2011-09-13

Co.Exist

Build Something People Need: On Raising Venture Capital And Creating Startups That Matter

Instead of focusing on how much investment they get, startups should make something that solves problems. If they do, they’ll get loyal customers, and that’s more important than investors.

While sitting in a group of young entrepreneurs at a panel discussion in Mountain View last month, I was struck by how many of them felt like they needed investor money simply to validate the existence of their companies. Having recently closed a $4.4 million venture round, I was there to speak about my fundraising experience as an entrepreneur, founding ReadyForZero, an online software program that helps people manage their challenging financial situations. The panel discussion--an exclusive event hosted by Y Combinator--was meant to introduce newly accepted YC companies to alumni who have successfully raised outside investment dollars for their companies and candidly discuss and demystify the process. Just one year prior, my cofounder and I had attended this very same panel discussion as a new YC team and listened to war stories from alumni and other inspiring entrepreneurs. I had come back to return the favor, admittedly, feeling only slightly more prepared than I was the first time.

As I listened to their questions, though, I noticed a lot of them started with something like: “This other company, that is doing something completely different than us, raised $X million last week…so we need to raise at least that much to succeed.” As a startup, it’s common to compare yourself to other startups; in this case it was the only way they were measuring their company’s success.

In reality, the only validation a young company needs are people (ideally paying customers) who are using what the company creates and, even more importantly, people who believe they can’t live without what the company creates. Along the way there will be technical challenges, but none will be as important as continuous validation from real people.

Unfortunately, what I noticed at the panel discussion is a symptom of a bigger problem here in Silicon Valley: there aren’t enough technology startups focused on solving real problems. What Silicon Valley should be creating is companies focused exclusively on addressing major personal and professional annoyances--products your mom or neighbor would find invaluable; not neat technology stuff and nice-to-haves that investors occasionally get excited about because, unlike entrepreneurs, they have the time and resources to spare.

If you work in Silicon Valley long enough you see how quickly fads come and go. Too often entrepreneurs feel compelled to engineer a complex answer to a complex problem as opposed to creating an elegant answer to a simple problem. As YC cofounder Paul Graham likes to say, "make something people want." In fact, this has become such a mantra YC turned it into a T-shirt and gives it out to newly accepted teams.

And yet, I fear that the culture of Silicon Valley is drifting away from that simple message. There has always been an unavoidable tension between investors and entrepreneurs here. As an entrepreneur, your vision and livelihood often depend on whether you have the support of investors early on. As an investor, your responsibility is to get big returns for your limited partners and yourself.

Unfortunately, sometimes this tension has the effect of hyping up companies that are based on exciting ideas that don’t solve real problems. The result is usually a massive deflation of expectations (and investors’ money) once it becomes clear that the “exciting idea” wasn’t addressing a real need for people. And too often entrepreneurs get distracted chasing these ideas and end up measuring their progress--or worse, their company’s value--on what investors say or do early on.

We saw this recently with Color. Their talented and experienced team raised over $40 million from top investors, including Sequoia Capital, only to fall short of expectations. The company continues to struggle. It obviously isn’t because of the caliber of its investors or any lack of talent and resources (by Silicon Valley standards, they have it all).

The reality is that investment dollars matter, but only when they can serve your company as a means to an end. When my co-founder and I set about raising capital, we vowed to use investor money in order to reach specific company and product milestones that aligned with what our customers were asking us for. We got exceptionally good at using our product at various stages of completion to explain what problem we were solving (and how) while at the same time alluding to our vision for the future. The funding ought to be a tool and a means to an end, not an end in itself. The best investors appreciate and encourage this type of thinking.

If you think about your company’s success only in terms of investment or venture capital dollars, you are fundamentally in the wrong business, and entrepreneurship will prove to be a long, painful (or at least, more painful than normal) journey. The daily reality of starting a company from scratch is not as sexy as it’s portrayed--it’s a grind all the way, day in and day out. You won’t validate your existence until you actually do something worth validating. Read: Solve a real problem people have, rinse and repeat. No amount of money can make this happen magically.

Don’t forget: Taking on investor’s money and building companies that solve real social problems are not mutually exclusive. Unfortunately, it’s too easy to get caught up in the next “big thing” syndrome and lose sight of the basics. The Internet was the next “big thing.” Now it needs a whole lot of little things to make it work for us, and that’s where the real opportunities exist to build lasting businesses. My team and I are trying to do that by building ReadyForZero, and I hope we’ll be one of those lasting businesses.

There are still a whole lot of offline inefficiencies and social problems that need talented entrepreneurs’ attention. Stay focused, stop reading TechCrunch, and "make something people want (and need).” Nothing else really matters.

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4 Comments

  • Louise Montgrain

    "Solve a real problem people have, rinse and repeat. No amount of money can make this happen magically."
    Hi Rod, 

    Congratulations for a wonderful mission that is actually solving problems for the majorities...

    I am a realtor with REMAX since 2003 in the residential market. Our business model (real estate) is changing by the hour. Realtors, buyers and sellers are getting confused about it. I am actually at the early phase of an innovative project (idea/concept) startup that is motivated by a passionate sense/urge of making a difference at this stage of my life and carrer. It is about services to people, sellers, buyers and professionals inside/outside my industry. "I strongly believe it would be helping solving problems". ReadyForZero has attracted my attention for it's complementary service to offer to our future clients.I am "saying" that at this point and time I am looking for strong directions to bring my project to a next level.Would you have some other hints to share?Thank you!Louise Montgrainlmontgrain@mac.com

  • Spiegro

    Wonderful article. It describes a lesson not solely applicable to start-ups, but one everyone should use towards searching for their life's purpose...