Tuesday, February 24, 2009
Distorted motivation of startups
I'm absolutely torn between choices and motivation of startups. I touched on the futile attempts to raise venture capital, and I'm a firm believer in fixing broken systems and making life richer, regardless of how money is raised.
Over the last several weeks, I met many friends doing all kinds of different things with their lives... mostly people sitting on the other sides of table: entrepreneur and investors.
The stunning contrast among their motivation was nothing less than stimulating, and I want to share the discussion with my readers.
Friend A - early-stage VC:
I've been bouncing some business ideas and wanted to get his feedback on products, features, and potential business opportunity out of a mere idea. He's a venture investor at a very respectable firm with vast knowledge of industry, technoloyg, and market. I thought he would be the right person to give some agnostic feedback based on what he knows about startups. About 15 minutes into the "pitch", his attention was already somewhere else, and he asked, "Do you think this is a $100M business opprotunity?" and it was an obvious no. My original intention is to fix some broken system based on my own experience from b-school. With very limited capital out of my pocket, I was going to solve it. If it happens that I can build loyal users WAY beyond my original target, I *might* consider runnning it as a business. Then, he said, "Why are you wasting time going after no market opportunity?"
Summary: Small dreams are futile attempts.
Friend B - Non-VC-backed-entrepreneur:
He started his business doing someting very fundamental. He takes a purchase order from website, manufactures and delivers the product. For every single order he processes, there's a gross margin and money to be made. The challenge is to scale the business to be profitable. The target market size? Not too big to be honest, but he can make a pretty good living out of this if it takes off. He went on to make predictions about the whole Web 2.0 implosion, and how forgetting fundamental business concept (a.k.a. revenue - cost = profit) will prove detrimental to many seemingly successful tech startups. His motivation: make profits and run businesses like business. Hype doesn't generate profits. Points taken!
Summary: Small dreams are NOT futile attempts. There's something grandiose about small businesses.
Friend C - VC-backed entrepreneur:
He runs a pretty well-known startup in the gaming industry. The first time I met him, he had a very, very long lecture on how raising venture capital is wasting his time while he could've worked on something very productive. He's going after a very big market opportunity with significant capital that already went into his business. He's still going for the >$100M market opportunity... the only problem is ... he's not making much money at all. For almost every transaction/deal he makes, he's still sinking money.... for more than 7 years now. What a contrast with Friend B!
Summary: Big dreams are way to go.... only takes much more money to be profitable.
I'm not saying any of them is right or wrong. It's just that the motivation of startups varies very much. We in the ventue capital ecosystem tend to think that small dreams are futile, because it's a homerun business after all.
Think Facebook, Twitter of the world VS. Craigslist and Wikipedia. Maybe a bad example, think Facebook vs. MIT Truck, what's wrong with MIT Truck? I don't see much.