The Danger Of Solving The Venture Capitalist's Problem

February 17, 2006

As a software startup founder, you have a fundamental decision to make in the early days:


  1. Do you focus on solving a customer/user problem?  (i.e. spend most of your time trying to build something that does something for someone who cares)




  1. Do you focus on solving the venture capitalists problem?  (i.e. spend most of your time figuring out how to convince investors that you’ll help them make a return on their money)?.


Too many entrepreneurs fall into the trap of automatically picking #2.  Shortly after having their idea, they start crafting a business plan, devising financial projections, doing market research, etc.  Most of this is not because they want to better understand the opportunity, but because they want to better articulate a story to a VC so that they can get funded.  I will posit that most software entrepreneurs are much, much better off initially going with #1.  One of the truly wonderful things about software startups (vs. other types of startups) is that the capital requirements are really, really low.  As such, there’s no requirement that you go off and raise any outside capital.


Here’s a typical scenario for founders that pick path #1:


You come up with an idea (which is just a fancy way of saying that you’ve discovered some idiotic thing that people are doing, or not doing, simply because there’s no software to do it – or there is software to do it, but it sucks).  These ideas are often generated while you’re an employee somewhere and witnessing the idioticness first hand.  Or, you’re personally doing the idiotic thing, and try as you might, you can’t find a solution to your pain, so you decide to solve it yourself.  Regardless, you go off and start writing code.  For those of you that passed out on the floor because I didn’t mention design, UML or any kind of planning before writing code, relax – you can design first if that’s your thing.  At this point in the process, you’re really telling yourself “its just a prototype” and “I’ll rewrite it later”.  Interesting, you actually believe this.  Along the way, you start to tell a few people about it (because you just can’t contain your excitement).  A few potential customers grudgingly express interest, perhaps a few even offer to try it out “when it’s ready”.  Weeks or months later, you finally have something to show.  You go to your “early adopter customer” (who by this point has likely forgotten that you were off building something that they had volunteered to try out just to make you go away at the time).  You demo your product.  The customer throws up all over your shiny new software and tells you why it sucks so badly that they’re scared to be within a 50 foot radius of any computer that has it installed.  So, you go back and write some more code, tweak this, clean up that.  You repeat this process ad-nauseum.  If you’re persistent enough, you’ll find that eventually, you get it sort of right.  Right enough that people start agreeing to pay small amounts of money for it.  You then listen to these people, do what they tell you, and make the product better.  More people pay, and you’re able to push up the price a bit, and life is good.  Not great.  But good.  Congratulations, you have a software company!


Here’s a typical scenario for founders that pick path #2:


You come up with an idea.  You’re pretty sure the idea is reasonably good, and you bounce it off of a few people, some of whom say its great (but most don’t even understand the idea).  You start writing your business plan.  You do some market research and discover that low and behold, if you look at the market just right , with the light beaming on it at just the right angle, it’s a $1 billion market!  Woo hoo!  This makes writing the financial projections so much easier because all you have to do is capture 10% of this market and you’ve got a $100 million company.  You refine the business plan some more.  You start contacting friends (and friends of friends) to get introductions to VCs.  You get your first meeting lined up.  You stay up all night putting the finishing touches on your PowerPoint deck.  You have the VC meeting.  During the meeting, one VC seems overtly distracted and the other keeps interrupting with questions that you don’t have good answers to.  On the rare occasions that you do have good answers, they don’t seem appropriately impressed.  At the end of the meeting, they tell you your idea is “interesting”, but that you need to come back after doing X, Y and Z.  “Flesh it out a bit more”.  You go back, write some more, have some more meetings.  You start detecting a similar pattern.  Not a single VC tells you your idea sucks or that there’s no chance in hell they’re going to fund you.  There’s no “upside” for them to tell you this (just in case you happen to be the next Google and they figure this out later).  They’re better off maintaining just enough interest so that you stay in touch, but not so much interest that you’ll linger after the meeting and waste any more of their time.  6 months go by.  You’ve had a dozen meetings, the business plan is on Version 6.7.3 but it doesn’t seem that you’re any closer to an actual check than when you started.  You’re in good company as its likely 90% of the other startup founders that picked “door #2” are in the same boat you are.  You do not pass go, and you do not collect $200 and sadly, you decidedly do not have a software company.


Obviously, these are both contrived scenarios, but those that have been through either one will find remarkable similarities to real life.  My point here is this:  Unless you’re a rock star software entrepreneur (which means you’ve done it before and made money for your VCs), your odds of actually getting funding from a VC are really, really low.  And, save the argument of “but, I’m well above average when it comes to other startup founders”.  In venture capital land, we have the Lake Wobegon effect (i.e. every startup founder is well above average).  Even assuming you actually do raise capital, the sad truth is that all this gives you is the opportunity to go solve a real problem.  Important note:  Just because you’ve raised capital does not mean you’ve created any value.  You’ve just earned the opportunity to create value.  But, you had this opportunity already.  In most cases, you could have worked on the original problem anyway (though likely with much less fanfare and no Aeron chairs). 


So, this is my long-winded way of saying this:  If you have a software development background (which most software company founders do), then play to your strengths and go write code.  Solve problems.  Iterate.  Don’t play someone else’s game (which you likely suck at anyways) and depress/frustrate yourself in the process.  At least if you write code, and still don’t succeed, you’ll have done something you enjoy and have something to show for it.  Writing business plans and trying to solve the venture capitalists’ problem is just not fun.


But, that’s just my opinion.  I could be wrong.  J



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