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Overfunding is an existential risk for startups. Scaling a team before finding PMF seems like a blunder in most circumstances. Instead of setting your best eng

Overfunding is an existential risk for startups. Scaling a team before finding PMF seems like a blunder in most circumstances. Instead of setting your best engineers to work creating the best product, they're busy recruiting and dealing with company growing pains from the get-go. The mythical man-month and scarcity of great people combine to diminish your returns on this hiring. Furthermore, battleships don't turn on a dime, and you may be hiring a lot of irrelevant expertise if you have to pivot later. This is why Stripe took 6 months to hire its first 2 people. Furthermore, huge funding means investors are looking for a huge returns. A $1b sale is now failure?? My gut says this "go big or go bankrupt" pressure encourages tunnel vision among leadership rather than innovation. Essential Products was overfunded in late 2015 and is already up for sale. I think Magic Leap and Desktop Metal will end up as similar cautionary tales. I see good arguments for overfunding if (1) there's huge capital costs for development and high probability of large exit regardless of technology success (e.g. biotech) or (2) you're trying to capture a market with a strong network effect. The second case seems dangerous though, e.g. is Uber's popularity really a moat? What if they had spent their billions on developing a product with a real technological advantage instead of scaling to the world first? As a huge fan of his book, I'm sad to see Steve Blank largely ignore these ideas in his article.

vkou 8y ago
> Furthermore, huge funding means investors are looking for a huge returns. A $1b sale is now failure?? My gut says this "go big or go bankrupt" pressure encourages tunnel vision among leadership rather than innovation. If you don't take the money, they will go to your competitor, and give it to them instead. If you're in a space where you can be killed by your competitor selling $1 for 90 cents, that will kill you just as dead. It doesn't matter if Uber's popularity is a 'real' moat or not, as long as its a moat big enough to drown you. Sure, a few years later, said competitor will make an announcement on their website about the conclusion of their 'magical journey', but that's not going to matter to you, is it?
- salt-licker 8y ago
  Good point, I forgot to mention that "race to IPO and cash out" is a viable business strategy, though a sad product strategy. See A123 Systems, Desktop Metal's founder's previous company that went bankrupt. Also the Energous story: https://liesandstartuppr.blogspot.com/2016/04/those-other-guys-pt-ii.html https://liesandstartuppr.blogspot.com/2016/04/those-other-gu...
- WalterSear 8y ago
  >If you don't take the money, they will go to your competitor, and give it to them instead. Your competitor is getting funded whether you take the money or not. A failure to have planned for this is a de facto plan to drink the cool-aid.
mjfern 8y ago
Did you read the article? Blank is saying that the lean approach is still highly relevant unless you have a huge amount of risk capital available to essentially throw away on mistakes.
- salt-licker 8y ago
  I don’t disagree with the article, I believe Blank accurately describes the current vc mindset. I just think he missed an opportunity to point out its pitfalls and in doing so implicitly endorsed overfunding. My argument is that even as a vc with unlimited funds, overfunding a startup may be suboptimal. You paradoxically decrease its probability of success by misaligning the startup leadership’s incentives at a crucial pre product-market fit development stage.
- Bob95120 8y ago
  Steve Blank basically spent the whole article destroying Lean startup and dropped in the conclusion that it's still relevant to avoid rubbing Eric Ries the wrong way.
trhway 8y ago
current business model - $50M (pretty lean by today standards) VC investment with ratchet (it is the key element here) to $150M, do something SaaS-y and hire 50-100 people, in a 1-2 years if it isn't becoming a unicorn then sell it at least for $150M+ (a crowd of 50-100 engineers plus whatever they spent these 1-2 years on) to one of a BigCo with FOMO syndrome wrt. latest tech trend. Tripling money in 1-2 years is not a failure, it is more like SV equivalent of break-even, and it keeps you in the game of unicorn hunting.
- cloverich 8y ago
  Relatedly, and I don't know if this is actually valuable, but if you build a strong engineering or product team, I could see that itself being a valuable asset (not unicorn valuable, but perhaps recoup some or all investments valuable). Esp. selling to a company that does have products but not enough talent. Not the hand I'd want to play, but maybe its a thing people do?
- InclinedPlane 8y ago
  Don't forget the acquihire aspect as well as BigCo FOMO.
jasonm23 8y ago
Could you define PMF for me please?
- keerthiko 8y ago
  I'm assuming we're referring to product-market-fit in this context (not some stats jargon)
  - deleted 8y ago
    [deleted]
  - jasonm23 8y ago
    Thank you, appreciated.
- anujabro 8y ago
  PMF is when the startup has i) identified which users are desperate for the product, ii) made a product that customers can’t get enough of (demand feels exponential), and iii) found a business model that works https://a16z.com/2017/02/18/12-things-about-product-market-fit/ https://a16z.com/2017/02/18/12-things-about-product-market-f...
  - jasonm23 8y ago
    Thank you.
vivekd 8y ago
Combating overfunding seems difficult to do. I imagine VC type companies are ones that experience rapid uncontrolled growth. So how do you limit investors in that situation without running the risk of a future scenario where you run out of capital? Do you set up a waiting list of funders that you can take money from as you need it? Limiting and controlling growth seems like a difficult and dangerous proposition, particularly in an environment where there are competitors just waiting to perfect the idea and take it to market before you.
Bob95120 8y ago
Good point. I actually wrote a reply to his Medium article here: https://bit.ly/2CxeT9z https://bit.ly/2CxeT9z His article is for 1% of entrepreneurs. For 99%, lean startups still works. And let's not act like investors spray and pray that they hit a unicorn. Of course it's good for their track record, but it's not like they don't ask questions before investing when you have the track record of Jeff Katzenberg. There are a lot of MVPs out there to know the Netflix for mobile will work. Lean startup never said that the MVP had to be your own. Read my Medium article, I develop on the subject : https://bit.ly/2CxeT9z https://bit.ly/2CxeT9z

vkou 8y ago

> Furthermore, huge funding means investors are looking for a huge returns. A $1b sale is now failure?? My gut says this "go big or go bankrupt" pressure encourages tunnel vision among leadership rather than innovation. If you don't take the money, they will go to your competitor, and give it to them instead. If you're in a space where you can be killed by your competitor selling $1 for 90 cents, that will kill you just as dead. It doesn't matter if Uber's popularity is a 'real' moat or not, as long as its a moat big enough to drown you. Sure, a few years later, said competitor will make an announcement on their website about the conclusion of their 'magical journey', but that's not going to matter to you, is it?

salt-licker 8y ago
Good point, I forgot to mention that "race to IPO and cash out" is a viable business strategy, though a sad product strategy. See A123 Systems, Desktop Metal's founder's previous company that went bankrupt. Also the Energous story: https://liesandstartuppr.blogspot.com/2016/04/those-other-guys-pt-ii.html https://liesandstartuppr.blogspot.com/2016/04/those-other-gu...
WalterSear 8y ago
>If you don't take the money, they will go to your competitor, and give it to them instead. Your competitor is getting funded whether you take the money or not. A failure to have planned for this is a de facto plan to drink the cool-aid.

mjfern 8y ago

Did you read the article? Blank is saying that the lean approach is still highly relevant unless you have a huge amount of risk capital available to essentially throw away on mistakes.

salt-licker 8y ago
I don’t disagree with the article, I believe Blank accurately describes the current vc mindset. I just think he missed an opportunity to point out its pitfalls and in doing so implicitly endorsed overfunding. My argument is that even as a vc with unlimited funds, overfunding a startup may be suboptimal. You paradoxically decrease its probability of success by misaligning the startup leadership’s incentives at a crucial pre product-market fit development stage.
Bob95120 8y ago
Steve Blank basically spent the whole article destroying Lean startup and dropped in the conclusion that it's still relevant to avoid rubbing Eric Ries the wrong way.

trhway 8y ago

current business model - $50M (pretty lean by today standards) VC investment with ratchet (it is the key element here) to $150M, do something SaaS-y and hire 50-100 people, in a 1-2 years if it isn't becoming a unicorn then sell it at least for $150M+ (a crowd of 50-100 engineers plus whatever they spent these 1-2 years on) to one of a BigCo with FOMO syndrome wrt. latest tech trend. Tripling money in 1-2 years is not a failure, it is more like SV equivalent of break-even, and it keeps you in the game of unicorn hunting.

cloverich 8y ago
Relatedly, and I don't know if this is actually valuable, but if you build a strong engineering or product team, I could see that itself being a valuable asset (not unicorn valuable, but perhaps recoup some or all investments valuable). Esp. selling to a company that does have products but not enough talent. Not the hand I'd want to play, but maybe its a thing people do?
InclinedPlane 8y ago
Don't forget the acquihire aspect as well as BigCo FOMO.

jasonm23 8y ago

Could you define PMF for me please?

keerthiko 8y ago
I'm assuming we're referring to product-market-fit in this context (not some stats jargon)
- deleted 8y ago
  [deleted]
- jasonm23 8y ago
  Thank you, appreciated.
anujabro 8y ago
PMF is when the startup has i) identified which users are desperate for the product, ii) made a product that customers can’t get enough of (demand feels exponential), and iii) found a business model that works https://a16z.com/2017/02/18/12-things-about-product-market-fit/ https://a16z.com/2017/02/18/12-things-about-product-market-f...
- jasonm23 8y ago
  Thank you.

vivekd 8y ago

Combating overfunding seems difficult to do. I imagine VC type companies are ones that experience rapid uncontrolled growth. So how do you limit investors in that situation without running the risk of a future scenario where you run out of capital? Do you set up a waiting list of funders that you can take money from as you need it? Limiting and controlling growth seems like a difficult and dangerous proposition, particularly in an environment where there are competitors just waiting to perfect the idea and take it to market before you.

Bob95120 8y ago

Good point. I actually wrote a reply to his Medium article here: https://bit.ly/2CxeT9z https://bit.ly/2CxeT9z His article is for 1% of entrepreneurs. For 99%, lean startups still works. And let's not act like investors spray and pray that they hit a unicorn. Of course it's good for their track record, but it's not like they don't ask questions before investing when you have the track record of Jeff Katzenberg. There are a lot of MVPs out there to know the Netflix for mobile will work. Lean startup never said that the MVP had to be your own. Read my Medium article, I develop on the subject : https://bit.ly/2CxeT9z https://bit.ly/2CxeT9z