There is something really important in this post on the Feedly blog about how they launched their company and approach to building out the product. Along with the succinct description of what it means to develop and launch a product using an agile process is the indictment of the stealth-and-hype approach startups have embraced in years past as a calling card for venture capital.
The benefit of this approach is that you put the customer and your metrics at the center of your development process: as a result you get constant feedback and can use that feedback to both improve the idea/positioning and the product. It will also help you iterate and add a lot more polish to the product. Finally, it will help you have a core user community and measurable understanding of their behavior – something which is really important if you are interested in raising VC money.
[From An Alternative to the TechCrunch 50 Model « Building Feedly]
In a nutshell the VC industry is in a bind of epic proportions right now as institutional money, the bulk of money invested in VC funds, is deciding to sit this one out and M&A and IPO activity is trending to zero for the foreseeable future which has the effect of dramatically reducing any opportunity to generate returns for active funds.
Perhaps more significantly, venture capital is on average a 9-10% return as an asset class which means that putting your money in venture funds is no better or worse than what you would have earned on real estate, equities, or any other of a number of different investment options. Venture capital is a cottage industry built on the perception of outsized returns that very few funds actually deliver. I have spoken with a frightening number of individuals, who are LPs in name brand funds, who are questioning the point of funding their capital call commitments, which in effect is capitulating on venture capital in general because defaulting have consequences beyond future investments.
The holy grail of venture capital is the “10 bagger”, also known as the “home run”, and for good reason because venture funds simply can’t survive on a steady diet of singles and doubles because the losses accumulate over time to wipe out anything other than monster gains. Entrepreneurs essentially understand this and have crafted, although not always with deliberate care but rather intuition, a startup process that swings for the fences. This momentum based approach, as in “getting the flywheel spinning” and all other manner of creative metaphors, is designed to catapult a promising startup into the consciousness of potential investors and acquirers, which has the effect of depriving potential competitors, large and small, of the oxygen their require to establish a base in the marketplace.
Furthermore, by being in the rarified air that white hot startups reside in, investors tend to overlook shortcomings and deficiencies by overweighting marketplace momentum and using this as evidence that “it’s the team that matters” in their investment review process. The competitive dimension among investors comes into play here as hot startups benefit from the fear that a competing investor will be first with a term sheet, offer a better deal, or promise a more prestigious syndicate.
Interestingly what has happened in recent years is that by tailoring the startup launch process to investors and the Valley echo chamber what startups, and their advisors, have done is raise the bar to levels that are almost impossible to achieve. Saddled with institutional attention deficit disorder (IADD) the typical Valley pundit and investor is on to the next shiny new thing before any real and meaningful growth is achieved.
It’s a cliche to suggest we need to get back to basics but essentially that is what Feedly is documenting, an approach that values focus on customer experience first and uses that to lever up interest among the various constituencies that startups often court first. Yes it is stating the obvious but sometimes we all need to be reminded of the obvious.