This was published to my letter.ly subscribers on 5/29. I just published another one yesterday called “Zombie startups, fake liquidity, and flailing VCs”. Sign up at letter.ly/dave to get them first.
Today I want to talk about something that hit me pretty hard this past week on the last day of the TechCrunch Disrupt conference: for all the talk about Lean Startup vs. Fat Startups, no one was talking about the Starving startup.
Really quick background on what Lean and Fat startups are. “Lean startup” is this idea that startups who don’t have product / market fit should stay quick and agile as they iterate and pivot. For example, don’t hire an expensive VP of Sales and a 10 person sales team until you know you’ve got a product you can sell scalably. “Fat startup” is this idea that in some cases you need to spend heavily to win, because the gap between being #1 in a market and everyone else is large.
What I realized is that all this talk about “lean” was being misinterpreted by many (myself included) as “cheap”. Stay small, don’t hire unless absolutely necessary, figure out the perfect business model… and then raise a bunch of growth capital and ramp up. I think we’ve taken it too far and created the “Starving” startup.
A starving startup typically has 1 product & business focused founder and one technical founder. Following the lean startup concepts, they build, test, and iterate on their product. Since it’s just the two of them, it can take 1-2 years to find product / market fit - there is only so much 2 people can do, and typically the bottleneck is in engineering early on as the product gets built. After months or years of effort, they finally achieve product / market fit, as greater than 40% their survey respondents say they would be very disappointed if the product suddenly was no longer available. Congratulations!
Here’s the problem: 1-2 years is an eternity for consumer web software, because “fast followers” can generally leapfrog the time you spent making mistakes, copy your successes, and be out in the market quickly. Heck, they might even get to product / market fit faster than you, by copying the general direction you’re taking but making key innovations. Suddenly, you’re fighting for your life in a crowded market… a market you created!
This is a long-winded (sorry!) way of saying I think startups need to raise more seed money than they have been. $200k (or $350k, the amount we raised) is too little. Sure, it keeps you hungry (literally!), but you’re just not moving fast enough. If managed properly, an 8-12 person team with $1.5 million in seed money can make dramatic progress. Basically, an experienced and agile entrepreneur + access to capital is a powerful combination, so take the money!
From an investors point of view, I can understand the hesitation - you want an entrepreneur to turn assumptions into facts and “de-risk” (hate that word, sorry) before investing significant capital. But if you come across an amazing team and a strong market, I think investors need to convince founders to take on more capital and increase burn to $50-$100k / month, while still practicing all of the agile “lean startup” techniques that Eric Ries, Steve Blank, and Sean Ellis have been preaching. Remember, just because you are thinking lean doesn’t mean you need to starve.
