly possible, pain and all - then nitro your turbo up at the right time. Fast and Furious.

Paul Graham quoted on TechCrunch :
"Once you’ve taken a VC-scale investment of two or three million dollars, you give up the option of an early acquisition. You’re also under more pressure to grow fast, which can cause you to make design errors. It may not be a coincidence that both Flickr and Del.icio.us avoided the usual VC route. Both had to get a lot of subtle, social things just right. You’re more likely to do that if you can evolve organically."