Monday, November 20, 2006

Reality check on start-up funding

As part of my work I often meet entrepreneurs at fairs and events dealing with entrepreneurship or related subjects. A fraction of the people I meet seem more focused on getting massive funding from VCs than on developing their business. While it is their right to do so, I feel one of the best piece of advice one can give them is to take a reality check.

The New York Times published an interesting article discussing start-ups like Meebo or JotSpot that used relatively modest amounts of money to show their offering could be a major success.
Download 200611009_NewYorkTimes_WebSuccessOnTheCheap.pdf

The trends discussed in the NYT article confirm statistics from Canada showing that the average amount of initial investment in successful start-ups is 75 000 CAD, which is more or less the average amount often quoted in the US and Europe, i.e. 50 000 €.

So it does seem that:

  1. investors will agree to join forces with entrepreneurs only after the market relevance of their idea has been proven

  2. there are far more investment opportunities than there is available capital to fund them

  3. entrepreneurs are on the weak side of the negotiation as long as their ability to capture a sizeable market is not established

  4. the pattern of risk aversion of institutional investors is such that the proof of concept will not be funded by other people than the entrepreneurs themselves and their relational network

  5. the scarcity of financial and human resources that is so typical of start-ups makes it essential to focus all efforts on showing that an offering is desirable on the market by more than just early adopters, which means that entrepreneurs must also have a clear way of capturing a larger market (and in fact they cannot pursue several paths to achieve that goal as beautifully discussed in Crossing the Chasm - and I am taking the opportunity of this post to thank Philippe Back for convincing me to read that book)

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