robmay

Just to clarify the "don't read blogs" comment... what I meant was that tech blogs are disproportionately written by engineers. You don't see, for instance, many middle managers at Apple or Amazon blogging about their work. So if that's all you read, you have this skewed view of how a company should work based on what a bunch of young, small startup engineers tell you.

There is a disconnect between how the world works and how you think it works if you spend too much time reading these blogs, and that disconnect hurts you more than it helps you.

I will add that Backupify started in Louisville, KY, and we were funded by First Round while we were still there. We didn't have to move to raise money, but we couldn't find the tech/startup talent we needed. So we looked at NYC, Boston, and the Valley. I talked to lots of people who lived in each place and ultimately, as you would expect, everyone raved about whichever place it was that they lived. Ultimately, I chose Boston because MIT is the most innovative place in the world, and because it is a highly intellectual city and I have a lot of interests outside of just tech startups. I've been very very happy here, and think it's a great place to build a company.

And protecting startups. There are disclosure issues here that are much more risky for startups. For a publicly traded company to disclose a lot about its business is one thing... but such disclosures could kill a startup.

Well, but here's the problem... Backupify was my third attempt at raising VC. Before I did it, I would have jumped at the chance to raise money from anybody, even average Joes. But now that I know the difficulty in managing investors and their expectations, I would never consider it. So this idea will develop a lemons problem (similar to what you see in penny stocks) which is that any entrepreneur who understands the game well won't participate and won't raise this kind of funding, so you end up with the bad ones, and the uneducated/inexperienced ones. Some of the latter will ultimately be successful, but not enough.

That's probably a better overall idea. To let people by a mutual fund, in effect, that invests in a basket of startups.

I have a lot of experience here because a) in 2005 I started something called "The Business Experiment" which was an attempt to have a purely crowd sourced business. (http://www.fastcompany.com/magazine/101/next-essay.html) At the time, I spent a lot of my own money on lawyers trying to figure out how to give equity to people who aren't accredited investors.

b)I have since raised $10.5M in venture capital for Backupify.com, so I have also learned that side of the world.

From my view, allowing anybody to invest a few hundred or a few thousand dollars in a startup is a bad idea for a few reasons. First of all, the startup world is glamorized by the media. Most startups fail. Most capital is erased. No one writes about those companies, unless the failure is spectacular. Studies have shown that on average, entrepreneurs will do better financially in the "real world" of work than in startups. But the media doesn't play this up, and as a result, society has a bias that is a combination of the survivorship bias and recency bias that makes them think startups are a good investment. Many wealthy people that I have dealt with don't really understand the odds and risks of startups, so all the less likely that your average Joe can do it.

Secondly, capital structure matters a lot as your company grows. If you are successful, a bad capital structure can really fuck you over down the road when you need bigger rounds. And some issues require a shareholder vote. Average Joe doesn't know how to deal with these issues, and that scares professional investors. An idea like this will get a lot of companies seed capital, and they won't be able to raise later stage.

Third point - startups are really fucking hard, and will strain all of your relationships in your life, including those with your investors. Hell, Backupify is doing pretty well and it's still hard. Having to manage a bunch of small investors can be a nightmare, and going through difficult times with people you barely know, who don't do this professionally, will just make it worse.

Here is my prediction about how this legislation plays out. 1. It will eventually pass, because it is sexy and cool and part of the American dream.

2. Media will point to examples of companies getting funded that wouldn't normally get VC/Angel funding, to show how great it is. These examples will be thinks like companies outside of major startup hubs, companies that don't put profit/shareholder value / growth first, companies that are highly unusual, weird, or even too risky for VC, and companies that have non-sexy ideas that can't get VC because they aren't mobile/social/sharing/whatever.

3. Many will fail, but there will be at least one massive success, and that success will become the poster child for why this works.

4. But really, it won't work. People will lose money. There will be lawsuits and complaints. There will be a bubble after point #3 happens, and some 60ish dude will invest too much of his retirement in a dozen startups only to see every one of them fail and his whole net worth wiped out.

5. There will be outcry against this, and we will pass laws to regulate it, taking us back to where we began, only in a much worse situation.

Now, all that said, I will say there is probably room for a new investment scenario under two conditions.

1. The amount is so low it doesn't matter. For example, the bar is $100 and you can't invest in more than 5 at any one time. This makes your returns so small, even with homeruns, to be almost irrelevant, but maybe it's fun and cool and people will like it.

2. There is probably room for an "almost accredited investor" clause. I'm a perfect example for this. I'm not quite accredited, but probably will be by this time next year. I understand startups quite well. So maybe a clause saying that if you have worked 2 years in a venture backed startup, you can invest up to $10K, that might be ok.

Anyway, those are my thoughts. It will be interesting to see how this will play out.

I think people should do what they want to do. If you are passionate about your work, and want to spend more time there than everyone else, I'm not sure that sends a bad message to kids. If you want to spend more time home with kids, that's fine too. People are different, and you shouldn't adopt the standards of other people.

I sat through a recent presentation about this at M.I.T. While it's a long way from practical implementation, it does seem like it is at least feasible that we will get there.

According to the lean startup presentation given by Eric Ries at Web2.0 expo, (http://www.web2expo.com/webexsf2009/public/schedule/detail/7...) one key point is to "1. Identify a profitable business model faster and cheaper than your competitors." Google took VC money without having a clear revenue model at the time. So I would argue that they weren't a lean startup.

And anyway, I would say MVP and lean startup are different but related concepts.

Hi Ryan, If we are going to just play the game of pulling random sentences and saying they are all tied together and show some kind of logical connection to what we each are trying to argue, here are my two:

...The broader idea behind customer development is that you should get close to customers early...

...The broader idea behind a lean startup is that you should be capital efficient...

Your turn.

Why is no one addressing the key issue that "customer development puts you in constant short-term thinking mode."?

Hi Patio, As an example problem (I wrote the original post), we strongly suspected users wanted encryption of their backed up data. But when we talked with initial customers, there were certain things they wanted more that, when built, made encryption a slower, more difficult process to implement. We punted on encryption because, for the first 3 months we were in the market, there was a little demand, but not much. Then as we hit more mainstream blogs and publications and got a wider user base, encryption shot to the top of our list. So what we learned is that our first 500 customers weren't very representative of who would ultimately use the product and we shouldn't have catered to them so much. We really should have paid less attention to early customers, and more attention to related markets like PC backup, and assumed they had already figured out what the market wanted.

Excellent point. What we found is that the risk with Backupify is technology risk.

Mz, actually, Backupify is still going strong. This wasn't a "where we went wrong" post. It was a "we built too short-sighted" post and now scaling is painful.

Rich. I tried to distinguish between the ideas behind lean startups and the common perceptions of lean startups as portrayed in most startup blogs. It is the latter I was attacking, which is why I qualified the post at the end.

Hi Ryan, I actually did point that out towards the end of the post. My problem is not with the ideas per se, but with the way people treat them in general. Most people equate lean startups with bootstrapping in the startup blogging world.