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Entrepreneurs Now Can Build What Customers Want (Rather than What VCs Want)

With Capital Efficiency, Entrepreneurs can focus on building what customers want, rather than what VCs want to fund.

In addition to Democratizing the Startup Process, Capital Efficiency drives another important improvement in the startup model: Entrepreneurs are largely freed from the tyranny of building what the VCs want to fund.

In the traditional startup model, step one is for the entrepreneur to raise venture money.  Pragmatic Entrepreneurs want to know what the VCs want to fund, because it is much easier to sell a VC on an idea/category/business model that they have already decided they like.   This is a significant contributing causal factor for all the reporting and cocktail party chatter around what VCs are interested in/funding now.  This echo chamber effect causes some big problems, systemically reducing the chances of startup success through two mechanisms:

(1)  The world ends up with multiple copycat companies pursuing essentially the same business idea.  These companies engage in infant fratricide, wasting money, time, and market opportunity, in the process.

(2)  In an effort to “anoint a winner”, some VC funds will put much more money into the number two or three player in a space on the hopes that they can leapfrog into the number one spot.  Most of this “extra” money is spent inefficiently at best; poured down the drain at worst.

But, Capital Efficiency changes this.  Since Entrepreneurs don’t need to seek VC money as step one in the process (step one is put product into the market, since it’s so cheap to do), they don’t need to try to read the VC groupthink tea leaves regarding what is hot today.  Instead, they can follow their own market knowledge/intuition to build something the world really wants.  I humbly submit that we’ll all be much better off with this approach.

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  • Tom Gabriel

    Hi Eric,

    You wrote “Pragmatic Entrepreneurs want to know what the VCs want to fund, because it is much easier to sell a VC on an idea/category/business model that they have already decided they like”. 

    Really? Are there still VCs out there that actually consider the idea/business model? I've been reading VC blogs for a while now and most of what I hear is “traction”, which means VC don't take risks anymore on “on-paper” ventures; they go for ventures that are already functioning.

    Thanks for your comments
    Tom

    • everploeg

      Tom, you are wise to be jaded. A few thoughts.

      First, it's been over 20 months since I wrote this post, and the blessings of Capital Efficiency increasingly allow venture folks to wait for the risk-reducer/price-increaser of waiting real world traction before putting their money at risk.

      Second, it depends on the sector and stage the venture investor is operating in. A super angel/micro VC operating in the mobile/web sector may indeed be willing to take that “on-paper” risk if the price is low enough. Unfortunately, they see some adverse selection in that process — the more credible teams/ideas are the ones most likely able to cobble together the resources to show at least some real world traction before seeking outside money. Without a good strategy for addressing this, that investor is much safer staying with the herd, waiting for real traction before investing, and writing blog posts extolling the virtues of waiting for traction.

      And, of course, if you're talking about building a solar array in the desert, or electric cars, or any other big capital sector, some venture investor is going to have to take that “on paper” risk.

      Good luck, and remember the famously short Winston Churchill commencement speech: “Never give in. Never give in. Never, never, never, never–in nothing, great or small, large or petty–never give in, except to convictions of honor and good sense. Never yield to force. Never yield to the apparently overwhelming might of the enemy.”