No funding? You have this one big advantage (so use it!)
A little while back, I wrote a piece about how Harvard Business Review article called Discovery Driven Planning formed the basis for a lot of the the tools and techniques in the Lean Startup.
The authors of the original work, were inspired to develop these tools after studying large corporations who invested heavily into new product launches but got nothing in return except for embarrassing failures. Some of these very 90s ideas included: a chemicals company looking to get into high end fashion, Disney taking their theme-parks to Europe without adapting to the different culture, and several others.
What I find really interesting about this are the parallels that you see between these large corporate investments and many VC investments nowadays.
And in fact, often you will see that not only does a large investment not guarantee success, it may actually be a curse.
There are some technical reasons that taking too much money from a VC might not be a great idea as high valuations create unrealistic benchmarks and the threat of a future down funding round. (this concept is well-documented enough that it even inspired a plotline in the HBO show Silicon Valley.)And true this may stretch some startups beyond their means and lead to some disappointing results, but this is not going to cause the most spectacular failures.
To me, the big issue with having too much money in the bank is the same for the large corporations trying to launch new products as well as for the cash-rich startups: they’re willing to push forward with lots of untested assumptions or assumptions that have already been proven wrong.
Skip first base at your own risk
If you look at the biggest VC flops over the past few years, you will see some ridiculously bad products. Maybe the king of all of those products that has rightfully taken a lot of ridicule is Juicero.
But look, it’s easy to see how someone pitched the idea of Juicero:
It’s like Nespresso but for juice. Not only can we sell an expensive machine, but we can also lock in great subscription revenues by sending regular juice packet deliveries!
Someone could then make some market share assumptions about the juice market and build some financial projections off potential subscription revenues and just like that you’ve painted a really amazing picture of what the payoff could be.
The problem here is that no one ever really questioned the foundation that all of those projections were built on top of: is this product useful and does it solve a problem that anyone needs to have solved?
Having lots of money in the bank lets you skip that first step.
But this is very dangerous as you have no validation that any of your assumptions are correct. You might not even know if this is a product that anyone will ever buy.
More Money = Bigger Failures
Really there’s no difference between Juicero or the chemical company that thought they could become the next great fashion house. Both of these companies had a stubborn vision from someone at the top along with the money to throw around to bring that questionable vision to life.
And once the money starts flowing into an idea, the harder it becomes to change direction. Why?
Nobody wants to look like they made a mistake when lots of money has already been spent. VC firms have an image and limited partners that they want to continue investing funds with them.
And it’s the same with large corporations. To kill off an idea that is the baby of some important executive and has received a large budget allocation is career suicide for anyone working underneath who knows the actual facts on the ground.
The incentive is to start to ignore the facts and to hope for the best.
The advantage of no money
When you don’t have any money, there are no incentives to ignore facts: you don’t have a senior executive who is pushing for their own version of reality.
You are able to conduct experiments and then immediately change your strategy based on the reality that you are seeing.
But this isn’t always what people do!
It’s very easy to get attached to an idea or a way forward that you firmly believe is right, even if the facts are telling you something different.
So the big question and piece of advice that I have is:
When was the last time you changed something based on an experiment that you ran or from speaking with your customers?
If you can’t remember, then you have just given up the only advantage that you do have over the well-funded competition.
Can you do me a favor?
I am thinking of creating a series of online courses about the most important finance topics for startups.
It would be similar to the thoughts that I share here on Medium, but with step-by-step videos, templates, and much more in-depth content.
If this is something you would be interested in:
Or if you have anything specific that you would like to see, please let me know in the comments below.
Thanks for reading!