I wonder of its time to disrupt the process part of startup fund raising. Should we turn the spotlight of the lean startup and data driven decisions onto VCs and Angels?
This thought hit me when I was reading Charlie O’Donnell's post explaining Why Founders are Wrong. This is a pretty good article and it covers some familiar ground. One stat appears in some form every time a VC offers advice to entrepreneurs. In Charlie’s case, he estimates that he invests in around 8 of 2,000 or so deals he sniffs in a typical year.
That is a paltry conversion rate of just 0.5%. Imagine the reaction of an investor if you included a metric like that in your pitch!
The wrong way of doing business
We have come to accept this way of doing business. Founders I meet are a little cowed by the competitive challenge that such a low success rate implies. Investors and their advisors relish endless nights with a cold towel round their head. Buried under information overload. And they feel their finger is on the pulse. No good opportunity will escape the net.
The preceding paragraph shows how many cliches this process inspires. Once that point arrives, the whole affair has become routine and burdensome. It has entered the realms of "no-one likes it but that’s just the way things are."
Life and death for a startup
Investors may be happy to live with that but I don’t see why startups should. Raising funds is life or death for a startup. Success is essential but the cost in terms of time from the founders is prohibitive.
It is no coincidence that the immediate transaction cost of money raised this way is also rather high. Charges and fees for both investment funds and professionals soon add up. The heavy burden reflects the high time costs of doing business this way.
6 suggestions for a better way
So it would be in everyone’s interest to find a better way. Making this happen needs someone much smarter than me. But in the interests of furthering the idea, here are a few modest suggestions:
Investment in startups plays a vital role in the allocation of economic capital. This money is the lifeblood of innovation and growth. All the more reason that the investment process should be efficient and effective. No-one wins if we get this stuff wrong.
If you have better ideas for improving the way fund raising works, I would love to hear about them.
There has been a little to and fro in the startup blog world this past week about heroes. A tweet from Joe Fernandez criticised those who suggested that VCs wrote large cheques with a Homeric flourish. Fred Wilson responded that entrepreneurs were the true inheritors of the mantle of Achilles. Then Howard Lindzon weighed in. The more modest contributions of first up angel investors deserve the accolade. Or maybe the code itself is the hero?
Are heroes a helpful startup metaphor?
In spirit, I am inclined to Mr Wilson on this question. But I wonder if the language and the image are helpful. Conjuring up the bravest of warriors or the most noble of martyrs feels out of place. I am not sure the mantle sits well with the greatest icons of the entrepreneurial world. My guess is that Bill Gates, Mark Zuckerberg or Richard Branson would reject the description.
And these are rare individuals. Talents and characters that appear only a handful of times in each generation. They provide an inspiring example for the few. For the majority of founders and leaders, a more practical aspiration would be appropriate.
Success takes more than a few unicorns
There will always be a place for the next big thing. Whatever follows Microsoft, Apple and Google to the summit will be a business that changes and enhances the lives of billions. But broad based economic prosperity, better health and education, bringing an end to global conflict and poverty will take much more than a few unicorns.
Aim for sustainable not superstar
The aim for almost every entrepreneur should be to build a sustainable business. First, something that will support that individual and his or her family for a lifetime. From time to time more successful companies go on to employ more people. They can provide those teams with a decent living. Some, but not all, such businesses will also offer a return to external investors. These will attract capital from a variety of sources.
A small number of these will outlast their founders. Gaining a longer life through external or by means of an inherited family business. A word of caution though. The overwhelming majority of businesses, have a lifespan less than half that of a human being. Around 40 years on average. This includes all but a handful of the most successful names. The only large technology companies today that existed when I was born are IBM and HP. Of course HP is in the process of being broken into its constituent parts.
The traditional role model doesn't fit
Think about the tradition image of a hero. Someone who does extraordinary things in extraordinary circumstances. Building a good quality business today is neither of these things.
Digital technologies, the lowest trade barriers in human history and unprecedented access to investment capital mean the environment for starting up is the best we have ever experienced. Yet exceptional talent is not required for most endeavours. Good quality products, designed for users and supported by excellent service will do the job.
A more modest aspiration
So let’s forget about being a hero and put aside the imagery of battle and sacrifice. Set out on the entrepreneurial journey with a different role model in mind. Some aspirations which sound more modest. Yet provide a real basis for sustainable, achievable value:
Being an entrepreneur can be tough. Then again, life is tough. Don’t worry about being special. Just focus on doing the right thing.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.