I retired from personal blogging in July 2008.
But you can find me over at http://blog.xero.com.
I’ve had a number of dicussions this week on how we should try to fund businesses earlier. I argued earlier that we should be moving closer to Design, Fund, Build.
I missed out a step in the normal NZ model where to get funding start ups have to Design, Build, have reference Customers (therefore revenue) all before getting funding.
There is a layer of smart young techies who are struggling to pass these first steps with the resources they have available.
This is a pointer to the immaturity of our investment market.
In fact many NZ companies have this model …
…. where they are actually selling the product before it is properly developed or even designed. This ‘running to catch up’ model is very common and gives software a bad name. A vicious circle.
I have heard the comment many times this week that the Due Diligence required for Angel Investors takes almost all risk out of the investment. It is a bar that is too high for many of our young companies and is stifling innovation.
To my mind Angel funding is risky. Angel funding occurs early in the process where you are betting on talent and providing the resources for the young company to build their prototypes, dress themselves up, and get ready for the funding required for real commercialisation.
As an industry we need to do more to demonstrate we are lower risk and can provide exceptional returns, but the ‘Angels’ also need to understand where they contribute to the process. To accelerate our industry, we need to leverage design and planning so that entrepreneurs and early stage investors can meet and that our young businesses have the early resources to do it right.
Interested in your comments on this. Is this the common experience?
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I don’t know about DBRF being bad. It’s even what 37signals evangelize in Getting Real, and it’s what I’ve always done. It’s best to get something out there and making revenue to prove the concept before you take on serious funding IMHO.
DFBR, on the other hand, is what most Web 2.0 Silicon Valley type companies are doing, but unfortunately a lot of them are missing the final R stage. I’d rather miss the final F than the final R ;-)
Um, yeah. If you can get me that model, I’d be very thankful.
Right now, I’m in the top model - at that tricky 60 days between “build” (and all the bills that come with it) and “revenue” - too many folks saying “Let’s set up an SOW for execution in January!”
This is not a great place to be.
If you look at the government funding schemes by TechNZ ie. TAP, TBG, GPRSD They supported the FUND - DESIGN - BUILD - REVENUE model. The government will support R&D projects by topping up monies invested by the companies for their research.
What would happened if Angel Investors and Govt combined as with the SCIF fund and co-funded R&D projects?
Experienced the design-build-FUND-revenue model this year. Design and build is easy if you are willing to dedicate your own funds and energy into a the “potential” of a positive outcome. In reality, that’s a stupid way to do things. “Build and they will come” is only a valid option when you either have deep pockets or a narrow vision.
Gaining funding from traditional forms (Govt) isn’t worth the effort (time and money) in my opinion, and, avoiding the vultures lurking in the magic forrest of venture capital is always the recommended.
The ideal approach for all us “creative” types would be FUND-design-build-revenue. But can you imagine gaining funding if you can’t prove you have experience in similar entrepreneural activities. I know if I HAD the money I wouldn’t give it to “john doe” off the street with 3 years commercial development experience who reckoned ‘idea-A’ was a winner because ‘mr-X’ did something similar but missed ‘niche-9′. Then again as a start up business owner I’d be as loyal as old yeller if someone was that keen to part with there funds.
Even though “Build and they will come” is a stupid approach (business wise) I still feel attached to the number 8 wire mentality of just “giving it a go”.
Anyhow .. ranting now lol
The good thing about getting revenue at the earliest possible stage is that it validates the concept as something that really does attract paying customers (well at least one).
The danger (apart from failing to deliver) is that the product is eminently suitable for one or two target customers and useless in a more general sense.
My last business secured good funding on a basis of a prototype and some customer interest (though not significant revenue). The trouble was that with everyone being heavily VC funded at that time (London 2000), the client base had developed an expectation that software was either free or soft dollared. Which made it hard for businesses to transition to sustainability - and meant that most people were focused, as we were, on getting more funding or an early trade sale.
From an investor point of view, the trouble would seem to be that “lower risk and … exceptional returns” don’t go together. The risk of early stage funding is very high, so investors expect to hear a story of monster future returns to offset this. Unfortunately, the number of new businesses that actually achieve those returns are tiny. Best case for investors is often to be in a company that at some point *appears* very valuable (e.g. Netscape) so they see payback then at the expense of the next mug.