I’m seeing a new type of startup emerge. This startup is not yet a company, but an experiment in its purest form. The founding team is very small, often one technical person. In some cases, the founding person is recently self-taught and is hacking something together because she needs this thing to exist.
I’m seeing a few of these new startups achieve early signs of traction and engagement. They are slowly and deliberately building small communities or early customers. Some are even making money. In fact, a few of these startups are profitable (in the ramen sense).
Not surprisingly, VCs, seed funds, and angel investors are circling around these companies. But here’s the reason I’m calling them the 2013 startups: the founders are saying NO to the money. This is a fundamentally different strategy than the one I witnessed with many of the most sought after 2012 startups. The 2012 startup had a good founding team, maybe a beta, and the opportunity to raise (in some cases) millions of dollars on attractive terms. So why not take the money? Hell, in some cases, these financings represented years of runway. Fuck 18 months, we have YEARS to figure this out! The reason that this was a bad strategy at such an early stage is that now many of these startups have millions of dollars in the bank, no traction, and no idea what to do with the company (or themselves). Companies that are prematurely overfunded are designed to throw money and bodies at problems that may not exist.
Danny Sullivan used a good Sim City analogy to describe 2012 seed funding in a recent episode of the Gillmore Gang. Paraphrasing, he discussed how there were ways to buy accelerated growth in the game, but every time he did it, he seemed to end up with a less sustainable city than if he’d just built it (slower) himself. Similarly, one of John Borthwick’s core mantras is that funding is all about sizing. It’s alright to raise large amounts of capital if you can understand the business you’re in and how you’ll use the money to grow. Startups in 2013 have access to the most sophisticated sets of data, tools, and analytics our world has ever seen. They should use these tools to understand and measure their business before stepping on the VC treadmill.
The 2013 startup founder is taking these lessons to heart. He’s saying no to the money not because he thinks he can bootstrap forever or because he wants better terms or because he’s playing coy, the founder is saying no to the money because until he can show some sort of sustained and organic growth, why raise years of runway? The 2013 startup is the pre-2012 startup, a throwback to a simpler time, and a sign of more mature founders.
What does this mean for investors?
The 2013 startup isn’t so bad for VCs, who should be in the business of funding growth. Almost all of the 2013 startups will need capital at some point. The 2013 startup, however, is not so good for seed investors. For it is at this very point, one or two founders, a beta with a little traction, that fits the seed fund model. The 2013 startup has the opportunity to skip this stage of financing entirely. Because if they can engineer organic growth with one or two founders (and survive this period), then they can commit to building a valuable long-term company, which likely requires more than seed capital (from the larger VCs).
So what does this mean for seed investors (and me)?
Mainly, I think that it means an acceleration of something we’ve seen for the past few years: An ever clearer demarcation between seed investors that can add value and investors that are just writing a check. Even though the 2013 startups may not need the money right now, almost all of them need help navigating the treacherous road that is building a valuable long-term business. This post is not meant to be a flyer for betaworks, but it’s a fact that entrepreneurs approach us because they know we’re builders. First and foremost, we make things. We seed invest in companies outside of betaworks in order to build the best network of makers (inside and outside of betaworks) that can navigate this road together. In fact, we recently made a seed investment where we’re not simply providing money and network, but a couple of our internal studio companies will act as the first customers.
I know well a 2013 startup when I see one, because that’s exactly how we build new things at betaworks. Our projects don’t start as companies, they start as lean product experiments with no more than a couple people that we fund ourselves through the seed stage. If we don’t see a road to growth or data to support our project’s thesis, then we don’t go to the market to raise additional capital.
As for me personally, I’m damn excited for the 2013 startup. It’s not as showy as the 2012 startup, which is why it’s so much sexier. The 2013 startup has the opportunity to be just as big as the 2012 startup, but it will get there differently, with a little less money and a little more help. And I think that means I keep my day job :-)