Ottawa entrepreneurs were treated last night to a rare performance when seasoned entrepreneur and pioneering angel investor David Rose, founder or funder of more than 75 technology companies, spoke at the city’s monthly StartupGrind event. Describing himself as a third-generation entrepreneur, Rose spent fully 40 minutes answering StartupGrind organizer Cheryl Draper’s very first question about his early adventures in company creation and angel investing. As entertaining as his personal story was, it was the concrete advice he gave to entrepreneurs that made the evening valuable.
Like many other tech sector observers, Rose pointed out that it has never been easier to start a company. His first venture consumed $20-million of investors’ money to get to a revenue-producing product. His next venture cost $2-million to get to the same stage, and the third just $200,000. The costs have dropped by another order of magnitude — or maybe even two — to the point that today, he said, “almost anyone can start a web company at almost no cost.”
This low cost of entry means that too many people start companies to do easy things or to mimic things that have already been done, Rose said, a paradox that I don’t hear enough people emphasizing. The world doesn’t need another recruitment site or social shopping site, he said. Instead, “look around for real problems that haven’t been solved by anyone else…The first question (every entrepreneur needs to ask) is, ‘Does anyone want what I’m going to build?’”
The biggest source of funding for a new company is ‘your pocket’
The biggest single source of funding for a new venture is the pockets of the company founders, Rose said. ”Only one in 40 people who actively look for angel funding actually get it. That’s sobering.” The success ratio for venture funding is 10 times worse, one in 400.
And if you don’t have an investable idea — that is, something with the possibility of generating a 30-fold return on an angel or VC investment — don’t even bother trying.
(If you think you do have an investable idea, you could do a lot worse than follow the explicit advice in Rose’s TED talk on how to pitch a VC.)
Crowd funding is a potential game changer
Someone in the audience asked Rose about equity crowd funding and, like me, he did not seem to be a big fan. It “is a potential game changer,” he said. “But not necessarily in the way people might think.” The problem, he said, is that small individual investments like those made on Kickstarter or Indiegogo come from “the discretionary pocket,” the same pocket from which people pay for a night out or to gamble. (He mentioned gambling several times when talking about the relationship between discretionary funds and crowd funding, a parallel I am sure he made quite deliberately.) Real equity investment “comes from a different pocket,” one that calls for conscious and serious consideration before the money is paid out. Would you rather have, he asked rhetorically, a whole pile of investors who were really just playing around or a smaller number of professional investors who had much larger stakes in your success?
As for how many investors is the right number, regardless of their source? ”Fewer rather than more, and more than one rather than one.”
‘Stealth mode generally doesn’t work’
Again in answer to a question from the floor, Rose tackled the notion that companies should operate in stealth mode for a period, a concept that he didn’t much favour. Regular readers will know I am a fierce critic of so-called stealth mode, and Rose agreed with me for much the same reasons. ”Operating in pure stealth mode generally doesn’t work very well,” he said. It “doesn’t really protect you. It just cuts you off” from people who can help. Couldn’t have said it better myself.
California is about the big idea. ‘New York is technology meets marketplace.’
Easily one of the most interesting bits of Rose’s presentation was a brief but insightful discourse on the differences between the technology and startup sectors in California and New York. California, and especially Silicon Valley, had a clear head start, he said, and whatever momentum New York might have built up during the dot-com bubble was crippled when that bubble burst, and it nearly expired altogether when the World Trade Center towers were attacked in 2001. While Silicon Valley took a similar hit from the dot-com downturn, it did not suffer the consequences of the 911 attacks, and it had a much more established ecosystem that recovered more quickly.
All that has changed in the last few years, Rose said.
New York’s more recent surge in technology, at a pace that has moved it ahead of Silicon Valley to become the largest tech centre in the world, has a lot to do with fundamental differences in the broader economic makeup of the two areas, Rose said. In California, it is all about technology and not much else. Every guy at every Starbucks in Silicon Valley is an entrepreneur. By contrast, “you could shoot a bullet and not hit a (technology) entrepreneur in New York” because that city is also “the global financial capital and media capital and marketing capital and fashion capital.”
The industries that make New York a global commerce juggernaut all have massive problems that could be solved by technology, and entrepreneurs in that city are much better at connecting with those industries, Rose said. By contrast, technology development in California seems to be pursued for its own sake, with everyone chasing the “next big idea that’s going to change the world.”
Rose’s observations are a bit of a generalization but I’m inclined to agree with him, and they contain perhaps the soundest counsel he shared all night. There are lots of huge problems out there still left to be solved. Instead of trying to figure out how to create the next great social network, how about you connect with an industry that has such a problem and devote your entrepreneurial talents and engineering chops to solving it? To do so will make you an even more abnormal member of that already abnormal collective called entrepreneurs. It will also make the prospects of success far likelier.
Photo: Brandon Waselnuk via StartupGrind Ottawa.