{"id":255312,"date":"2010-01-31T12:00:31","date_gmt":"2010-01-31T17:00:31","guid":{"rendered":"http:\/\/gigaom.com\/?p=92374"},"modified":"2010-01-31T12:00:31","modified_gmt":"2010-01-31T17:00:31","slug":"why-startups-need-capital-discipline","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/255312","title":{"rendered":"Why Startups Need Capital Discipline"},"content":{"rendered":"
<\/p>\n

\"\"<\/a>While reading through Seth Godin\u2019s free e-book<\/a> recently, I noticed that Fred Wilson<\/a> had dedicated an entire page of his blog to the concept of “slow capital<\/a>.”\u00a0I like the notion of slow capital; it strikes me as the other side of the coin of agile, capitally disciplined startups.<\/p>\n

Since more often than not, a startup\u2019s model and\/or product will change from the point of founding and funding, early-stage startups need to have the ability to make informed progress in the face of all challenges.\u00a0How capital flows into and out of a startup in order to enable such progress is absolutely critical and yet very difficult to manage.<\/p>\n

And execution in the presence of too much capital, too little capital, or poorly applied capital defines both the health of the business and the relationship between a startup and its investors. Together, the concepts of slow capital and capital discipline provide a framework for managing this relationship.<\/p>\n

A startup has capital discipline when it:<\/p>\n

1. Raises just enough to execute to the next business\/financeable milestone. <\/strong> The term \u201cjust enough\u201d does not mean the absolute minimum.\u00a0 A startup could raise no capital, $20,000 or $20 million, depending on stage and state.\u00a0 Different stages and situations present different capital requirements; of course, different stages require different business proof points and validation as well.<\/p>\n

The term \u201cjust enough\u201d is helpful because it minimizes the amount of equity sold, demands better clarity in decision-making and sharpens a startup’s focus.<\/p>\n

The term also minimizes the investors’ capital risk, which is good for two reasons: One, it allows them to fund a startup when there is more risk than they would otherwise take at bigger valuations and round sizes; and two, their definition of an acceptable outcome is advanced in a healthy, stepwise manner.\u00a0In other words, the more one raises, the larger the outcome must be in order to make a venture firm\u2019s economics work.<\/p>\n

Finally, this characteristic is aligned with early-stage programs such as Y Combinator<\/a>, Tech Stars<\/a> and Capital Factory<\/a>. \u00a0In these cases, \u201cjust enough\u201d capital is augmented by mentorship and business guidance that further accelerates the push toward that next financeable milestone.<\/p>\n

2. Practices a lean-oriented<\/a>,\u00a0customer development-focused, <\/a>minimum-viable-product strategy<\/a> in order to make informed, measured progress.<\/strong> Informed progress is the result of having requisite knowledge . Customer development and MVP strategies are, fundamentally, strategies for accelerating learning. Startups with capital discipline use the best data currently available to direct both capital and focus.<\/p>\n

At a high level, the idea is that such accelerated learning minimizes or eliminates waste.\u00a0Wasted time, wasted focus, wasted features, wasted money — all such waste increases a startup\u2019s operational risk and its investors’ capital risk.<\/p>\n

3. Is focused on investing to maximize the business opportunity independent of time frame.<\/strong> Since a typical startup\u2019s model and\/or product will change, it\u2019s logical that some opportunities and strategies will only become apparent as a consequence of execution. Indeed, iteration, learning and improvement all aimed at maximizing the business opportunity is a process that takes time\u2026years, in many cases.<\/p>\n

The notion of a startup having capital discipline goes hand in hand with the notion of slow capital, which Wilson defined as having the following six characteristics:<\/p>\n

1. Doesn\u2019t rush to conclusions and doesn\u2019t expect entrepreneurs to do so, either.<\/strong> This characteristic benefits the investor more than the startup. In general, \u201cdelay\u201d is the friend of the investor and the enemy of the startup.<\/p>\n

Why? Because \u201cnot rushing\u201d allows more time to gather data and better inform the assessment of risk. Is the startup executing well?\u00a0 How is the competition doing?\u00a0 Are other investors interested?\u00a0 Can the startup stretch its existing capital if necessary?<\/p>\n

All things being equal, entrepreneurs would prefer not to rush; however, not rushing is usually not an option: gotta beat that competition, gotta talk to those customers, gotta finish that feature and get it tested and deployed.\u00a0 I\u2019ve never known a successful entrepreneur that doesn\u2019t feel like their hair is on fire and, personally, I want entrepreneurs that I work with to feel a keen sense of urgency.<\/p>\n

2. Flows into a company based on the company\u2019s needs, not the investor\u2019s needs.<\/strong> A company\u2019s capital requirements change over time as the model and product are proven out and the go-to-market strategy is fully understood; getting to that point should take much less capital than scaling for growth going forward.<\/p>\n

It\u2019s generally understood that a company that’s funded beyond its stage-wise needs is more likely to execute poorly because it can afford to not choose a single path of focus and execution. Slow capital wants to find that \u201cjust right\u201d level of funding, the one that reinforces good execution but doesn\u2019t starve the company along the way.<\/p>\n

This second characteristic suggests that investors \u201cneed\u201d to put money into a startup. VC firms need to return to their investors all the money they raised in the fund plus a significant margin above that. So if a VC is investing out of a large fund, putting, say, $3 million into a company and getting $30 million out (a truly great 10x return), that probably doesn\u2019t constitute a drop in the bucket relative to what they need to return to their limited partners. Such a VC might therefore \u201cneed\u201d to put much more money to work in each startup they’re investing in, hoping for a much larger exit.<\/p>\n

3. Starts small and grows with the company as it grows.<\/strong> Capital requirements should scale over time as good execution illuminates \u201cwhere\u201d and \u201cwhen\u201d investments will positively impact the business.<\/p>\n

From an investor\u2019s perspective, slow capital should be \u201crisk-adjusted capital\u201d because it allows investors to fund a startup early on, when there’s more risk than they would typically take at bigger round sizes and valuations.<\/p>\n

4. Has no set timetable for getting liquid, for slow capital is patient capital.<\/strong> This is an especially entrepreneur-friendly characteristic of slow capital; it’s also well-matched to the current exit environment.<\/p>\n

That said, there is an implied qualifier of making \u201cinformed progress\u201d along the way. \u00a0I have yet to see (or be) a patient investor when faced with poor execution within a portfolio company.<\/p>\n

5. Takes the time to understand the company and the people who make it up.<\/strong> I believe the intent of this characteristic is to understand the more qualitative elements of what makes a company successful. Revenue, expenses and conversation rates are substantially quantitative. The culture, people, and interpersonal dynamics of a startup are far more qualitative but perhaps the most vital accelerators or inhibitors of good execution.<\/p>\n

I would add that slow capital also:<\/p>\n

6. Comes with stage-appropriate strategic and operational assistance.<\/strong> It\u2019s hard to do this well if you\u2019ve never been an operator. The perspective and best practices from investors who routinely look across industries, companies and strategies coupled with a startup\u2019s \u201cin the trenches\u201d view helps yield lockstep agreement as to the company\u2019s execution and capital needs.<\/p>\n

Stage-appropriate means more assistance for early-stage companies and less as the company grows.<\/p>\n

7. Is consistent, transparent and disciplined capital.<\/strong> Slow capital doesn\u2019t apply these principles only when it\u2019s convenient to do so, rather they are built into the operating philosophy of the firm that puts such capital to work. This must remain true even in the presence of investor-side competition for particularly \u201chot\u201d deals…no matter how hard it is to do so.<\/p>\n

Meanwhile, transparency suggests that the data and philosophy driving investment decisions is not a black-box process that precludes the startup from understanding such decisions.<\/p>\n

Overall, I believe we\u2019re entering a new phase for investment in technology — call it Venture Capital For the New Decade. The venture capital supply chain is transitioning and startup execution velocity (rapid iteration, learning and adjusting in order to maximize the business opportunity) is more attainable than ever before, but it requires the right amount of capital at the right time.<\/p>\n

And that requires a new sort of relationship between startup and investor, one in which the historic friction associated with bringing capital into a startup over time is reduced or eliminated. Together, slow capital and capital discipline provide a framework for just that sort of transparent, trust-based relationship.<\/p>\n

Kip McClanahan <\/a>is currently an investor in startups including SocialWare<\/a>, SpareFoot<\/a> and uControl<\/a><\/em>.<\/p>\n

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While reading through Seth Godin\u2019s free e-book recently, I noticed that Fred Wilson had dedicated an entire page of his blog to the concept of “slow capital.”\u00a0I like the notion of slow capital; it strikes me as the other side of the coin of agile, capitally disciplined startups. Since more often than not, a startup\u2019s […]<\/p>\n","protected":false},"author":4982,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-255312","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/255312","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/4982"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=255312"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/255312\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=255312"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=255312"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=255312"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}