Building a great product is not enough

When a great product hits the funding crunch

By Andrew Chen

Today I read a well-done article by The Verge on the shutdown of Everpix, a photo startup that’s gained a small but loyal following. It’s a great read, and I’d encourage you to check it out. There’s a lot of things to comment on, but the Everpix story is a common one these days…

a lot of startups have built great initial products, and even shown some strong engagement, but ultimately not enough traction to gain a Series A.

In 2013, these days, 

  • you are expected to have a product coded up and
  • ready before you raise your first substantial angel round.
  • Maybe the product won’t be launched, but people will want to play with a demo at least.
  • Then you raise $1-2M to get traction on your product.
  • Then if you have millions of signups, then you get to raise your Series A of $5-10M.
What’s going on?
  • sheer proliferation of seed-funded startups, combined with investors who want to invest post-traction, post-product/market fit
  • mismatch in the supply and demand for funding
  • Series A venture capitalists are often acting like growth investors now, where they want the entire equation de-risked before they put in much capital
Lessons
  • Monetization won’t save you if it’s not combined with growth
  • Having a business model isn’t enough; you need enough growth and scale to be profitable without outside funding
  • A modern startup’s costs are all people costs; 80% of the costs went towards the employees and contractor/ consultants/legal while only ~15% of the capital went towards actually running the service

Reality Check
  • Products that hit immense traction are the exception, not the norm, for a reason
  • every founder needs a strong sense of “milestone awareness” and the ability to:
1. understand what you need to accomplish before the next round of funding
2. work backwards on that until you can put together a reasonable roadmap to get there
3. cut costs if the plan doesn’t seem to work
4. revisit this plan on a regular basis to understand how it fits together

Danger
  • problem with hyper product-oriented entrepreneurs is that they often have one tool in their pocket: Making a great product.
  • Once the initial product is working, the team has to quickly transition into marketing and user growth, which requires a different set of skills
  • an entrepreneur that’s too product oriented will just continue polishing features or possibly introducing “big new ideas” that ultimately screw the product up

Distribution strategy

  • can you imagine building your company culture around your marketing strategy?
  • when you dig into why Apple is so secretive, it’s because the company is really focused on advertising and product launches
About Andrew Chen
Andrew Chen is a writer and entrepreneur focused on mobile products, in particular metrics and user growth.He is an advisor/angel for early-stage startups includingAngelListAppSumoCardpool (acquired by Safeway), Frankly(an SK Planet co),  Grovo,  Kiva,  Mocospace,  QualarooQik (acquired by Skype), WaneloWeeWorld, and is also a 500 Startups mentor.
Previously, he was an Entrepreneur-in-Residence at Mohr Davidow Ventures, a Silicon Valley-based firm with $2B under management.Prior to MDV, Andrew was director of product marketing atAudience Science, where he started up the ad network business that today reaches over 380 million uniques. He also co-authored a patent on personalized advertising, USPTO #7,882,175 and holds a B.S. in Applied Mathematics from the University of Washington. email anytime: voodoo at gmail. On Twitter @andrewchen

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