Long thoughts for 2013
This year has been massive. We now have the nucleus of a global venture business which excites us and 2013 will be the year to create momentum around that core.
I thought I’d share some of our learnings that may prove helpful to others. Pollenizer is a startup too, and this shows us discovering our business. Brace yourself. It’s an epic post.
Being an entrepreneur is a ludicrous proposition. Going in, we know that we are statistically likely to fail in our final goal to build a sustainable business. But we do it anyway. We learned in our Silicon Beach report this year that less than 5% of Australian tech startups are reaching scale stage. These are still not sustainable companies. These are companies that are starting to grow around a known business model.
Pollenizer’s own business model is even more preposterous. We start multiple businesses per year and only make a profit when we exit the businesses we build. Each one is frighteningly risky and likely to falter but when we succeed, our potential for returns is terrific. In the end, we do it, because we love it.
But we need to de-risk what we do. We can’t build a business like this by the seat of our pants. This year we have started to describe what we do as ‘startup science’. This is the science of reducing uncertainty in the craft of startup building. There is still no guarantee of success, but it does make things better. Each time we learn something, we codify it into our practice and make the next business a bit more likely to succeed.
Mick and the crowd at Failcon this year contemplated the need for a new word that Ross Gerring eventually proposed. Flearn. It says that we learn through failure. It is the positive by-product of a fail. We get to success by failing as many times as we can before we run out of resources. So what have we learned this year?
The bar keeps getting higher @seriesacrunch
Starting a tech company is easier than ever before because of maturing ecosystems (people, know-how, funding, markets) and technology stacks, but the bar for success gets higher each year. In the end, high growth startups need an accelerant of some kind and this tends to be capital.
When Bjoern from the Startup Genome Project visited us this year, we discovered data that indicated that there was already a hole in the market for investors backing businesses between Angel/Seed and Series A/Growth stages. We coped with that by building a rich investor network in Australia and through innovative deals such as our relationship with Mi9 that introduces the massive Mi9 audience to our companies when we need to push them to show Series A-ready traction.
But now the bar has been raised again, ironically caused by the startup wave which Pollenizer has helped form. In Australia, we have created 6 new companies ourselves this year, Blue Chilli aims to create 1 new company per month, Startmate invests in about 8 companies per year. And then there is AngelCube, Pushstart, Foundry, York Butter Factory, Fishburners… In Singapore, we created 1 new company this year (but we just got started!), JFDI graduated 11 companies, Neo is ramping up, iJam incubators continue to create new startups, all feeding the frenzy around the NRF TIS incubators. (See Meng Wong’ss Map of the Money for an awesome overview of the Singapore ecosystem)
Together, we are multiplying the number of companies being created and we are getting better and better at it. More + better companies, all looking for capital and yet the sources of capital are not growing at the same rate. Here is some US data that shows a massive increase in seed stage deals but a much smaller increase in Series A.
It is being called the Series A Crunch and we incubators, accelerators and venture builders are going to feel it the most. This same trajectory is clearly happening in Australia and Singapore. It is a “buyer’s market” for Series A investors and a sign to those of us in the business of making new, investable companies, that the bar just got higher.
Because of this, we will make fewer companies and support them for longer while providing more of our own capital to feed them as they grow. We know that we will be measured by our ability to deliver sustainable businesses and this is our absolute focus.
Agencies can’t build startups – the need for a ‘burning platform’
We founded Pollenizer with the goal of creating a real and practical way for new companies to begin in an ecosystem that was starved of expertise and talent required to get something built and in market. Our first model was that we provided the team at cost and the co-founder provided the capital. It is more complex now, but this is still at the core.
We have always been aware that a comfortable 9-5 life is not the place where world-beating disruptive businesses are built. They are built from the fires of fear, passion and obsession. They are built from thin-air, and become material slower than we want them to. In the first few months, they can vanish ‘with a thought’ and yet massive amounts of effort, determination and resources are needed for each drop of traction as the business takes form.
This takes a ‘founder’ and not an employee.
Our team here is amazing. They are trained, entrepreneurial masters who touch a lifetime of startups in their career at Pollenizer. Each year, we innovate around our talent processes and this year we started giving direct equity in the businesses to the pod that builds it as well as working with them as co-founders. The hunger to nail it is impressive as the teams discover what it takes to succeed. The more they feel the pressure and the opportunity of a ‘burning platform’, the closer we get to combining highly experienced practitioners with the voodoo magic of an entrepreneur.
Michael Dijkstra, who leaves us in 2013 to accelerate Storyberg under the Startmate program, reminded us in a team workshop of the immense feeling of pride that a true founder feels when they make that first sale and they can draw down the funds from Paypal to buy dinner that night as a reward. This is a feeling that you do not get if you are an employee who never touches the money, nor feels the pain when there is none, nor feels the joy when it comes in. A true feeling of cause and effect. We learned from that and will bake it into our process.
At the very start of life for a new business, Theil’s Law applies. It says that baking in something broken at the start is difficult if not impossible to fix later on. We have learned this the hard way, and in the past we have stuffed it up. People make startups. We provide the seed that grows into a big company. We need to do this with care.
We’ll be innovating more in this area in 2013, fanning the flames of the platform, introducing a new generation to the wonderful world of entrepreneurship and, hopefully making some money for them along the way.
Premature scaling can happen at the earliest of stages
The Startup Genome Project research has shown that the most common cause of failure for startups is self destruction through ‘premature scaling’. Premature scaling is not just something which happens when a company promotes itself on Techcrunch before it is ready, it is a general principle for missing a stage in the lifecycle of a startup. These stages are:
- Problem <> solution fit: can the business show evidence in the data that a real problem is being solved for a real customer?
- Product <> market fit: can the business show evidence of expressing problem <> solution fit in an actual product that is starting to show evidence of predictable customer acquisition, retention and engagement?
- Efficiency: has the business maximised its ‘levers’? Driven down customer acquisition costs, maximised viral mechanics, healthy engagement and repeat usage?
- Scale: does the business predictably grow when specific levers are pulled?
We have learned, painfully, this year to not allow ourselves to move onto the next stage until we can show evidence of completing the current one. It is a great discipline. While frustrating to have the conversation and admit that you are not there yet, it drives the right engagement with venture building – learning what the sustainable business is.
Product <> market fit needs more people
If you’d asked me a year ago how many users a startup needs to validate product <> market fit, I would have said a low number. Something like 1,000. But I now think it is higher.
When I think of our experience with Spreets, we were able to go from 100 to 10,000 to 100,000 customers very quickly. The 100 was easy, the 10,000 came from an existing mailing list we owned and the next 100,000 came from a referral deal with Brands Exclusive. As we scaled the business model, there were enough users coming through for the internal momentum of the business to kick.
I think of product <> market fit in terms of flow. Do a predictable percentage of people respond to a message in an email, ad, news feed, tweet to come to the product? Do a predictable percentage of those convert to a customer? Do they invite their friends? Do they stay in the product and show in their usage that they find it useful? Do they come back?
Businesses with a social dimension need the next waves of users coming through to build on the value being created by the early adopters. Friendorse failed because we could not bring on the next waves fast enough.
Our friends at large online retail businesses tell us that messages like “70% off [brand name]” work really well. That is not our experience in startups and I think that is because there needs to be enough people seeing the message that want [brand name] who can be swayed by the great value deal. So, with Travel Candy which we built a couple of years ago, offering 70% off a great hotel deal in the Blue Mountains required that someone out there was already thinking of a trip to the Blue Mountains and might be swayed to our offer. The chances of getting a hit with a base of 1,000 customers is unlikely. In a ‘lean startup’ we would tend to look at the data here and conclude that the business model was not validated.
In 2013, we are going to focus on opportunities that require less scale to validate and these will tend to be non-consumer products.
We will also be focusing on customer acquisition, or ‘growth science’ so that we can validate our businesses in larger pools of customers. We need to be systematically better at this.
It’s a business not product
As startup founders, our natural tendency is to build great products but the web world is littered with dead companies with great products which failed to monetise. We have learned that the entire team needs to be focussed on discovering working business model as a primary focus. It sounds obvious doesn’t it? But, almost 5 years into Pollenizer, we still struggle to make this our habit.
Niki Scevak taught us an important lesson by asking this defining question: How much does it cost you to acquire a customer and how long does it take you to recoup that through sales? We try to understand and validate this as soon as we can now. Teams model the commercial levers of the business and test it side-by-side with the product development process.
We have learned to always be selling. The act of selling value defines what should manifest in the product. I learned a lot from watching Dan Noble join us as the CEO of Wooboard this year. The first thing he did was to start selling. As he talked with customers he changed his pitch and the value proposition mutated into the one today that sells “cultural analytics” to measure and grow proud, aligned teams. This, in turn, fed back into the product. The sales pitch is the lightest MVP and we all need to be selling, every day.
We have also learned that there needs to be clarity on who is accountable for the business development work from Day 0. It is usually, but not always, the question about who is is the CEO.
Startup Science Together
Pollenizer could be the best in the world (we are not) at product development, sales, customer acquisition and disruptive innovation but every single business we create will fail if we release them into a weak ecosystem. It is no surprise that Silicon Valley has double the success rate to Australian startups. The community there speaks the same language, buys and sells from each other, hires each other, invests in each other. The stronger our ecosystem in Asia Pacific, the better we will all do. It’s fun to help each other, but we are also more likely to win. We will continue to participate heavily in the ecosystem and I hope that we can all work together in a bigger way in 2013 to make this thing amazing.
Things to do: