Crowdfunding

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Stay away from the mediocre middle. Cognitive dissonance is painful.

Stay away from the mediocre middle. Cognitive dissonance is painful.

We aren’t losing deals to other VCs, we are losing deals to startups that continue to bootstrap.

-anonymous venture capitalist lamenting the state of affairs to me

We’re now long into a new startup reality. One that will be characterized by constant change. The rules of the game are changing, the disruptors themselves are being disrupted, and tactics that worked a few years ago are now nothing but useless cruft.

By now, it isn’t news that the new startup reality is more global (eg Estonia, Israel, New York), more social/crowd-y (eg Twitter, Meetup, Kickstarter)  more inexpensive (eg RoR, AWS, AppFog, Google Apps), more distribution/platform-based (eg App Store, Google App marketplace, App Exchange, Pinterest), more metrics-driven (eg Lean Startups, KissMetrics, Unbounce) and savvier (keep reading) than ever before.

In future posts I will get into what I think is really happening in terms of startups and innovation from a 1 million foot-level, but for now, I am interested in expounding upon is how the confluence of the factors listed above is shifting the balance of power between entrepreneurs and investors, while still favoring the moneymen and money-women, to more and more to the side of the entrepreneurs.

The great investors already grok this — the not so-great are about to be a whole helluva lot pain as they attempt to remain relevant in order to get a seat at the Good Deals table.

Simply put, in the new startup reality, today’s savvier entrepreneurs, with more flexibility in financing (Kickstarter anyone?), are no longer assuming investors’ value-add (sans money) – but are actively verifying that a value-add exists and making sure that they get investors who add considerable non-monetary value or pressing investors who don’t, to provide better financing terms. And in some cases, intentionally pursuing “dumb money”.

To recap, a non-exhaustive, and non-mutually exclusive, list of how an investor can add value (ostensibly) to your startup:

Their Network

You want this investor to invest in you because their network is relevant to your startup. Not only is it high-quality and far-reaching, it goes beyond simple introductions because they possess a singular ability to make people in that network actually do their bidding…for you.  <—- Read this again. And again. This is rare.

While many investors claim this – very, very few actually can deliver on this promise. Today’s entrepreneurs, unfunded and funded alike, are comparing notes on these claims. Does Jane McVentureCapitalist get her calls or emails returned? Can she force, cajole or beseech people to do her bidding on your behalf?

(Inversely, such investors see a natural fit to leverage and hedge their investment in you and your startup vis-à-vis their network.)

The Signaling Effects

This investor is a high-quality brand-name. You should trade on their name for the high-value signaling effects it provides. Broadcasting that you are funded by such an investor makes it radically easier to hire top talent, to create a perception of stability and fait accompli success, to make deals with potential partners, to get the attention of the press easily, and to sell your startup, amongst other things. It should be readily apparent to you who these investors are and who they aren’t.

Note: these brand names used to be the name of the actual VC firm, but now the brand value appears to be accruing to the actual partner.  This is not trivial.  See if you can suss out what that implies for your startup and for the other partners (perhaps those who don’t have a brand name) in the firm.

Pattern-Matching & Specific Domain/Phase

A particular investor has both deep and broad experience in the same space you are attempting to disrupt. Similarly, you are in or will be in a specific phase of company building that an investor has an unusual talent for – be it starting out or scaling hyper-growth or the sale of your startup.

(Recent) Startup operational experience

This investor has been around the block once or twice in a startup, they know your pain, your dreams and your reality better than you know it yourself. They’ve shed copious amounts of blood, sweat and tears to get across the finish line.

This is tricky — while many investors will claim both a) relevant operational experience and b) willingness to fight in the trenches with you — not many actually possess both. Also, this may swing the other way, you don’t actually want their hand on your steering wheel.

On the other hand, this is one that is relatively easy to verify via your entrepreneur back-channels.

Everything to Everyone

Watch out for this category. What is their value-add? Warning sign: they have discomfort verbalizing it and aren’t used to being asked about it. They’ll say it’s a little bit of everything. I don’t buy it, and neither do today’s savvy entrepreneurs.

Savvy entrepreneurs would rather take money from so-called “dumb money” that, at least: Stays the f*ck out of your way.

My sense is that great investors know precisely where and when they actually add value and also know how to stay out of your way, and not impede you with wind-bag advice and onerous ceremony and status re-enforcing ritual. “Dumb money” that knows it is dumb money isn’t so dumb in my book.

Summa summarum, based on my conversations with entrepreneurs and early employees, who have exited, whose startups are still in play, some funded and some not-funded —- they firmly believe that, in some cases, it is advisable to take “dumb money”, on good terms, that provides more value-add by staying out of their way and not pretending to be everything to everyone than it is to take money from the middle-tier folks who destroy value and waste your time by not delivering on their value-add promises.

It is the middle-tier investor class that may prove most dangerous, fickle and least valuable to your startup. They like to pretend they bring to the table an exploitable network, strong signaling, domain expertise, and operational experience – but rarely do – and by fooling you, they actually destroy value by wasting your time and sapping your creativity.

Head’s up. You’ve been warned.

PS Pre-order a copy of The Lean Entrepreneur.

Follow @Pv

A Bit About The Lean Entrepreneur

TL;DR: Brant Cooper & I have a new book coming soon. Go buy The Lean Entrepreneur AppSumo Bundle while you can. It is 96% off, has a bunch of apps + pre-order of The Lean Entrepreneur.

 

Lean Entrepreneurs Surf The Wave

Surf The Wave Art by @FAKEGRIMLOCK for The LeanEntrepreneur.co

 

It has been too long since I last blogged. This blog post will update you as to what Brant Cooper and I have been up to for the last few months, namely: finishing our new book, The Lean Entrepreneur.

We’re excited about The Lean Entrepreneur. It is a wholly new book that takes what we wrote about in The Entrepreneur’s Guide to Customer Development to another level, demonstrates the application of Lean Startup-like thinking in anywhere one desires innovation: social entrepreneurship, automotive manufacturing (ironic, right?), tech startups, music and artist development, and finance and investing, to name a few.

All of that, in it and of itself, is deeply interesting. But what we are most excited to cover in the book is the context and landscape of Lean Startup thinking.

Many a time, Brant and I have asked ourselves, “Why Lean Startup now? Why not 10 years ago? Or even 50 years ago?” The answers to those questions are explained by the coming social, economic and cultural sea changes we are rushing into headlong…whether we like it or not.

Think of yourself sitting on surfboard a hundred yards offshore, and a set of massive waves are visible on the horizon as they build towards the shore.

These waves are powered by the mobile internet and mobile devices, by the read/write digital fabrication technologies such as 3D scanning/3D printing, by “cultural technologies” such as crowdfunding, crowdsourcing and of course, by *Lean Startup-like methods themselves.

Currently mid-2012, we have only begun to feel the power of these disruptive waves. And when they start to converge upon the shore, suffice to say, we will be living in interesting times.

In the Lean Entrepreneur, we interview amazing entrepreneurs who are living in this future, and are kind enough to report back to us.

But back to the you on your surfboard – you have two choices:

1) You can paddle back to shore and build a fortification to protect yourself. (Think music labels in the last +10 years or so)

2) You can swallow hard, paddle farther outside (ie away from shore) and position your board and yourself to surf. (Think Lean Entrepreneurs)

If you choose 1) — you will be obliterated and washed away. Maybe not immediately, but certainly very soon. And when you do, it will be ugly; kicking and screaming the whole way.

Let me give you a contemporary example:

Entrepreneurial education (and education as we now know it) has just begun to feel the cold spray of this wave, and entrenched stakeholders aren’t happy about it. Direct competition like MIT OCW, New.edu, Udacity, Udemy and other learning platforms are going to displace traditional education. Moreover, hackathons like Lean Startup Machine and Startup Weekend are also disrupting entrepreneurial education. As are incubators — incubators aren’t just at the bottom of the investment ladder but also they are the top of the education ladder. Why go into debt for MBA, when someone will pay you to take a crack at a startup?.

Online learning platforms, hackathons, incubators are all initiatives that are surfing these waves, ie they have chosen 2). Now, listen for the unsheathing of the knives as those (eg student-debt-financial-industrial complex, tenured faculty, textbook publishers etc etc) in their fortifications find themselves about to be washed away.

Personally, I am very bullish about the prospects of unlocking human capital and creativity globally vis-a-vis this sort of disruption in education. This will make the world a better place, but the transition to this will be painful.

Now back to you: WHO are you? Where are you relative to these coming waves? Are you paddling out into deeper waters? Or are you scrambling to get to shore?

More on this later….

BUT TODAY you should get go buy The Lean Entrepreneur AppSumo Bundle while you can. It is 96% off, has a bunch of apps + pre-order of The Lean Entrepreneur.

*Yes, that is an argument for endogenous effects.

Cutting to the chase

My final analysis on Diaspora’s hyper-successful crowdfunding strategy demonstrates that they sold 1,942 more $25 pledges than they “should have” because of their t-shirt strategy, resulting in additional $48,550 just for the $25 pledge category!

Take a look:

Here is what that chart “should” look like:

This was because to get a Diaspora t-shirt, a person had to pledge at least $25.  Diaspora succeeded in nudging people who had a willingness to pay something, say $5 or $10, up to a $25 price point.  In one word:  Clever.

But why a t-shirt? Because a Diaspora t-shirt provides significant, visible and hard-to-fake social proof of geekness (being “cool” amongst geeks), which translates into social capital.  (Clearly, this is nothing new.  Rock bands have been doing exactly this for who-knows-how-long with concert tour t-shirts.)  If you plan on crowdfunding a project, it would behoove you to draw the right lessons from Diaspora, although I am not sanguine about the possibility of replicating what is essentially a Black Swan.

Namely:

  • You need to think of pledges/sponsorships in terms of products, pricing and value. In other words, WIIFM – What’s In It For Me (the buyer)?
  • Reward your backers appropriately. Anything that combines social proof + “cool” is probably a good bet.
  • If you can harness yourself to a growing/popular social trend, you may benefit in an extraordinary manner.
  • Don’t forget about reference pricing. My reference price for a generic “cool” t-shirt is around $20. Meaning, that is what I would expect to pay in a store for a t-shirt that was adequately “cool”. The Diaspora t-shirt, in that light, seems like a bargain.

Assumptions

First off, I don’t have access to all of the real data points. My data are gleaned directly from the fund-raising page itself.  This means I don’t “see” the exact amount pledged in many cases, if someone pledged $645.21, for example.

Second, my major assumption is that each pledge bucket is not a different product, ergo each pledge does not have its own unique demand curve. What I think we are seeing is that Diaspora is selling one product at various prices (hence, one demand curve).

A pledge is a product that signals you are:

a) a geek
b) in-the-know
c) a trend-setter
d) elite

while also providing:

e) the satisfaction of sticking it to The Man (Facebook)
f) the good feeling you get from being philanthropic

Nuts and bolts of it

I threw the publicly available data in an Excel file and given the non-linear nature of the data, I applied a natural log  transformation to both price and quantity before running an OLS regression. The regression fits well and the log transformation preserves the $25 spike.

The regression predicts a quantity of 6.5 for a price of 3.22 — to make sense of that, we simply take the antilog of 6.5 to get 664 t-shirts.  Plugging 664 into the original data set for the expected number of t-shirts to be sold at $25 pledge level generates the second image from the top above.  The one with the smooth curve.  Here, I’ll show it to to you again.

And of course, my new regression is even a better fit (no surprise given that I have plugged in one of its own outputs).  :)

If you want to see the actual regression outputs, download this Excel file: Diaspora Regressions for Blog Post

[BTW my previous thoughts on Diaspora can be found here and here as guest posts at Brant Cooper's blog.]