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3 myths about the startup scene that are stifling entrepreneurship

Posted by Chad O'Connor  August 1, 2012 11:00 AM

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Okay, we all know there’s an entrepreneurship and startup frenzy going on in the country. It seems that being an entrepreneur has, once again, gone mainstream. However, many people believe or are made to believe the glamour and success of a few, like Steve Jobs and Mark Zuckerberg, is indicative of what startups should strive for.

The reality is that entrepreneurs are rarely driven by glamour, fame or power. Most successful entrepreneurs I have met were compelled to start because they wanted to offer society something new, different, better or cheaper. They often experienced a deeply personal “aha” moment that convinced them to explore and pursue a real business opportunity.

Being an entrepreneur in Boston is hard, and being successful at it is even harder. Over the years I have been lucky to count on great advisors and mentors who have selflessly supported me and my ventures. However, as a participant in the local startup scene, I have heard many myths about the startup process:

Myth #1: Landing meetings with investors is a proxy for landing customers

Myth #2: You have a short time to show traction before becoming stale

Myth #3: Raising money from investors is a good indication of success

Let me take one at a time.

Myth #1: Landing Meetings With Investors Is A Proxy For Landing Customers

This is the most disturbing myth I have heard about starting a business. I have heard investors say things like: ”I don’t think you are a good entrepreneur if you can’t manage to find a way to get introduced to me” or “If you can’t find me, how will you find your customers?” I find this disturbing because it assumes that the skill set needed to get in front of an investor is the same as that for identifying early customers.

Although I agree that entrepreneurs must be able to clearly articulate and “sell” their vision to land introductions to the right kind of investors, the process for finding good investors is very different than the process of finding early customers. To illustrate this point, imagine you have to study a new subject for a final exam, but in order to study, you need to search for the class’s reference book which may be in the bookshelf of someone in your neighborhood. Yes, you can show resourcefulness by diligently knocking on doors of people who may likely have the book, but this process will certainly not help you advance your knowledge of the subject matter.

To find early customers, entrepreneurs need to focus on clearly understanding the market’s needs and then articulating a potential approach for addressing such needs. This process is highly iterative and requires many interactions with prospective customers or, in Steve Blank’s terms, “getting out of the building.” In contrast, the process of connecting with investors is more of a hit-or-miss endeavor, given that investors are often in very high demand because the have access to cash. Sometime investors hold office hours or attend events making themselves available, but these often result in a quick no or non-action from the investor’s part.

Another reason this proxy is invalid is that investors have an inherent financial view of the startup world. An investor is interested in a company primarily because it may have a promise of yielding a solid return on investment. In contrast, early customers employ a strategic view when deciding to connect with a startup, because of the potential for getting a real, painful problem solved or a desire fulfilled. The point here is that entrepreneurs need to focus on speaking with customers, not investors. Steve Blank put it well when I asked for his views on Startup BLVD’s offering during the 2011 SxSWi conference: “Why do you care? I am not your customer.” He is a good professor.

In recent years the market began to shift in a positive direction, thanks to people like Nivi and Naval, founders of AngelList and Venture Hacks, who created a more efficient way of connecting entrepreneurs with investors. Our goal is to contribute and accelerate that shift by providing an easier way for startups to find early customers.

Myth #2: You Have A Short Time To Show Traction Before Becoming Stale

Although we agree that traction in a startup is extremely important, the reality is that many startups don’t have much traction because they still are iterating on product-market fit. In a recent Fast Company article – you can find it here – John Linkner shared some incredible stats:

  • Angry Birds was the founder’s 53rd attempt at creating a cool game. They spent eight years – yes 8 – and nearly went belly up,
  • James Dyson failed in 5,216 prototypes before perfecting his revolutionary vacuum cleaner and, our favorite,
  • The ubiquitous WD-40 lubricant got that funny name because it was the 40th attempt to creating an effective Water Displacement solution.

Most people who are struggling to find the product-market fit find themselves working from their basements or renting desks at places that don’t offer dedicated advisory and business support that could help them iterate or pivot their business faster.

Although startup accelerators are a great option for receiving a concentrated dose of advisory and mentorship services, their fundamental weakness is that they are time-bound and accept only a small fraction of companies and ideas. As the Fast Company article described, it took the developer of Angry Birds eight years to iterate and converge in a blockbuster. Most accelerators last 3 to 6 months. Moreover, accelerators have to accept a small fraction of the applicant pool to be able to manage the concentrated process. For example, MassChallenge, the largest accelerator in the world, indicated – view post - that only 125 of the 1,237 companies that submitted were accepted as finalists for the 2012 cohort. That is just over 10% of the total.

We are taking a different path to address this issue: Startup BLVD is a new platform where startups can find and talk to early customers easily. We want to help startups iterate on their business model, products and services faster to achieve product-market fit faster. And we will do this while offering dedicated support and advisory for those that need it.

Myth #3: Raising Money From Investors Is A Good Indication Of Success

This is an easy one to debunk. The word is out: The venture capital model is broken, according to the Kauffman Foundation’s most recent report, a whopping sixty-nine (78%) of the total eighty-eight funds in their sample “did not achieve returns sufficient to reward us for patient, expensive, longterm investing.” Ouch. You can find the report here.

Moreover, this conclusion is at odds with a venture capitalist’s seemingly selective and discerning process for making investments in startups. According to PWC’s Money Tree Report, 343 startups (approximately 1,200, annualized) received seed/early stage funding from institutional investors in Q1, 2012. This number is much smaller than the 543 thousand – yes 1,000′s – new businesses that were created each MONTH in 2011, as the latest infographic of the foundation shows.

Where is the disconnect? Following the mainstream logic, it seems most American entrepreneurs are not worthy of getting funding from venture investors. We believe that inefficiencies in the venture funding model are at the core of this problem.

The sheer number of new companies formed each year, 5% to 10% of which may have the potential to become high-growth companies according Kauffman Foundation estimates, makes a compelling case that many startups don’t get the funding they need, not because they are not worthy of it, but because they don’t have access to it. This phenomenon may be explained in part by the Kauffman Foundation’s finding that most limited partners (funds that invest in venture funds) were afraid to contest the compensation structure for fear of “rocking the boat” with general partners (people who run venture funds) who use “scarcity” and “limited access” as marketing strategies to attract the best startups.

Just how many startups may be successful with the right access to capital? Well, if 5% to 10% of all new startups have the potential of becoming high-growth businesses, applying the lower end of this range to the average 500,000 businesses created each month in the U.S. results in approximately 25,000 new, high-growth potential businesses a month or 300,000 a year. This clearly points out the obvious conclusion from the report: Venture investors are extremely selective and invest in a small fraction of new startups each year because they basically get paid to wait.

We believe investors should have an activist role in building companies and should be “equal” partners in the business. In our view, capital serves the business, and not the other way around. That is why, in a GAAP compliant balance sheet, assets go on top (or left) and capital goes in the bottom (or down and to the right). The entrepreneurs builds the asset, the investor finances it.

Enrique Shadah is founder of Startup BLVD and a Boston World Partnerships Connector..

[Reposted with permission from Startup BLVD]

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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