As for why I refer to the current climate as “cataclysmic”, I would point to the key word of the times: FEAR. Everyone is afraid of what they don’t know, what could happen next, what happened already, what news has come to light, what news has yet to surface, which jobs might get hit next, or worse, which other industries will dramatically change. People are frozen when it comes to combining FEAR with Money and Decisions. Investors, angels or institutional, are hesitant to make risky bets in this kind of market. This climate of course causes issues considering that essentially all startups are risky bets (though with potentially outsize returns) in any market.
Why start something now?
This topic deserves its own post, but people are striving to start companies now because of one of several reasons, depending on which Class of Entrepreneur they are seeking to be. People might see opportunities created by this unique and difficult period in time, or they may recognize a new problem that just has to get solved. Others are just trying to figure out a way to make money so they can be more independent. In times like these, sometimes you have to Survive before you can Thrive.
My friend’s startup dilemma
This friend of mine is a great guy. He is a brilliant thinker, problem solver and engineer. I always have thought of him as a bit of a “programmer philosopher”. He has started several very interesting projects and is currently working on several new ones.
As he and I got to talking, I could tell that he was a bit frustrated by how hard it it’s been to get any of his projects funded. Some people have a talent for fundraising. They can convince people of a vision for a new market or a new tomorrow. Unfortuantely, my friend is not an expert fundraiser. He is a fighter though, which is great, and he’s already come farther than a lot of people would have come given the circumstances.
My friend the fighter
As an example of the ‘fight’ in him, he had been working for years on a project that had a very grand vision. He had been banging away on it off hours, weekends, and whatever time he could find. But after years of hard work, the project hadn’t taken off and he was stuck in a bit of rut. Instead of throwing in the towel, he decided that he needed a change of scenery and a fresh start. He picked up and moved from Boston to San Francisco.
We can debate the relative strengths or differences between the Bay Area and The Boston Area for starting companies 🙂 but that aside, I was super impressed that he just picked up and went. He found renewed energy, met a bunch of new people, and had a chance to explore a new city. A change was exactly what he needed (in my opinion).
Struggling to raise funding
So he’s in this new environment and he’s meeting all these new people. He has been working on all these new ideas, and as I was saying before digressing, he shared some of them with me. I listened to his description of his ideas and I took a look at some of his presentation materials. What he had to say was quite interesting and I think he could be on to something with some of the stuff. As we were talking though, he was expressing some frustration about the fundraising process. I could tell that it’s been tough on him. He said, “It’s the classic chicken and egg problem. We can do so much if we just had the funding. But we need to show progress to get funding.” He is essentially working on 4 concepts and was hoping to raise enough funding to try a bit of each to see which one got the most traction.
There is only Chicken
I completely sympathize with my friend’s situation. It’s so hard to try to play the movie forward to try to predict what will happen with your various startup ideas. And, it can be very frustrating to try to raise funding. Fundraising for a startup is a little like prepping and hosting a big dinner party for a bunch of guests. You put a lot of time into it and you try to figure out what people might want to eat or if there are any dietary restriction. Then when the big day comes, many of the guests do not show up! And the guests that do come often complain about the food 🙂
When you have been deep in the analysis and planning around your startup for weeks/months/years, it’s incredibly painful to have people poke holes at it after hearing about it for just a few minutes. But it’s critical to try to detach yourself from the situation and try to write down the key themes of the concerns. Often times there might be a few gems to think through.
As I listened to my friend explain to me his ideas, I felt that it was critical to lay it on him straight. I told him that though it may feel like a Chicken and Egg situation to him with respect to fundraising, it’s really not. Not in this kind of cataclysmic environment. There is ONLY the Chicken. Why? Because in order to attract interest from investors in this kind of environment, you have to be able to demonstrate progress of some sort:
– Your idea has to be thought out
– You have to have spoken with some prospective (or better yet current) customers
– You have to have a prototype (or better yet, Beta Users)
It’s all about Building the Onion, and in order to attract funding, the pre-funding onion has to be a lot more built out than before.
So what can he do?
If you are like my friend and are faced with the reality that it may be very difficult to raise outside capital (other than from close friends and family) in the current economic environment, you may have to make some tough decisions. In the case of my friend, I suggested that he narrow down his efforts to focus on the best ideas (ideally, 1) behind which he can apply more muscle. I tried to walk with my friend through the ideas he’s working on to look for a few critical screens:
1) Which idea has a big potential market?
2) Which proposed solution could attack a clear and straightforward SINGLE problem?
3) Which concept can I get off the ground in Phase 1 with relatively little money?
4) Which one has had the best reaction from potential customers or people knowledgeable about the industry?
5) Which is most timely and is attachable to big moving trends in the market?
6) Which project has the most chance to be a Chicken and not just a shiny egg?
Can he scrape by?
I personally think that if my friend could scrap for a little longer and focus totally on one of his ideas that passes most of the above screens, he could demonstrate enough progress and learn enough about the market to be able to raise money in a few months. It’s tough to have to give this type of advice, and I know firsthand how hard it is to live with the uncertainty of a future without a safety net of a salary and healthcare. For the most part, people who have been able to take a chance and start something have had a few things in common:
– Incredibly low personal burn rate
– Supportive family or a partner/spouse with a steady job and healthcare
– If you’re lucky, at least 1 year of savings to live off of while you’re trying to work on your idea
– Insatiable drive to succeed
My friend has a low burn rate and he’s got the drive, but he is hurting for money. I suggested that he accept a job offer that he has to work at a finance company while he hacks at night.
This may sound like a cop-out, but when you are dealing with real people and real lives, it’s so hard to give the kind of advice that some of the big guys have given. To paraphrase these big guys, “Grow some cojones, and go for it”. In this case, my friend has been going for it for years now and he’s been struggling.
All I can tell him is 1) be smart about where he’s focusing his energy 2) lower his expectations about fundraising 3) build something 4) learn from the market/users 5) demonstrate some progress 6) hang in there
I wish that I had something more inspiring to say to him, but in this case, as I’ve said, There is only chicken. Fortunately, despite this environment, I think that he’s the kind of person who can get something really interesting hatched.