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© John Mullins 2014
What Entrepreneurs and Angels
Should Do
Before They (You?) Dance
John Mullins
London Business School
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© John Mullins 2014
Let’s Face an Uncomfortable Fact
• Fred Wilson: Union Square Ventures
– “The amount of money that start-ups raise
in their Seed and Series A rounds is
inversely correlated with success.”
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Why Might This Be So?
– Talk with your neighbor • 2 minutes
• 3 top reasons, please
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Why Might This Be So?
• My take on it:
– Too much money makes you sloppy, stupid
– Plan A rarely works. But your funder wants
you to (flawlessly) implement it anyway!
• Question: Might it be wiser to wait and
seek to fund customer traction, instead
of a plan?
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So, What Should
Entrepreneurs and Angels Do?
• Here’s what you probably should not
do…
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© John Mullins 2014
So, Would You Invest in Ali G?
• Fact: the vast majority of fast-growing
businesses never raise venture capital
(nor write business plans, either)
• Nor should they, at the outset, I argue:
why?
• Raising capital too early – whether
from angels or VCs – is a dangerous
practice, on both sides of the table
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© John Mullins 2014
The Killer Drawbacks of
Raising Capital Too Early
• Distraction: takes the entrepreneur’s eye
off the ball, now, and later, too
• Higher risk = lower stake for the founder
• And the baggage that comes with it in the
shareholders’ agreement
• Is this good news for the investor in such
a deal?
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Let’s Consider Some Evidence:
US Venture Fund Returns
Returns from inception to 12/31/11.
Source: Josh Lerner analysis of Thomson/Reuters data.
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So, Is There an Alternative?
The Customer-Funded Business
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Matchmaker Models
Service-to-Product Pay-in-Advance
Models Models
Scarcity-Based Subscription Models Models
Your Customer
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© John Mullins 2014
Is Anything New Here?
• Pay-in-advance models: Consultants, architects, Dell. Nearly all services, too.
• Matchmaker models: eBay, Expedia
• Subscription models: Periodicals, Netflix
• Scarcity models: Zara
• Service-to-product models: Microsoft
• But let’s look at some savvy 21st century entrepreneurs putting them to use
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Vinay Gupta 2006:
A Pay-in-Advance Model
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Brian Chesky & Joe Gebbia 2007:
A Matchmaker Model
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Krishnan Ganesh 2005:
A Subscription Model
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Krishnan Ganesh 2005:
A Subscription Model
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Jacques-Antoine Granjon 2001:
A Scarcity Model
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Balder Olrik, Claus Moseholm 2003:
A Service-to-Product Model
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© John Mullins 2014
These Examples Share
Three Attributes in Common
• Negative working capital – love thy float!
• They required essentially no external
capital to get started
• When they did raise capital to grow
once the concept was proven, there
was an eager queue of angels or VCs
lined up at their doors
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Not Just for Pioneers
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So, What About You?
• Which one of the five models might be
put to work in your new business?
– Pay-in-advance models
– Matchmaker models
– Subscription models
– Scarcity models
– Service-to-product models
Talk with your neighbor
• 2 minutes
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So, Which Did You Choose?
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Matchmaker Models
Service-to-Product Pay-in-Advance
Models Models
Scarcity-Based Subscription Models Models
Your Customer
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© John Mullins 2014
OK, “So What?”
As an Entrepreneur,
What Should You Do?
• First, what NOT to do
• Prepare
– Pages of prose
– Reams of spreadsheets
– All in support of the perfect Plan A (that probably won’t get you where you’d like to go!)
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© John Mullins 2014
OK, “So What?”
As an Entrepreneur,
What Should You Do?
• Mark Suster, Upfront Ventures
– “I say ring the freaking cash register. I have said so for years!”
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© John Mullins 2014
So, Is Venture Capital – from
Angels or VCs – Bad for You?
• Not necessarily. It’s the timing that concerns me.
• And it concerns Mark Suster and Fred Wilson, too!
• If you’ve got a venture that’s firing on all cylinders, perhaps yours, that’s when to add fuel!
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© John Mullins 2014
But Can You Get Funded by a
Good Angel or VC?
• Consider the rejection rates
– YCombinator 97.1%
– Angel List 98.9%
– Andreessen Horowitz 99.3%
• Is customer-funding a better way to go?
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A Final Observation on
Business Plans
“We believe that…
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For the “When-to”, the “How-to” and
the Pitfalls to Watch out for…
David Rose, NY Angels
“The Customer-Funded
Business should be
mandatory reading for
every entrepreneur
before even thinking
about seeking angel or
venture capital.”
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In a Nutshell…
“The customer is not just king.
He can be your VC, too!” Bernie Auyang
Angel Investor
Shanghai
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© John Mullins 2014
Questions?
www.TheCustomerFundedBusiness.com
@John_W_Mullins
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