Raising money is only a means to an end, says 500 Startups’ Dave McClure. The key to success is a scalable path to customer acquisition and activation.
You are not Tony Stark
You are not Tony Stark*, 500 Startups founder Dave McClure said during his keynote at Echelon 2013. Even if Tony Stark is cool and you are not, you can build great stuff on the platforms that the cool guys have been making so far. Of course, by Tony Stark, Dave refers to the big guys with names like Larry, Sergey, Steve, Zuck and the like**. They have built great platforms with billions of users, and the question now is how can an entrepreneur take advantage of the likes of Facebook, iOS, Android and Google.
This is said in the context of having what is supposedly a series A crunch, especially in Silicon Valley. We are at an era when there are a lot of new startups, and a handful of seed investments, but there is the supposed cliff: what happens when you need more money, but there is just too much competition?
The little cockroach startup stage
Dave offers a solution. He offers an important advice for startups: raising money from investors is a means to an end, and should not be the goal for your startup. Even with a supposed lack in the availability of series A financing, Dave says that not all startups need to raise a series A. Some will get to an exit early on. Some will earn enough money from customers and will not need to raise funding to support development. In the process of raising funding, a lot of founders lose focus in building their product, Dave says.
If anything, the startup community today is better off than it was 13 years ago, when the first dot-com bubble burst. Dave compared platforms and companies back then to how they are today. He described platforms pre-2000 as big, fat dinosaurs.
Meanwhile, today, we have cloud computing platforms, mobile app development, a bigger open source community and social everything. Dave calls this the little cockroach startup stage. Everything is cheaper to build, capital is easier to find or raise, and development cycles are shorter than ever (three days to three months).
In short, it’s easier, cheaper and more flexible to start up today than before. Dave advises to build on already-established platforms, so you don’t have to expend too much of your resources building things from scratch (and spending the money for it).
Fail at your own thing
If there’s another thing that Dave is worried about, it’s worrying too much about failure. We are spending too much money on MBA programs, he says. People spend a lot of money studying success stories from other businesses, but why not pool all that money to fund startups so people can fail by themselves?
But of course, failure is not the end-all, be-all of things. Because startups today are leaner than ever, Dave says we can afford to fail because we are failing on a smaller budget than ever before. In fact, it is expected that only 20 percent of 500 Startups’ portfolio will go on to the next level. About 80 percent of startups are not likely to grow. The key here is finding the 20 percent that will matter.
“It’s cheap to build stuff. But we still fail a lot. We try a lot of little things, and expect that some will fail. But we gradually invest more and more money to see progress.”
A few points of advice on how to get un-crunched that Dave shares:
- Build something people want.
- Make sure the would want to pay for it.
- Get a lot of customers.
- Get on Angel List and get connected with other startups and investors [Editor’s note: e27 runs our own 27x, too].
- Ride on the growth of platforms.
Your path to success
A key piece of advice from the 500 startups founder, and from the perspective of an investor, is for entrepreneurs to focus on customers. “Your primary path to success is not great engineering or design,” Dave says. “It’s a scalable path to customer acquisition and activation.”
Sadly, most founders don’t have an idea how to do that, he stresses. But Dave shares a simple recipe for success.
A simple recipe
Still on the lookout for a great startup idea? Here is a simple recipe: look at an existing brick-and-mortar establishment, and copy their business model. But improve on it by adding another layer, such as technology, social media, and the like. Dave says there are a handful of traditional companies out there that have very large overhead costs but do earn a lot of money with their existing business models. The key for startups is to do things better, cheaper and faster, whether it’s airline reservations, car rentals, restaurant reservations and the like.
Dave says it’s amazing how much many traditional businesses suck, but still make a lot of money. Businesses suck at innovation, Dave says. Here’s where a startup entrepreneur can swoop in and make a killing.
* Tony Stark = Iron Man
** Larry Page, Sergey Brin, Steve Jobs, Mark Zuckerberg
Editor’s note: StartupCentral is a media partner for Echelon 2013, organized by e27, a Singapore-based media company focused on growing Asia’s technology startup ecosystem.