tech

“Meaningful” startups

There is generally a lot of enthusiasm in the startup world these days. But some observers worry that too many startups are working on “features” instead of world-changing ideas. Founders Fund published a provocative article summed up by the subtitle: “We wanted flying cars, instead we got 140 characters”. Alexis Madrigal writes in The Atlantic that “we need a fresh paradigm for startups”, and dismisses the significance of recent “hot” startups:

What we’ve seen have been evolutionary improvements on the patterns established five years ago. The platforms that have seemed hot in the last couple of years — Tumblr, Instagram, Pinterest — add a bit of design or mobile intelligence to the established ways of thinking.

One thing these critics need to be careful about is that, as Clay Christensen has long argued, many important new inventions start out looking like toys. Twitter (Founder Fund’s headline example of a “trivial” startup) started out looking like a toy but has since transformed the way information is distributed for tens of millions of people. Madrigal dismisses cloud computing as “a rebranding of the Internet” whose only effect has been to make “the lives of some IT managers easier,” overlooking that cloud-based services solve the “third party payer” problem of enterprise sales, thereby completely changing how enterprises adopt new technology.

That said, I generally agree with the sentiment that the startup world is too focused on chasing trends. I don’t think this is the fault of entrepreneurs. I meet entrepreneurs all the time who are working on ideas that seem quite meaningful to me. Some of them are building futuristic new technologies. Some are trying to disintermediate incumbents and thereby restructure large industries. Others are trying to solve stubborn problems in important sectors like education, healthcare, or energy.

The problem I encounter is that many of these “meaningful” startups have trouble raising money from VCs. An entrepreneur working on groundbreaking robot technology recently joked to me that he’d have an easier time raising money if his robots were virtual and existed only on Facebook. He was only partly joking. His startup will require a lot of capital and doesn’t have an obvious near term acquirer. Only a small group of VCs today will even consider such an investment.

Categories: tech

66 replies »

  1. To your point – Look at how long @Bre worked at MakerBot – years – before he was interesting to a VC (and good for him to end up w/ a VC firm who really gets devices).  I agree the fault lies not w/ the dreamers but w/ the funders.  As they are willing to bet on more crazy-ass-wild-ideas, then more more entrepreneurs will pursue their dreams.

  2. Great point. I think there are a bunch of changes in the investment or fund-raising scene that’s causing a shift in the equation though. Example – the Pebble watch. They had raised a small round post YC, but couldn’t raise as much as they wanted. But thanks to Kickstarter have raised $4.6m and $24k in the past 10 minutes alone.

  3. In my mind, the most problematic consequence is the amount of intellectual capital that is tied up in these “feature” projects. Because the funding is following “features” or trends – some of the brightest and most motivated people in our country are spending their time working on things with little (if any) lasting significance.

  4. To go one step further, you could argue that part of the issue with VC willingness is because they’re beholden to limited partners, finite fund lives, etc. That’s why patient capital (if available) can be so crucial for some of these “meaningful” startups that may have $1bn exit opps, but not in a 2-year time horizon. 

    My firm (New York City Investment Fund) misses out on a lot of the “trendy” startups since we’ve pulled out of the consumer web space, but that was intentional — our mandate is to support NYC sectors that aren’t as well-supported (enterprise IT, fintech, cleantech, biosciences) and we have capital that’s more patient and can “prime” certain sectors or companies for other VC investment, betting on some of these “meaningful” companies that traditional investors can’t/won’t touch because of LP pressure or other reasons.

  5. Add value to the world, not users to your database. — wisdom

    Turns out, you can just do awesome sh** — more wisdom

    Show me the money — Oh crap.

  6. This is an argument for why government investment in new technologies is necessary. Despite the Solyndra fiasco, the government is often the only “investor” willing to put up money to fund highly capital-intensive projects in new technologies.

    Even if a VC or PE fund is willing to put up equity, they normally (at least for green energy startups) want/expect the startup to get Dept of Energy loan commitments before they actually invest.

  7. Nailed it. This complaint can be a proxy for failed ideas, but truly hard ideas do need longer term capital and the increased risk makes that capital hard to find.

  8. I agree. Although I’d argue working at even a “feature” startup is better than, say, going to law school. So, assuming the current enthusiasm for startups is sustained, I think the trends are generally good for society.

  9. I agree it is partly a structural problem. A new VC needs to make her mark in the first 2 years, and normally that means exits or big up rounds by other VCs.  The most patient, long term VCs tend to be ones who are senior at well-established firms.

  10. I agree. The vast majority of long term computer science funding comes from government (DARPA), which led to, among other things, the internet itself.

  11. working on big ideas is hard. decapitating incumbents is hard even when using disruptive innovation principles.

    Lack of VC appetite is an easy excuse. Real reason is laziness and chasing easy bucks.

  12. Less to prove = more patient, yes? Interesting to think about how partners are incentivized… NYCIF’s realized gains just go towards new NYC investments, so I guess perhaps that’s a moot point as far as I’m concerned!

    Chris, any thoughts on the role of “social venture” or “venture philanthropy” in the funding ecosystem?

  13. there are two real obstacles:

    1. government. no one wants to solve the government problem and it’s only getting bigger. though there are finally some signs of resistance here, the inertia is epic. 9/11 truth is the starting point. 

    2. an acceptance that much of the science we operate from is false. academia is polluted by corporate interests that fund them. as such any science that explores alternative concepts like a multi-dimensional universe in which energy can be extracted from other dimensions — thus providing us with free energy — are ignored or ridiculed. 

    related to the first problem, government, is bubbles. monetary policy fuels bubbles which rewards quick speculation (i.e. flip to facebook) rather than value-based, long-term, disruptive investment. on one hand i don’t blame investors as they have LPs to serve, though their ignorance on this matter is something i find both astounding and annoying. let us hope reality sets in once bubble 2.0 collapses, though given that we just had a bubble 10 years ago, i’m not so sure. after all, easy money is too hard to resist, so long as the game can be played. 

  14. Like you allude to (and paraphrasing Randy Komisar), maybe there is a “Deferred Startup Plan”, where first you do the Startup(s) you have to (e.g. virtual goods) and then you do the Startup(s) you want to ..

  15. Hard to say if it is a secular or cyclical trend. You could argue that we are at the end of this Patterson Cycle so VCs want quick exits before the cycle ends. 

  16. Do you think crowdfunding offers a solution? Loads of smart people might be willing to invest relatively small amounts of cash toward more futuristic/idealistic projects. Less capital = less risk, right?

    Do you have any other solutions in mind?

  17. I know a number of entrepreneurs who’ve done this (or are doing it now). Because their first startup gave a good return to investors they are now able to raise money for their “meaningful” idea.

  18. I agree the Fed has been mostly a negative force over the last 20 years – especially under Greenspan. I do think Bernanke saved us from a great depression, but you could argue Greenspan created the crisis in the first place by stoking the real estate bubble.

  19. I’m just reporting on what I see. And I just empirically don’t see a lack of imagination from entrepreneurs but do from the 30 or so VCs who write big Series A checks.

  20. ‘we want to change the world but can’t get financing to do it’ – seems a lame excuse to me.

    Remember what the fountain of all wisdom John Mason, aka Sean Connery, said in The Rock – “losers whine about doing their best, winners go home and fuck the prom queen’

    – just my 2c

  21. Great points as always Chris. Seems to me that, as is often the case, the press’ hype cycle & liquidity (different argument on whether or not those are tied together) have the ability to drive the market towards areas of innovation (i.e. your robot example). Chicken & egg problem in some regards as it takes that one leading company or product to break the back of preconceived notions.  

  22. Interesting ideas at the seam of success vs innovation. It highlights the question of what this ecosystem is supposed to provide. Are VC’s responsible for financing the world’s innovation? I think not. They’re out to make money and right now a lot of money is being made in these businesses. I think the big innovations that are having a hard time getting capital would have a hard time in any age. Why? Because true visionaries on either side of the table are in extremely short supply and only when you get one on each side of the table at the same time is their a high probability of funding. And that’s only the beginning of all the challenges.

  23. I would also add that too much “hot” money is following the same ideas in the over crowded space – Social media. Where is the next SpaceX? What about Robotics engineering? Big Data?

  24. Thanks Irving. Yeah I agree. It took a long time in the consumer internet downturn of 2001-6 or so for VCs to get excited about consumer internet again. During that time firms like USV that bet on consumer internet did incredibly well. Hopefully there are firms now who are thinking about accurate contrarian strategies right now that support meaningful new startups.

  25. Just as the money structure as dictated by VC is driving the types of problems being solved by engineers – the problems being solved by top lawyers is driven by the money structure for those who pursue a degree in law.  There are some important problems that require an education in law, but the top lawyers are taking gigs in big corporate firms protecting big corporate dollars (paying off their big student loans).  Granted, if you compare an average law student, at an average law school to an average group of people, at an average “feature” startup – I would agree with your position.

  26. This is just a great post, Chris. I will say that many really meaningful big ideas are getting funding these days – its just that many of these startups don’t happen to involve the internet so they get very little press. The VCs that work with these companies in advanced materials, energy, photonics, and biotech are for the most part a very different group than their consumer internent brethren. But like USV/Foundry types, they are extremely focused funds that have a core expertise. I work with startups in these fields everyday – there is no shortage of big meaningful work being done right now.

  27. Chris,

    I applaud your article it brings to light the problem that many of the companies receiving funding do not really solve real problems. Many “companies” are purely products that have strategic buyers willing to buy them once they hit critical mass. VC’s see this a preferable investment because of their fiduciary responsibility to their LP’s for returns and ultimately liquidity events. The demise of the public markets and cost of doing an IPO has led to shifted focus for VCs. This focus has changed to investing in companies that beyond a reasonable doubt have a logical large private company or public company that would will buy them. VC’s are companies financial partner until they can find their strategic partner/acquirer. Under this current model would a Gottlieb Daimler or Henry Ford be funded? I mean who is going to buy a motor powered carriage when you can buy a horse which cost 1/10 the cost.

    I also do not want to knock some of the public companies out there investing in things like “building space elevators,” cough Google :) Is there nothing better that $ could be invested in?

  28. To predict “meaningful,” don’t just look at the product, look at the founders. Even if Twitter was thought to be a toy, the founders has a set of goals and ambitions that were big. 

  29. I think you raise two brilliant points. 

    The quirky hot startups can sometimes change the world in surprising ways. So let’s stay foolish and think big! 

    It’s hard to raise money on many large un-sexy problems which always annoy us yet no one seems to willing to fix them. So let’s be persistent and have the will to go against the trends.I have recently had first hand experience on the latter point while bootstrapping my health company BetterDoctor that helps you find and book a good quality doctor near you – http://BetterDoctor.com. 

  30. There’s no reason why the government needs to be the source of capital-intensive investments in an ideal free market completely void of government intervention (obviously today’s market isn’t this free).

    There are so many arguments against government involvement, including lack of profit motive which leads to low productivity, low value, malinvestment, mismanagement, and generally terrible value for the dollar. But the strongest argument is that the government can only fund these things with tax money. If the project was so valuable, the taxpayers should have their money returned to them and then decide the value and subsequent investment for themselves.

  31. When talking about ‘VCs’ people generally refer to the ‘GPs’ in a limited partnership, and these GPs are often guided by LP trends and interests as entrepreneurs are guided by ‘VC’ flights of fancy. The reality discussed in this article is only a manifestation, where the root cause is further off in the domino effect.

  32. Chris, seems to me that recent changes to US law providing for funding channels, democratizing the Kickstarter-like #crowdfunding model, will help fund more of these “meaningful startups”, do you agree?

    In the UK, #SocialBonds, a form of #SocialFinance, are starting to gain traction too.

  33. I totally agree with you. Finding the right match when two visions meet and empower one another is the most difficult challenge and most rewarding moment as well.

  34. good observation. the obvious next Q is: why?

    they ‘seem’ too small exactly because of the point you’re making above — namely, that trend-chasing is seen as the most efficient path to stability for investors, so ‘meaningful’ ‘social ventures’ (there are lots of words in this space) tend to get ignored. vicious cycle.

  35. Part of the problem is that social ventures and change the world start-ups try to boil the ocean precisely because they are trying to change the world. Social start-ups can be lean start-ups too.

  36. Everyone else is producing false signals. Media coverage, venture capitalists, all giving attention & money to things tells entrepreneurs “chase those things.” If social entrepreneurs were focused on making the lives of paying customers better and only cared about signaling from their customer segment, they would make themselves and everybody else better off. 

    That’s not an institutional problem, it’s an individual one. If you are not #BEONFIRE for what you are doing, but only chasing the attention, you aren’t going to change the world, with our without VC money.

  37. To your friend- I think he should raise a bunch of capital based on robots being virtual and on Facebook, then use the money to evolve it into the groundbreaking technology they are talking about.

    Until VC’s themselves change the way they fund companies, entrepreneurs won’t change the way they approach them. What works is what gets done.

    That said, the trick is in evolving the initial feature set into a world-changing product/company. The only way to get noticed is by starting with the “thin edge of the wedge”, then making the wedge fatter and fatter til it becomes a sledge hammer. Then you change the world with your sledge hammer.

  38. I get cranky when I hear people [not you Chris] talk as if there are not enough exciting things being created.

    I mean hell – we have flying cars – terrafugia transition for one.

    3d printers – Thingiverse – shapeways – cheap cnc machines, laser cutters. Thats some crazy amazing stuff!

    Kickstarter …

    Quadcopters…

  39.  Good point.  An alternative for some of these “meaningful” startups is to pursue government research grants targeted at small businesses (SBIR, for example).  The government (mostly the defense and energy departments) puts out requests every quarter for research in strategic areas which startups can answer, and the grants are competitively awarded.  The advantage for the entrepreneur: the government takes no equity and the company owns the rights for private use of any IP generated.  The down side is that it may be difficult to execute on a unified vision for your company since the government sets the goals and milestones for each grant.  But, it’s been done successfully, I believe iRobot (creators of the Roomba) pursued this funding strategy in their early days.  

  40. Agreed it is not the fault of entrepreneurs. But I don’t think it is the fault of VCs either. (On an aside I also think the author’s perception of uselessness of current innovation is overcooked) The big item that has been missed is the broader socio-political one.
    The western world has lost faith in Modernity and the Enlightenment Project. From Columbus and Cook up to Apollo project there was confidence in man’s ability to engineer our way out of (or into) anything. That confidence is gone in the west. The Hoover Dam probably wouldn’t get through an Environmental Impact Assessment. Just listen to Kennedy’s 1962 Rice University speech- the amazing and accepted belief and confidence that the most extraordinary challenges could be solved with technology. Oh how things have changed.
    Today the English-speaking West is laden with self-doubt, remorse, and self-hate. the “inconvenient truth” dogma. “We’re destroying the earth, too many machines, oil accidents nuclear accidents” etc. Adapting our surroundings to suit our own ends has become frowned upon.
    A great little illustration of this is global energy and emissions. The response to greenhouse gas fears is not “let’s engineer out of this” but rather legislate to cut energy consumption (e.g. ban incandescent lights in countries like Australia and UK). Just check out the funding of fusion R&D, aside from nuclear probably the only viable baseload energy supply http://imgur.com/sjH5r
    And if you want other indicators on decline of Western engineering confidence, check out the decline of mathematical literacy, emaciated school physics curricula, declining engineering incomes relative to law, finance, business administration (at least in Australia & UK, probably not SV). Over the last 15 years modernism has been increasingly undermined by the progressive left. Until the west gets over that (if it ever does) I don’t think you can expect the market or VC’s outlook to change.

  41. >His startup will require a lot of capital and doesn’t have an obvious near term acquirer. Only a small group of VCs today will even consider such an investment.

    This is an even bigger problem when you consider that this dynamic applies anytime you’re building something truly groundbreaking, that does not look like a toy upfront. Building something like SpaceX technically may not require a founder like Elon Musk (ie there are a few other individuals who technically could solve the problems), but at least in today’s environment, it requires someone who has the track record, relationships, & connections of Elon.

  42. Hey Chris, thanks for bringing this up and appreciate all the comments too. As a co-founder for Microryza (we’re changing the way scientific research is funded) we’re going to run into this problem; we haven’t yet because we haven’t started pitching to investors. 

    Question: How does a young startup with a young team position itself as a “meaningful” startup without sounding overblown, pretentious or naive? I mean, if this is such a problem, what can we do to move past this as we start to pitch? Crowdfunding is not the answer, that’s what we do. 

    Any tips on approaching this problem from a basic investor standpoint? *obviously not looking for VC funding now

  43. Chris, the thing is when we have startups that start of the bat claiming “they are going to make a ding in the universe”, they are dismissed also. As you said, the companies that are $billions mostly did not start thinking they’d be that big.

  44. Interesting post. Been seeing a lot of startups that don’t provide that “meaningful” aspect but it is important to remember that the best founders have a long term vision of how to turn their company into something that impacts many lives. Your Twitter example is perfect. 

    I’m also a big fan of Runkeeper. Their vision isn’t to just track how much I run but change the way I monitor all aspects of my health. Their initial app was cool, but nowhere near where their big vision can take the company.

  45. I’ve been talking about this for a long time now. It’s great you are shining a little light on it. Chris, check out SaveUp.com, we are working on interesting problems in the finance space

  46. Pipeline Fellowship is trying to change this by investing in “social ventures”.  It is frustrating sometimes to be trumped by a company that has a lot of “users” on their app, but it’s essentially meaningless as a future brand or company.

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