I’m reminded this week of my favorite musical duet of all-time: Curtis Mayfield and Taylor Dayne doing ‘People Get Ready’. The lyrics of that song kept ringing in my head as I read and listened to Ron Conway, Dave McClure, Brad Feld, Fred Wilson, Mike Arrington and others on the state of entrepreneurship. The quote goes: “People get ready, there’s a train a-comin’; you don’t need no baggage, you just get on board.” As usual, Silicon Valley is leading the way... But, guess what? Chasing the right boarding station or destination ain't the problem. The solution starts by knowing that train is you. That's right, take the red pill, as I'm about to show you how deep the rabbit hole goes...
No matter who says what, the winds of change are blowing. The seed stage environment is improving every day. Even the money guys are in on it. The advent of the $20-$50M M&A event has increased the batting average enough to draw more funding dollars into five key areas: the consumer Internet, mobile, real-time value, crowd-sourced data and gaming. And make no mistake the hockey stick growth of brands like Twitter, Facebook and Groupon contribute to this momentum. This manifests in better deal terms for entrepreneurs, more freedom to engineer exits and the chance to pair-up with an investor team 3-4 times during a startup career.
Welcome to The Best Game in Town
This new funding model snapped fully into place following the Y Combinator Angel Conf, which featured Ron Conway among the guest speakers. Ron is easily the most prolific Web 2.0 investor of our generation (more than 500 over the last 12 years), and is a tireless proponent of entrepreneurs – a wickedly cool combination if you can be one of the 1-in-40 deals he funds. Also invited to speak was Mike Arrington from TechCrunch, who joked he must have been the ‘comic relief’, yet played the role of counter-point to the tee. Arrington's characterization (claimed not to be his own, but the views of more traditional VCs) that Y Combinator-style funding equals smaller deals, which spawns more ‘dipshit’ companies became the defining point of the entire debate. Ron led the charge by saying "bullshit...I radically disagree" then backing-up his argument with data that showed that investor's success rate with startups is improving with the increase of liquidity events. Just as importantly, Conway’s thoughts are stirring changes in the investment landscape that are very much pro-entrepreneur. Ron's simple point was he hopes “any entrepreneur that has 'the guts' to start a company gets funded.” You should absolutely watch the entire 33-minute follow-up panel session with Conway, Paul Graham of Y Combinator and Mike Arrington. What's clear is the status-quo rules of startup funding no longer apply. Short-necked giraffes beware.
One of the first guys to agree with Ron was Fred Wilson from NYC, who agreed 100% and took the next logical step in a July 30 post: this means give a small team a seed investment to determine whether the idea and the people have what it takes to be the next Google or Facebook. In making his point, Wilson also vehemently disagreed with Arrington’s ‘dipshit’ characterization. His quote was:
"I second Ron Conway's hope that "any entrepreneur that has “the guts” to start a company gets funded." That is my kind of thinking. We need more entrepreneurship, not less. So I'm with Ron 100% on this. Of course getting funded does not means 10s of millions of dollars of funding for every entrepreneur. It means enough funding to actually build something and see if the idea and the team has the right stuff to build a company. Then market forces should take over and determine what ideas and teams get more funding and which ones should close the doors and think about what is next for them.
Mike Arrington expressed the contrary opinion, apparently held by many VCs (not me), that this mini explosion in angel investing is creating a bunch of "dipshit companies." I don't know what a dipshit company is. I haven't seen one. If you listen to the chatter on the Techcrunch comment threads, you will see that people think Twitter and Foursquare are dipshit companies. Fine. Many great companies have been built on a wall of derision and I personally think those two are going to join that list of laughed at great companies (and maybe already have). My point is you just don't know what is a crazy idea and what is a brilliant idea. And you don't know what is a great team and what is a weak team. Of course, we have our opinions on that. We make those judgment calls every day. But we are often wrong. VCs are wrong more often than they are right. It is good for VCs if 10x or 100x companies get angel funding. That is more opportunity for us."
At the same moment in time, Dave McClure was laying out his (if you read anything this year make it this one) investment thesis that will serve as the basis for his new 500 Startups Fund. With a style that naturally endears him to co-founders and alienates him from traditional bankers (a stroke of genius in my way of thinking), Dave also contends the path to success involves smaller investments in pre-revenue products as a beginning point. His summary assertion and solution was this:
“Most VCs are Dinosaurs, and the World Wide Web is an Asteroid that hit the planet in a slow-motion cataclysmic explosion 15 years ago. It may take another 5 years for the ash clouds & nuclear winter of Browsers, Search Engines, Social Networks, & Mobile Devices to kill all the T-Rexes, but it's a done deal. The marsupials are taking over and in 2015 there will be a lot more investors that look like Jeff Clavier, First Round Capital, Y-Combinator, TechStars, Betaworks, & Founder Collective than any Sand Hill VC (funny how all the innovation is from non-valley investors, isn't it?).
This is really the key to my investment thesis: Invest BEFORE product/market fit, measure/test to see if the team is finding it, and if so, then exercise your pro-rata follow-on investment opportunity AFTER they have achieved product/market fit. It's sort of like counting cards at the blackjack table while betting low, then when you're more than halfway thru the deck and you see it's loaded with face cards & tens, then you start increasing your betting & doubling-down.”
So that’s three industry-leading voices beating the drum in favor of the entrepreneur. Pro small investments in small teams. In favor of allowing founders the choice to sell early (with the hopes they start something new again). Down with (that’s fancy for ‘proponents of’) investing dollars before the product/market equation has been completely hammered out. Smart angels helping smart entrepreneurs early. Hell yes, a proven model.
And now for the best news of all: any town with 'nerds and rich people' trying to replicate their success can just skip it all, pass go, collect $200 and move into this new world. It means losing the burden of trying to replicate something we never could. It means the world doesn’t need $250M funds to engineer real change in those five key growth areas: consumer Internet, mobile, real-time value, crowd-sourced data and gaming. (Sure, high-dollar industries like medical devices and green tech require a traditional view of capital infusion but that's a different beast altogether.)
Dave McClure lays out the stages of this new funding model incredibly well (including the investment amounts required):
1) Product: $0-100K, 3-6 months to develop basic MVP (minimally viable product) that's functional & useful for at least a few customers. Get to small product/market fit.
2) Market: $100K-$2M, 6-12 months to test marketing & distribution channels, understand scalability & customer acquisition cost, conversion to some non-zero revenue event. Get to large product/market fit.
3) Revenue: $1-5M, 6-24 months to optimize product/market fit and get to cash-flow positive.
By the way, each of these phases are completely linear and based on success milestones. If you fail one, you pivot or kill the idea. It’s a high-velocity game and one that supports the double-down strategy laid out by McClure. Plus it exposes more ideas and entrepreneurs to the market, which is good for the business of both startups and investors.
Alice, Wonderland is Where and What You Make It
So the real question is: What does this mean for towns like Atlanta, Raleigh or Austin? How does this thinking become part of our reality? First of all, notice I never said this was The Golden Age of Angels. This is your time and responsibility as founders. To succeed, it's going to require more collaboration and elbow grease from the nerds (entrepreneurs). It’s not a mistake that Boulder is quickly becoming a booming town for startups. TechStars has just introduced their 11 latest funded companies, and the second Open Angel Forum Boulder event has just gone down. Catch a read on Brad Feld’s latest blog post to see what real momentum looks like. This wouldn’t be happening if there weren’t great fundable ideas around every corner. Notice how the outsiders took note: Jason Calacanis tweeted "I've been stopped three times in one block in Boulder... Does everyone here work at a startup!!?!? :-) and @Scobleizer is in scoble-heaven: @techstars! Boulder is killer startup ecosystem – it's nuts how smart these bastards are!" Make no mistake, investors will travel for real opportunity.
For emerging cities, this means coders, UI/UX and marketing people all need to get busy co-mingling and creating consumer web and mobile companies. The type of businesses that can be created with light capital and scale with automated resources. You have to do this NOW and OFTEN, not just once a year at Startup Weekend. Fundable ideas in the consumer space will draw investors from all over. The big names will attract a new crowd of angels both locally and abroad. Their seed money will attract more entrepreneurs to the game.
In my hometown of Atlanta, this has the added bonus of rinse and repeat sustainability with killer nerdy schools like Georgia Tech and SCAD. That's with why I have no doubt Sig's void will not only be filled, but improved upon. In fact, show me a $10M seed fund directed at the consumer space, and nature will do the rest... So if you're a bootstrapper who wants to be funded on your terms, wake-up and realize this new breed of angel is exactly what you've been rallying for! These new angels (rich people) look to be a minority shareholder, and want you to be the leader and decision-maker for the company (including when and where to exit). Under these terms, if you refuse to seek good money to scale, know that the shovel is in the corner of your parents' garage. If you still want to arm-wrestle me on the subject, I ask you read the wise words behind Jason Calacanis' recent advice to entrepreneurs:
"Today I’m sensing a bubble in angel investing... In fact, startup companies are being bought for what I would describe as “the high end of normal.” Over the next three years we will see an M&A bubble as large companies deploy mountains of cash to buy startups that are strong in some combination of revenue, brand and customers. When the bubble is expanding rational entrepreneurs should focus on three things: a) raise a lot of money at a large valuation, b) getting a lot of customers (who are willing to spend), and c) selling."
So, I offer this advice to entrepreneurs-in-the-making: dust-off your biggest ideas and get them formulated and modeled-out. Build a prototype and acquisition engine before a business plan. Thrash them hard with the smartest people you can find. Figure out exactly how much cash you need to get to a minimally viable product to market. Do everything possible to get the concept in front of potential customers for a first-level reality check. Give yourself a month at most to accomplish these tasks, and then start shopping the deal to this new breed of investor.
As always, your best bet is to find someone who can engineer a warm intro to one of these 50 or so dealmakers who are leading the charge. If no one bites (either from a straight investment perspective or acceptance into a TechStars or Y Combinator style program), then pivot. The worst thing you can do in this new world is become entrenched on an idea or miss the boat as you bootstrap your startup into oblivion. Hell, if you can impress a guy like Paul Graham at Y Combinator your idea might not even matter. They’ve got plenty of good ones in need of startup ninjas.
Also know there are seed incubators in virtually every second-level startup town in America: Atlanta has Shotput Ventures; Austin has Capital Factory; Washington DC has LaunchBox Digital; etc. Your town may not have a Ron Conway or a Brad Feld yet, but there’s no doubt the model is coming – and it will affect the thinking of your local angel investors. And if all else fails, follow the lead of my LessConf buddy Jon Crawford of Austin-based Storenvy: get yourself into Y Combinator and shuffle off to San Fran Valley for a while. Or, get your groove on in Boulder. Then come back home if it makes sense. Go find your success and return as an angel-entrepreneur. Better yet, become a leader and make it happen here. My point is do what you have to do.
So entrepreneurs, the great news is it’s all in your court. The conditions are strong. Ron Conway’s data shared during the CrunchUp interview shows that game-changing companies are being formed every two years and his portfolio has shown strong growth over the last 10 years despite volatile economic conditions. There truly has not been a better time to build a startup inside one of the 'Hot-5' consumer categories. So get to it, and push for greatness. No one in this new world wants to see the sixth me-too copy of a mediocre company. As the old adage goes: Go big or go home.
I leave you with this... There is plenty of baggage to go around. Plenty of people will tell you it can't be done. To borrow a line from Dave McClure: "Fuck. That. Noise." There is a valid, profitable reason the best startup investors put their total faith in entrepreneurs. They place them on a pedestal-of-awe because that's where the source of innovation and future revenue begins and ends... Know I share the same belief that each of you are The One, but the question is... Do you?