Should Only Startups with Products Get Funded?

The “trend” of startups without a well-defined product idea getting funding was discussed in a recent Forbes blog post. Here’s an excerpt:

Having some kind of notion what line of business your fledgling company might want to pursue used to be a prerequisite to raising capital. Now, it’s a mark of hubris. You don’t tell the market what it needs; you gently offer it a series of options, which are less viable concepts than ritual sacrifices aimed at cultivating the favor of the start-up gods. It’s called “iterating.”

The gist of the post is essentially this: if there’s no product, there’s nothing to invest in, yet people seem to be investing anyway and OMGITSABUBBLEWE’REALLGONNADIE!! (ok, I’ll admit my version has extra drama).

The post doesn’t offer up much to back up the thesis that startups with no specific product idea are getting funded left and right (positioning Instagram as a typical startup is, in my opinion, bonkers) but it raises an interesting question – is there really value in a company that doesn’t have an offering? Suppose you invested in a company with a product, that later changes the offering significantly – does that mean you screwed up?

Pivots aren’t new. Admitting we do them is.

I’ve been involved in loads of version 1 product concept/development/launch exercises I’ve yet to see one where the offering didn’t significantly change after initial customer feedback. At what point in the product life-cycle these “pivots” occur however is shifting earlier and earlier as most self-respecting entrepreneurs have read Steve Blank and are now embracing the concept of early customer feedback and “customer development”. If anything, I think we are seeing less iteration post-investment than we ever have before because many startups are getting it done earlier.

I’d make the argument that previously startups were embarrassed to talk openly about pivoting precisely because we did it after investments (and investment cases based on selling a set product in a well-defined market) were made. We often pivoted, but we were sneaky about it. A shift in target market for a later-stage startup was an “expansion to serve a new customer set” or a “refined market focus” and a major product shift was a “next-generation solution”. Unlike their later-stage peers, early stage startups can more freely come out of the pivot closet because their shifts put less money (if any) at risk and often serve to demonstrate a growing understanding of the market, making them more attractive to future investment, not less.

Just because you have a product, doesn’t mean anyone wants it.

But hey, just because folks have been investing in pre-pivot companies all along doesn’t make it smart (VC returns on average DO kinda stink). Coming back to the question – Is your startup really worth anything before you’ve settled on your exact offering?

Leaving aside the issue of the skill of the team (which is difficult to assess and there’s an argument to be made that previous success doesn’t necessarily predict future success), it still takes two to tango. There are markets/desires on one side and there are offerings on the other. The money only comes when both are viable and a match for each other.

I know there are cases of companies that have developed/launched solutions without knowing what problem they would solve or what market they would eventually serve that were later successful but I think doing it that way requires a lot more luck and effort than doing it the other way around. If you get what customers are trying to get done, why they want to do it, who they are, how they make decisions, how they want to buy and how much they are willing to pay, then you essentially have the basis for a solution because you understand the requirements and the constraints.

On the other hand, simply building and releasing an offering doesn’t prove that your company knows anything about the market or that anyone wants it. You might have that knowledge but you can certainly build stuff without it. And by “stuff” I mean crap nobody wants or will pay for.

So if both have no customers, why on earth would a company with an offering necessarily be more valuable than one without? There is absolutely no inherent value in effort put toward something nobody will buy. The value comes with market knowledge that informs the development of the offering, which in turn, increases the chances of market success.

Is a startup with deep market knowledge but without a well-defined solution yet worth investing in? I don’t think anyone can know for sure but if I were a gambler I would bet my money on the folks that were certain about demand but uncertain about the way to meet it over the folks that had a solution they weren’t sure anyone wanted.

(thanks to Mike McCarrell @mmccarrell for pointing me the Forbes post 🙂