Bricks of Venture
Judging by my purely empirical research, there are not too many people from the Venture Capital industry, who are familiar with many Lego initiatives. It’s a toy company — nothing surprising, yet I think, it’s a huge oversight for those, who live in the Startup paradigm. Why? — Lego actually managed to map and recreate a major part of the VC industry with technically one simple product — Lego Ideas (Don’t waste time on the link now — the explanation will follow). Learning about Ideas, I came to realize — people in venture always strive to see the “bigger picture”; though, as my experience shows, only few have successfully dotted the “I”s, be that investors, founders or even customers. That said, this article is my take on how VC works, derived from the childhood hobby.
First things first — What is Lego Ideas?
Back in 2008 Lego launched a program, which allowed creators build, post and vote for their own projects. Those, who made it to the threshold of votes (10,000 unique users) and complied with the application rules had a chance to be reviewed by Lego; The review was designed to select the most promising projects that could be then put into a full-scale production. 1,500,000 users, 33,000 submitted projects, and 42 released sets later, Lego still has been fine-tuning the selection process, while consistently adding more sets to their line-up. You might want to ask, why in the world would that be any similar to Venture Capital? — Think of it this way, let’s say that Lego are VC funds; Creators and their submitted Projects are Founders with their Startups, and then Voters are End Customers. To add some more colour — 10,000 votes is the Product/Market fit (or PMF), deadline to get to the vote threshold is market timing, and all the Lego restrictions posed on the submitted Projects are industry trends. Now that we are familiar with our main characters, I decided to have the rest of the article, broken down by the subjects of the venture ecosystem.
Lego, aka VC Funds — the navigators
Clearly, Lego, as a company contributed a massive effort to build out the Ideas initiative. Community creation, bricks production, ongoing updates to the application process and so on. But let’s look at the other side of it — ROI. The simplest way to think of the ROI for Lego achieved through Ideas is the demand tracking. Obviously, the risk of low sales substantially decreases as people vote for the projects they like the most, hence, forecasting sales even pre-production begins to make sense. Same with VCs. Funds want to bet on those Founders, who managed to prove that their product is indeed welcomed by the End Customers. In other words, we would be looking for a startup that reached the Product/market fit. However, how does one know that a startup reached the Product / Market fit, when there is no votes? — Check this article, if you are struggling to find the answer.
Beyond that, Lego, same as VCs, neglect the “10,000-vote” rule from time to time, giving some projects “in review” status despite failing to reach the required number of votes. This is where the expertise comes in. Good VCs know — sometimes End Customers are just unable to recognize how good the projects are simply because they lack a couple of tweaks. This is where the non-monetary value of VCs kicks in.
In accordance with the Ideas, Lego pays 1% royalty to the Creator if the project goes into production. The simple analogy with VC funds would be the capital they provide to the founders. However, apart from this obvious financial motivation, Lego also tells a story about the Creator on the back pages of each manual of the released set. That’s what people from VC usually call value-add. Technically, value-add cannot be described with a specific set of functions that VCs are obliged to undertake. Nevertheless, there is a common practice that Funds indeed help their portfolio companies through looking for other investors, hiring talents, optimizing operations, etc. Why should you care? — Think of the Win Ratio and how value-add could impact it.
Creators, aka Founders — Silent diligence impersonated
While Lego brings a ton of benefits and motivation for the Creators, as do VCs, Founders clearly need to learn a couple of shenanigans that will increase the chances for success. I believe, the two things are — don’t be afraid to let go and put your customer first.
First of, admitting the defeat. Letting go is always hard. Especially when you have to wave goodbye to your own startup. But why would you hold onto something that does not really do as well as you thought it would? What if you can’t reach your product/market fit? Would you want to wait until the time to “vote” runs out (think burn rate and cash position)? Meh, sometimes the right play would be to start something new. And that’s the point. Most of the Lego fans do not just build ONE project, and that’s because they love BUILDING. So, as a Founder, you need to be excited both about the process and the final result rather than just about the result alone. Be willing to try something new, something that would catch attention of your End customer and, eventually, will give you their “vote”. Look for the hot topics, industry trends and try to figure out if you are at the point break, or you are just missing the timing. Failing is good, most likely you won’t make the same mistake twice. So, you might need to give up on your build, but don’t give up on building!
Next up — audience. Many of the startups are looking for ways to scale their creation way before there is a prove that scaling makes sense. Reason — Founders are vainly thinking that they reached the PMF. I think, Lego have done some great job in unintentionally showing the VC community how important the voters, aka End Csustomers, are. As per Ideas’ mechanics, Creators are competing for users’ votes. That said, how do you make users vote then? — Before committing time and efforts to create something — brace yourself and explore the trends; see what people would be willing to “buy” based on the submitted Projects. Startups’ logic is just about the same. Do not neglect people’s needs, even if you think that your idea is a killer. It might just turn out that, in practice, the demand for your solution (Project) is not as high as you would expect. So instead of just silently developing your product, go to customers, ask them if they need your Startup at all and see the reaction. At the end of the day, both Lego and Creators rely on customers’ opinion first.
Voters, aka End Customers — the overlooked driving force of VC
As I was saying, Lego Ideas is the living proof of the importance of the Voters. As a member of the program, any Voter can support as many projects as they want. So, in other words, Lego simply lets people choose which products they want to see on the shelves, driving even better customer experience. By doing so, Voters are becoming the core of the Ideas. That’s what End customers should also be aware of, while remaining the judge, the jury, and the executioner for the Startups. Be conscious and don’t just use any available solution — that will inevitably ruin the stats and create the effect of Vanity metrics. Don’t be shy on feedback — good Founders are always attentive to what their Customers say. Maybe next time you use the product — the minor issue from your previous session would already be gone for good.
Bottom Line
Venture Capital Ecosystem is a diversified, yet a very clear set of bonds established between its key agents. Everyone plays its part. Understanding the mindset of each cast is crucial to achieve positive results. Lego Ideas is just one of the examples that managed to simplify the mechanics of the VC and imply it on the business. So, as I am also a big fan of Rock music, surfing, and F1 — I’d be sharing more case studies soon and hope one day we’ll see even better synergies in the Venture Capital universe.
