

Dave McClure: Invest Before Product/Market Fit, Double-Down After. - malbiniak
http://500hats.typepad.com/500blogs/2010/07/moneyball-for-startups.html

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mitchkapor
Far and away this is the best, most comprehensive synthesis of how to approach
tech startup investing for consumer Internet in the new era

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aristus
McClure is smart and all, but the tone and formatting remind me of the
timecube guy.

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dirtyaura
McClure's Tone and formatting make his writing so delightful to read. Internet
writing needs more of that.

Unfortunately for us non-native English speakers, adopting an original writing
style in English is not that easy.

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joshfraser
having taken money from dave, i can say this guy knows his stuff. i like his
way of thinking about things.

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ehsanul
So I was under the impression that "product/market fit" meant adapting your
product to an existing market as early as possible, so you don't get stuck
building the wrong thing.

For example, IMVU started out with the founders writing 40k lines of code or
so to make plugins for AIM/MSN/etc chat clients. They then found out nobody
wanted it, and did the market research and saw that people did want something
else that was related. Then they built that and made lots of money. They
hadn't worked on the product/market fit early enough. Perhaps I've got the
wrong definition in my head about this "product/market fit".

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kylemathews
Sort of right. The problem is most startups don't go after existing markets,
as there's already existing companies there. So startups try to hit an
emerging niche in an existing market or even a brand new market. And it's much
harder to discover a market do that then copy an existing product and market
meaning during the initial life span of a company, much of it they spend
floundering about trying to find "product/market" fit. So what IMVU did is
very typical, they thought they understood their market, built a product to
meet that market, and only then realized that their product didn't fit their
market. When a company reaches this realization they can then "pivot" meaning
they can either take their existing product and try to find a new market or
take what they've learned about their market and build a new product.

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ehsanul
Isn't "pivoting" a huge drain on a startup though? You throw away a few months
of code and have to create another product. It just cuts into your runway, so
much better to get the right product as early as possible, through early
customer development.

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lsc
Yeah, this is what I don't understand. so when do you cut your losses, close
down the company, and move on to your next venture?

I mean, I understand about pivoting. when I first started I blew a bunch of
money building a setup to sell storage, then amazon s3 turned that market
upside down. (as an aside, I'm considering that market again. S3 is still
here, and it's still pretty good, but it's prices are way higher now, relative
to hardware and bandwidth costs, than they were then.) I pivoted fairly
quickly to FreeBSD chroot jails, which also didn't do so well, and then to Xen
VPSs, which worked okay, though it took me another few years before I got the
formula completely right.

The thing was, I blew through a significant amount of money (well, significant
to me; we're probably not talking about more than two porsches of consulting
income) but if I had used other people's money, they would have owned quite a
lot of the company. and other than my own experience and knowledge, the money
spent before a pivot doesn't really help after a pivot. (I mean, the
experience and knowledge matter a lot, but bankruptcy court can't take that
away)

Now, from my perspective (I own my company wholly; no investors, any company
commitments and/or debit are co-signed by me personally) unless I'm willing to
declare personal bankruptcy, there isn't much difference between shutting down
the company and starting a new every pivot, vs. keeping the company the same
every pivot. However, I did spend some significant money. If I was using
investor money, wouldn't it make sense for me the founder to close the
business and start a new one, thus either retaining more equity or gaining
more capital (if I got new investors)

I mean, obviously, if you do that from one very similar business to another,
you are going to probably have legal problems, and at the very least damage
your reputation amongst potential investors.

But, take for example, my first pivot. Going from selling raw storage to
selling shell accounts could reasonably be said to be a completely different
business. I don't think investors would blame me for failing to anticipate
amazon would swoop in with a price point I couldn't beat, and I don't think
they'd hold it against me if I decided to start another company later, selling
chroot shell accounts.

How does that usually work? what motivates the founder to stick with the
existing investors when the business must 'pivot' to something unrelated to
it's original intent?

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sblom
"cut your losses, close down the company, and move on" only works if you have
no investors, or if you end up on the verge of bankruptcy.

While there are investors around, they'll be looking for pieces of the IP
portfolio that they can carve off and auction away or for teams of developers
that can be sold as a capability to a company that needs help doing what your
startup did.

As for "what motivates the founder to stick around", the only things I can
think of are continuing opportunity to take what you have an make it
successful, mercenary compensation, or protecting your ownership through
continuing vesting. If none of those apply, and you don't like the direction
the investors want to go, you might be parting company with them.

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dmor
Anyone have thoughts on what this means for how startups might structure
founder and early employee equity differently, given that they are going to
take on a lot less capital and give up less of the company?

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mahmud
WOW! What a great read. He comes out in prose. Personality galore!

Do yourself a favor and _read_ it.

