Lean Startups Fail
By: Francis Pedraza
Tags: Philosophy, Venture Capital, Startup, Lean Startup, Technology

San Francisco, CA

Wednesday, 24 July 2013

Lean Startups Fail

Lean Startups fail for these 3 reasons, but they didn’t tell you in the book (or at some conference)

Most founders and their startup ideas are great; those that I’ve seen fail, don’t fail because they are building a product nobody wants, they fail for three very different reasons — all of which are preventable, none of which have to do with iterating, pivoting, or “MVPs”.

I just realized something today. It’s been right in front of me for so long, I can’t believe I didn’t see it before.

On the ride home last night, my Uber driver blew me away with his startup idea. Hang on. If I think a random person’s idea could work, then either I am going crazy, or my standards aren’t high enough, right? Or, of course, there’s a logical possibility that I am not crazy, and my standards are high enough, and that it can work. And that not only it can work, but we are living in a world so awash with opportunity, that there are so many well-conceived ideas addressing real problems with smart models, and that most of them canactually succeed. If that’s true, then why is it that, per common knowledge,“most startups fail”?

The entire Lean Startup school of thought is based on the premise that most startups fail because they build products that nobody wants.

That’s not at all what I’m observing.

Over the last two years in Silicon Valley, I’ve built relationships with the CEOs of just under 100 startups with seed funding of at least $500K or more. In total, their companies have raised over $1.18B in venture funding. (I know, right? Crazy. I didn’t even realize this until I made a list this last weekend and counted. Go figure: it follows a power law.)

Also, as a friend (or in some cases, as an advisor), I am currently tracking over 50 startups that are actively raising seed funding.

This should be an adequate data set to test this premise against. Let’s ask some questions, like:

Question #1

What percentage of these startups have “bad” ideas, in my opinion?

… Ones I find stupid, or just don’t get? That I just can’t see consumers, users, or customers “getting” or paying for?

Observation: Almost categorically, my answer is ‘no.’ About 80% of the funded companies and 30% of the pre-seed entrepreneurs pass the bar for me (after some tweaking, easily another 30% are salvageable, or even big, ideas — usually the problem is a real problem, the model is wrong). The “bar” being that : A) the idea is exciting to me, B) a priori, I believe that if properly executed, they will work, they will create value, there is a business that should exist here, and C) I believe in the founders and their ability to execute.

That’s way higher than the cliché “99% of startups fail” (or the ‘majority’ and‘most’ variants of that statement).

Help me! I am drowning in great entrepreneurs with great ideas. All of these have so much potential. I would give them money; along with some advice on getting to the next stage.

Question #2

Are the startups that pass the bar for you successfully, raising seed money, at good terms, quickly?

Observation: Again, almost categorically: no; in fact, I am observing just the opposite. Great entrepreneurs with great ideas and reasonable indicators (team, product, traction, etc.) that they will indeed be able to execute against their milestones, are spending large amounts of time, energy and ingenuity struggling to raise money, and when they do raise, the terms are often poorer, and the amounts, smaller, than would seem appropriate.

Except in rare cases, this is not a seller’s market for equity. It’s a buyer’s market. If you’re a seed investor, you’re getting opportunities to set (or participate at) incredible, sometimes ludicrous, terms for companies that, under previous market conditions, would’ve been foregone opportunities, institutionally backed, and onto the next stage by now.

Anecdotally, one founder I know who recently left a cushy, well-compensated job at a big tech company to start a company. He has been raising for a couple months and just got a lead for his first round. The post-money valuation, get this, is $1M. This is with A) a working product, B) a space with many potential acquirers, C) solves a problem that makes sense, that most potential users have, and D) two engineers and a designer. To me, this is shocking, angering, and just plain exploitative.

But it is also stupid. Its stupid because it doesn’t position the company well at all for future rounds, or big exits. It’s bad signal. Enough capital raised on bad terms gives the entrepreneur a reason to sell pre-mature.It’s acting out of knee-jerk risk aversion.

I am not observing healthy risk-taking behavior. I am observing both irrationally aggressive and overly cautious bets; some of the former, many of the latter, and very few in between.

Question #3

Supposing one startup’s idea is relatively more exciting than its peers, is it more likely to raise money, at better terms, more quickly?

Observation: No, unfortunately not. Again, the opposite, in some cases. A lot of the good, but no brainer, ideas raise money more easily than the complicated, ambitious, hard to execute, but truly fantastic ideas — the world changing ones. That’s a shame.

Peter Thiel is adamant about working on “hard problems”. I admire that stand. It’s truly inspiring to hear such a prominent venture capitalist say that. But there’s a reason why he’s Peter Thiel, and Partner X at Y firm is Partner X at Y firm. Because partner X at Y firm will give you funding for your boring, no-brainer idea, because it is easier for him to wrap his head around it, and imagine it, because it is just a small step forward. It is closer to the world today.

Question #4

Do these problems persist after the seed stage?

Observation: Thankfully, no they do not. Once a startup has cleared the Series A hurdle, the success rate seems, from where I sit, to be very high. The outcomes, of course, are power-law distributed; but they seem to mostly be “in the money” for their investors.

This accentuates the consequences of the #3 problem, above. If, in any cohort of startups that “pass the bar”, the startups with the qualitatively superior ideas experience more difficulty fundraising because they are inherently more aggressive vis-a-vis the status quo, then less of them will get to Series A, and realize their larger potential.

When returns are governed by the power law, this is a disaster.

All successful ideas are not created equal. One turns every $1 invested into a $20,000 outcome (Facebook for Peter), or 2,000X, or 200X, or 20X, or 2X. They’re all profitable. They are not all equal.

I don’t know how I missed the memo. Geez, when I showed up, they told me that Venture Capital was all about avoiding Type 2 errors, with high tolerance for Type 1 errors. Wasn’t the attitude supposed to be:

Okay guys, here’s the deal. Only one bet has to work to return the fund. So go out and make lots of crazy bets. It’s okay if most fail. What we can’t tolerate is making lots of reasonable, but safe, bets, none of which, nor all of which, summed together, return the fund; while one, some company we never met, or met with and passed, because it was too crazy, either gets scooped up by another firm and turned into the next Google, or experiences stunted growth because it never got the funding it needed, therefore never turning in to what it could have (imagine Larry and Sergey bootstrapping), or just dies entirely, because it can’t raise enough capital to test its hypothesis. That would be the disaster. Make sure that doesn’t happen. Leave no stone unturned. Go forth and invest.

That’s what I thought the plan was. Boy, was I wrong.

Instead, I have sat across the table from one MBA ex-banker after another (sorry, MBA ex- banker friends!) asking for models: financial models and comparables. I have been asked to cite research papers.

When I do provide models or reference research in psychology, the numbers are too aggressive and the theory ‘sounds nice’, but please, prove it.

“Let me get back to you after I talk with my partners.” Group think. How about some decisiveness and independent thought? Is your model really set up to expect that 10 people will unanimous decide to make contrarian bets, and win?

Show us your numbers! Your numbers, please! Just give us your username and password for Mixpanel, please, and leave us to it. We’ll crunch the analytics for you, for free. (Data, data, yum, yum.) Thank you!

“Come back to us when…”

Lots of please and thank you, actually. Surprisingly polite industry, really. Nobody tells you no. Everybody acts like your friend. They are afraid that there’s some universe in which you turn into Mark Zuckerberg, and they loose their job because they pissed you off, so you turned down their deal when the time came, and as a result they don’t return the fund, and they are fired, and left out in the cold, where there will be weeping and gnashing of teeth.

How about some good, old-fashioned straight talk? It would help entrepreneurs to say exactly what you think and why, instead of trying to read all the subtlety and tea leaves. It’s the least they deserve.

Not that there’s not enough VC>entrepreneur advice! Goodness, there’s so much of it. It’s just mostly wrong or not useful. Frankly. With some important exceptions, and those are the people you end up taking money from, because you respect them when they say no. Because they have a respectable reason. Maybe a reason you disagree with and prove wrong.

It sure has taken me long enough, but now I, finally, have the clarity of knowing the game I am playing. It’s called momentum.

Show them a graph of active users or dollars with, not just growth, but growth in the rate of growth, sustained for at least 3 months, and you are in control.

Then, the tables turn. You have leverage. They come to you. They start bidding and you play the auction, watching the price go up. Fuck you, pay me. Zuck’s business card: “I’m CEO, bitch.” That’s the infamous Steve Jobs attitude too. I’d pay to see that and cheer from the peanut gallery. Especially for entrepreneurs in their early to mid 20s, it’s very, very hard to A) understand power dynamics, then get into a position of power, B) leverage that power in a negotiation, and C) not feel like a fish out of water, or an asshole, doing it, because you’ve spent your whole life being respectful to adults and generally speaking, a pleaser.

Question #5

Are there any distinguishing factors that the founding teams of successful companies have that set them apart?

Observation: There’s this myth that makes every entrepreneur insecure: you need a designer and an engineer as co-founders, and an amazing team, and a fully built product, and users, and revenue, and growth in the rate of growth, to raise money.

By the time you’re done doing the things VCs tell you to “come back to me with”, you’ll have IPOd.

Then there’s the cult of the engineer. Engineers are the only talent that matters, etc. That’s so wrong. Of course they are hugely important. But they are only part of the product development piece (the right designer also adds non-linear value). But even if you have the right designer and the right engineer and they are iterating towards building the right product (the one that everybody wants), there is no guarantee that they actually cross the finish line without a very different skill set on the founding team.

The under-appreciated but absolutely necessary role to fill for a startup to succeed is someone in “the business role”. And not just anyone. But either someone who is good at it, or someone who can learn fast. Like, really, really fucking fast.

If that’s you, and this is your first rodeo, like it is mine, then YOU are your company’s first scaling problem. The company is maturing at an accelerating pace (even before you’ve launched, this is true, it is just harder to measure) — are you? How well do you understand the problems you are facing? Do you have blind spots? What are your unknown unknowns? What’s your strategy? What’s your vision? What’s your plan? How are you going to execute on this? Is that the best way? Are your assumptions as sound as they can be, before actually testing them? How organized are you?

The startups I’ve seen succeed, before my very eyes: Path, Square, Uber, The Climate Corporation, and most recently, Outbox.

Behind every Dave Morin there’s a Matt Van Horn. He was also one of co-founders of Zimride, also known, more recently as Lyft. Matt is a company-builder. One of the best. Path’s trajectory is well managed. I am sure he has a lot to do with that.

I’ve never met Jack Dorsey. But he’s already a legend. Do you know what, in my opinion, his differentiating strength is? I was in a cab once, trying to poach one of his engineers. I did my best. No matter how hard I tried, I couldn’t get him. He was so loyal to Jack; so bullish on Square. They were already a big company with a hundred plus employees, so his equity, in percentage terms, wasn’t significant. I pressed him on it: ‘Why?! What’s so important about Square to you? Do you know what he told me? He said that the thing he wakes up in the morning for, the thing that inspires him to do great work, is that Jack is willing to crash and burn playing a $100B game, even it means throwing away a sure win for $10B. Jack is playing a bigger game. He’s got a Sean Parker state of mind.

Uber is the most talked about startup these days. I don’t know if Travis remembers. I was on stage with him once in Berlin. We chatted in the green room. I was impressed. Impressed by the same traits above: he’s got a huge, strong, confident personality. He’s aggressive. I like

the way it comes off, though. His super-verbal and non-verbal communication says, loud and clear: I knew this idea would change the world, and it has been, and I have seen its power in the flesh, as I have watched it, and helped it spread, as I have conquered, as its agent, one city at a time, and I am still conquering, and there is so much left to conquer, and I’m sorry, you can’t stop me, because you can’t stop it — it’s too late for that. Get ready for your personal private driver. Transportation will never be the same again.

Dave Freiberg’s mind is so sharp, he’s one of the funniest guys I know. Always cracking jokes. Always has the line. He’s the CEO of The Climate Corporation, which falls into the category of “biggest company you’ve never heard of”. They sell weather insurance to farmers, of all things. Doesn’t sound like a tech company, does it? Their backers: Khosla, Google, and Founders Fund — and others. Peter Thiel — there he is again! Although, this time, he wasn’t the first investor.

There are lots of reasons why Climate succeeded. They did a great job iterating and doing customer development (yay! lean startup! oops, this was before that was a thing.) in the beginning, until they honed in on the business model they have now, and then went deep on the tech around it.

But, what the Lean Startup wouldn’t have told him, and his amazing co-founder Siraj, even if he had read it, was how to survive and persevere. It took years — years! — for them to get “there”, to the point where they, and every VC in the valley, could look at the model and see the magic numbers. I’m not sure if the company is profitable yet, because the model requires scale and the company has focused on growth — but it sure as hell will. How did Climate survive? How was he able to navigate that story, and keep raising money, without being completely annihilated by dilution?

Dave learned that on the Corporate Development team at Google. That’s right. Buying companies left and right in the early days. Brett and Scott Crosby’s company, Urchin, for example, which became Google Analytics.

He “gets” deals, and the psychology and needs behind them. He can structure them in his sleep. As a salesman, as a businessman, he came into the entrepreneurial journey with a training, a level of intuition and experience, that he has honed further until the point where it is effortless muscle memory. He’s a storyteller. It is beautiful to watch. Especially at weddings.

Evan Baehr and Will Davis are the co-founders of Outbox. Neither of them is an engineer. They have a great team behind them. They are excellent leaders and great recruiters and great at execution and great at everything. Their differentiating skill-set, again — is that they know how to build, and finance, a business.

When they decided they didn’t have time to wait around for Sand Hill Road VCs, they decided to play a different game, and they raised $5M on AngelList for their Series A round. Next time, everybody knows that they aren’t bluffing when they walk into the meeting and say, “Hey guys, we need to get this deal done by next Friday, because we need to move on to the next thing.”

The “Super Advisor” and the “Company Builder” are two roles that every startup needs to rise to stratospheric heights.

Sean Parker. Sean Parker doesn’t get nearly enough credit. But that’s okay, because his shares gave him plenty. With Facebook, Sean Parker was a joiner. Not a starter, a joiner. Then he did it again with Spotify. What a genius. There aren’t enough Sean Parkers in Silicon Valley. We need more of them. And we need them desperately. Think about the critical role he played in the company in those early days. A million dollars isn’t cool. You know what’s cool? A billion dollars.

How about one hundred billion, Sean? When you have someone who thinks like he thinks, that person will not only raise your expectations, but through their coaching, you may outperform their already high expectations by as much as 100-fold. That’s how powerful this role is.

The game you are playing is probably the wrong game to play. Play a bigger game. Raise the stakes. Open up the field. Founders need balancing forces to compensate for their weaknesses, but they also need accelerating forces to fortify their courage, vision and strategy. Startups have lots of scaling problems. This is the most important one: SCALE YOUR AMBITION.

The talent of a Sean Parker figure is in seeing a big idea in a small idea. Or seeing a bigger idea in a big idea. Or a huge idea in a bigger idea. Or a “holy shit this will change everything about the world, forever, OMFG!” huge idea in a “this is going to be huge” idea.

God, do we need more Sean Parkers. Like a parched throat of an exhausted pilgrim crossing the Sahara, needs water — we, founders, need more Sean Parkers.

Some founders need more help with this than others. Although we can do a great deal of this for our own thinking, we need someone else; someone who is invested; someone who doesn’t need you because he is surrounded by plenty of very attractive alternatives to spend his time, energy and ingenuity on other than on coaching this startup, so isn’t incentivized to play you like a call option, like the investment bankers and VCs, yet he clears his schedule for you, and takes risks for you anyways; someone who believes in your idea almost as much, or more, than you do, but who understands that the idea — not the 15 second pitch, but the endless labyrinth of inter-related sub-problems and sub-solutions — is in your head, not his; someone who has some credibility and experience, and ideally, a powerful and responsive network — the kind that not only knows that Peter Thiel is the most likely person to make this bet, and the only person you need to get a meeting with, and who not only knows this, but has the relationship and can get you that meeting before Friday — and a strategic mind — to know how to price the deal, how to re-structure, who to get involved — to give us permission to dream big and do bigger.

That’s how you get your seed round.

That role, in that instance, was worth 4%. Or $2B. Equity well spent. (We are hiring Sean Parkers at Everest. You? Pitch me. Oh, by the way, how did Sean find out about Facebook before everyone else? All the VCs, etc? He noticed the college kids, specifically women, using it. Well, guess what: http://blogs.wsj.com/digits/2013/07/17/five-apps-for-college-grads/.)

Then there’s your A round. When you need Matt Cohler. Matt’s a dude at Benchmark. So he’s a VC now. I’ve never met him, but I already know he’s the kind you can respect, because that’s true by definition: he’s been on your side of the table and won. I found it enlightening to read, in his own words, about the early role he played at LinkedIn and Facebook. He was basically their in-house VC. Matt’s not just good, he’s self-aware. He’s able to articulate, in two short paragraphs, a hugely valuable insight.

Key insight: the startups that succeed are GREAT at corporate development. Corporate development — or as Matt puts it “company-building”, as distinct from “product-building” or “business-building” — is a role that is not native to most founding teams. And what is not native must be imported.

So either grow or import great — no, not great — excellent corporate development into your startup as soon as possible. You need help. Not just more engineers.

You need help grooming the company to be investable. You need help timing, coordinating, and orchestrating your late seed bridge rounds, if you need any, and all subsequent rounds. You need to be on a trajectory, and let that trajectory pace you, and let not heaven or earth stand in the way of you and whatever you need to stay on track. Move mountains. Warp space and time. You have a scaling problem? You need a growth hacker? A data scientist? Throw cash, and if you don’t have cash, throw shares at anyone you need. Fire, ready, aim. Don’t hesitate. He who hesitates is lost. The universe rewards speed. And it rewards strategists. A Matt Cohler will speed you, and everyone on your team, up. Give them a whip and the permission to use it. They are like the physical trainer to your athlete. “Plan all the way to the end” — Sun Tzu. “Battles are won before they are fought” — also, Sun Tzu. Read it. It takes four hours to read, and a lifetime to understand and put into practice. But you don’t have a lifetime. You have the lifetime of your startup. So start now.

He got .8%. Or $680M. So, so worth it.

(We are hiring Matt Cohlers at Everest. You? Pitch me.)

How Snapchat turned the tables

Power dynamics play themselves out. It’s not personal, it’s business. In other words: Either you winning, or they are. The only way to win in this valley is to beat the VCs at their own game. Ironically, that’s what they want, too. Really? Yes.

As the venture capital industry has matured, the large firms have all become more comfortable investing after there is a “real business” (i.e. a working model for growth in place). I don’t see many taking many real risk bets in the consumer web or mobile software, for example.

Fund sizes are into the billions now, so they can afford to pay a higher price for companies that do manage to cross the chasm. Here’s a story about how a startup turned the tables on them. Snapchat. It wasn’t that long ago I was sitting on the rooftop deck of their Venice Beach office with Evan, their CEO. That was five months or so ago.

Progress is so non-linear. I’ve been shaking my head, amazed at how much has happened for that company since then. Amazed that it happened at all. Now, in retrospect, everyone is coming up with really brilliant explanations for why it makes sense, and why the product is genius. But how many saw it at the time? Lots of VCs passed on the deal. They talk about it now, because now they’re pissed. One I know who had conviction on the deal and begged his partners not to pass, ended up getting promoted after the fact.

In retrospect, I can imagine how Evan’s style and tone worked to his advantage in raising this round. He’s the sort that makes you feel kinda stupid if you don’t get it, and might just walk out of the meeting. Given the sort of leverage his numbers gave him, basically the perfect negative-seller. Basically: “I don’t need you, you need me. What you have (money to invest), I can get anywhere. What I have (the next big thing), you can’t get anywhere. I may let you have it, if you do exactly what I want. Now listen carefully. The terms are… and the price is…”

That takes balls, and I respect that ability. Admittedly, in retrospect.

Furthermore, there was ZERO a priori (i.e. on its face, before you build it, does it make sense?) reason why Snapchat makes sense. I can’t imagine Evan selling this, as an idea, to a bunch of 40, 50, and 60 year old VC partners on Sand Hill Road. No way they’d get it. They came to him.

What human need is it solving? Alright, in retrospect, there are reasons. There always are. The best explanation I’ve heard is that people share more if you take away the consequences. That may sound obvious, but it’s a very subtle insight, and it’s just one of many insights that went into the success of the app.

When I asked Evan for the story of how and why they built the product, he talked about how they would do stuff like build something, showed it to RANDOM people — like homeless people — and watched them use it, with no explanation or guidance. Then they would ask questions, gain some insight, and iterate.

For example, one insight I remember him remarking on was speed. People would move on from the app if it wasn’t lightning fast. So they invested really heavily into making it even faster than texting.

Okay, yes, that’s lean startup-y, in theory, but it was a long time before they had something that people really wanted to use, and the progress, was again, non-linear.

What if, like Edison, it doesn’t work 99 times. Does Lean Startup give you any reason to try the 100th time? No, pivot. It’s not working. Try a different idea.

So, why do startups fail?

We began with the Lean Startup premise that most startups die preventable deaths because they build products that people don’t actually want. Acknowledging the limits of my observational power, 2 years of experience, and ~150 startups, I asked myself, honestly, a series of questions, beginning with this: What percentage of these startups have “bad” ideas, in my opinion? Ones I find stupid, or just don’t get? That I just can’t see consumers, users, or customers “getting” or paying for?

I set “the bar”:

A) the idea is exciting to me,

B) a priori, I believe that if properly executed, they will work, they will create value, there is a business that should exist here,

and C) I believe in the founders and their ability to execute.

Then realized that even while a high percentage of startups “should succeed” by this logic, they don’t, and it is NOT because they aren’t properly implementing lean startup tactics. Looking back over all my own experiences and conversations with fellow entrepreneurs talking about their problems, I am absolutely convinced that it is because most founding teams lack certain skill sets. These skill sets are the differentiators between those who succeed in getting to their A round, and seeing their idea’s potential fully tested and realized, and those that never cross the chasm. These skill sets can either be learned or imported, in varying degrees.

Startups do not fail because they build products that nobody wants. In fact, the most successful startup in my data set built a product that, apparently, everybody wants, but nobody realized they wanted, until all of their friends were on it. Maybe that’s an insight in and of itself.

No, that’s not why at all.

Startups fail for three very different reasons:

The founder is not playing a big enough game, does not have enough conviction, is not confident enough in how BIG his idea is, and is not aggressive enough in execution, ends up quitting too early because he doesn’t have enough money to pay rent and groceries. Needs a Sean Parker. The founder does not understand how to do company building and fundraising. Needs a Matt Cohler. There is a capital markets problem (opportunity!) and there is not enough risk capital available.

How to Turn #3 — The Capital Markets Problem — into a massive opportunity

I’m about as capitalist as it gets: shameless, hard-core, libertarian, entrepreneur. So when I see a problem, I don’t like to whine. I like to understand it, then identify the opportunity that it presents. As Tina Seelig at Stanford has in her office: The bigger the problem, the bigger the opportunity. Amen, baby.

I am happy to be the Sean Parker to anyone who wants to set up a VC fund that addresses the following problem/opportunity by playing the following strategy:

What is the capital markets problem?

— In the 90s, VCs used to do the risky seed deals

— In the 2000s, the more wins, the more angels

— Costs came down, you could launch for $500K and then build an investable model and momentum with another $1M or so

— Then angels came in, en masse, because they could do that

— Super angels dominated

— Then the super angels raised funds on their reputation to have more capital to keep doing the same thing, while spreading out their risk a little bit

— Then the funds dominated, and they raised bigger funds… WAY bigger funds.

— Then their fund economics forced them to move later stage to deploy capital.

— Without their super angels to think for them and lead them, there are very few angels left who are “smart money”. Most of them have invested in Everest :-)

— Then mobile was invented

— Mobile was more expensive than web. It costs $1-$1.5M to build a high-production quality mobile app, and it has less features, and you are fighting for smaller chunks of consumers attention on a smaller screen, and the code is lower-level, you’re speaking directly to the device, so it is more brittle, testing and analytics frameworks are still not caught up, iteration cycles and distribution are different, blah blah blah.

— Then it costs another $1–1.5M to get to an investable model.

— There wasn’t a bunch of wins for a while and angels got burned.Therefore, the stigma that it is hard to make money on mobile.

— The only people who made money on mobile investments were infrastructure plays (Tapjoy, Kiip, etc.) or red-swan one-offs, like Instagram and Snapchat. Neither of which is structured as a true company or platform. Both as large, expensive acquisitions. With mobile there is no second place. You are either crazy-crazy blowing up, or you’re not.

— Because so many angels came in to do all the seed deals, and now all the angels are burned out, and party-rounds suck, and the VCs aren’t set up to step in any more, who is KILLING IT?

— Seed funds. First Round. True Ventures. All these guys.

— In the past, you used to sell 25% of your company in the Series A and maybe 10% in seed. These days, their median deal is a $1.1M the company for 22.5% of the company. That’s roughly a $4M pre, I think.

— Yeah, and guess what else? That CREATES smaller companies, why? Because their funds are small, that’s why they can write small checks. They only need a $100M exit to return the fund. So they will pressure you to sell. They will do the OPPOSITE of Sean Parker and Matt Cohler. They will be on your board, every month, moving you towards a stable, steady company exit. In fact, True Ventures likes to take all three of your first three rounds. Control!

— Who is coming to save the day? The Bullpen Capitals and Venture51s of the world. These weird micro-VCs that help bridge late stage seed companies post angel round. But that’s not the long term answer either.

— Entrepreneurs aren’t waiting for the capital markets to fix themselves, they are removing the possibility of defeat by pushing for break even. The old shibboleth of “just focus on growth and revenue will work itself out later” doesn’t work when the capital markets can’t recognize big ideas in the absence of business founders being there to sell it.

What is the solution?

Just go back to the original model, and set up a VC firm, except with two funds: one for seed and one for A. Almost like Andreesen, except Andreesen’s seed fund is basically an angel investor spraying and praying $100K for access to data and engineers and relationships and dealflow. That’s cool, but that’s not what I’m talking about, and that’s not even how they’re making money. I’m taking about a seed fund making $1–3M seed bets, but connected to an A fund making $5M-$10M A bets.

This fund should be thesis driven and provide every startup it passes on with real reasons why it won’t invest AND if there is any hope, a benchmark upon which it WILL invest, so there is not a moving goal post.

(As for which theses to invest in, you have to pay me. Or just keep reading everything I write. But then the ideas are in my head, not your fund. I’ll take 4% carry on all deals I send you. That’s my price.)

Simple. But it will work.

And by the way, when everyone is getting out of a space, like mobile or consumer or network — that’s obviously the time to go in.

The capital markets problem is a big problem and a big opportunity.

There is a practically infinite amount of liquidity in the world, so I am not saying that there is not enough capital. I am saying that there’s a structural problem that is preventing that capital from flowing efficiently to the people who are best positioned to give it a return and create the ecosystem that makes everyone rich.

From my observations over the last two years on the ground, there is a massive shortage of concentrated seed capital in the “up to $3M range”, and the capital that does exist, is super risk averse, or super price sensitive, or not very thesis driven/smart — or some combination.

The good news is, that, and I think this is the over-riding insight that made me happy and made me want to write this post, because it is so wonderful and so freeing, once you internalize it (Rejoice! Rejoice!):

There may be shortage of capital flowing to the right startups, but there is not a shortage of ways to create massive value in the world, and create things that should be created.

When I think about my friends who are entrepreneurs, and their beautiful startup ideas and amazing teams, there is no non-preventable reason for a high percentage them to fail. Many, many of them are BIG ideas. We are right to be excited. We don’t need to be skeptical and doubt our own excitement just because we know it’s not likely to work. It IS likely to work. We just need to get better at building businesses. We need to learn the business side fast. We need to import a super advisor and a corporate developer. We need someone reinforcing to us how huge this idea is, and raising our game, and someone guiding us along the narrow path.

I will quote Peter Thiel quoting Tolkien:

Still round the corner there may wait

A new road or a secret gate,

And though we pass them by today,

Tomorrow we may come this way

And take the hidden paths that run

Towards the Moon or to the Sun.

“The road isn’t infinite. It’s possible that, just around the corner, there’s a secret gate leading to a secret road. Take the hidden paths.”

Oh, and one more time, the Lean Startup is wrong. Read the quote below. If that doesn’t strike you as so, deeply wrong, wrong, wrong, prima facie, I don’t know what will:

Ries claims that despite the many proximate causes for failure, the most important mistake was that the company’s “vision was almost too concrete,” making it impossible to see that their product did not accurately represent consumer demand.

Join the mutiny

The age of the Lean Startup is over. The age of the Visionary Startup is here. If you’re interested in joining the mutiny, jump ship. Drink up me hearties, yo ho.

Steve Jobs flew the Jolly Roger over the Mac division.

Entrepreneurs for entrepreneurs.

Us against the establishment, the bureaucrats, the suits.

Welcome to our brave new world.