Back in November, Peter Hanschke blogged about the need for the lean and mean startup to beware the million-dollar cheque. In that spirit, I have an anecdote to share which illustrates that the mere prospect of such a windfall can also do significant damage.
At a time when early-stage ventures, particularly those in Canada, are thirsting for capital, be it traditional VC or an angel round, it may seem counterintuitive to suggest that a startup should be wary of a nice fat cheque.
But as Peter explained, for a startup that has taken a lean and frugal approach to market that relies on iterative product development and using a Minimum Viable Product approach, a sudden windfall of cash can have all sorts of negative consequences. The most obvious of these is that the product, which has until now been developed with only those features and functions that have the strongest market pull, gets bloated with all sorts of additional bells and whistles that dilute its focus and send the sales and marketing teams running in too many directions.
My story isn’t a clear-cut example of this, but the same lessons apply. This venture, let’s call it BigContent, was developing a unique library of content which it would make available through a subscription model. It was incubated with a nest egg the founders had put together from a previous venture. In fact, it was their experience with that previous venture which provided them with the idea for BigContent, as well as the initial proof of concept. From a marketing standpoint, BigContent’s founders were doing exactly what they should to identify, define and validate a strong market opportunity which BigContent could exploit.
Executing BigContent’s business plan didn’t require external financing. The founders were wholly committed to bootstrapping the venture through to positive cash flow. BigContent proceeded to develop its library of content, a distribution model through which to deliver that content and a strong roster of subscribers. Everything was proceeding well toward a soft launch of its service.
And then a Big Name VC comes calling without an invitation.
Well, what startup on the eve of its launch is going to slam the door in a VC’s face? At the VC’s behest, launch plans were put on hold. BigContent’s founders revamped their business plan to reflect the addition of external financing. A VC round may not have been necessary to BigContent’s get-to-market strategy, but it would certainly have accelerated the process and made for a bigger, bolder launch.
Big Name VC made lofty promises, even said it would bring one of its compadres to the table. Meetings were scheduled, then cancelled. After several months of song and dance, the VCs said a polite “No thank you” and moved on.
The damage was done. BigContent’s lean and mean go-to-market strategy was in shambles. One of the principals had also resigned from the company. Months later, the team is still trying to get everything back on track for a launch, as per the original business plan.
I don’t intend this post as a knock against VCs, but this story does demonstrate that both parties to a deal must always beware. The onus is on the entrepreneur to have a clear understanding of where their business is going and what it will take to get it there. There is always more than one route to a destination and the choices which lie along the way seldom fit easily into the “right” and “wrong” columns. If there’s a moral to this story, perhaps it’s the importance of staying the course when in the midst of executing a plan in which you have confidence.
What do you think?