Lean local startups aren’t worrying about the money

Zach finalrgbby Zach Clayton

Eight years ago, a little-known Silicon Valley entrepreneur named Steve Blank wrote an obscure book called The Four Steps to the Epiphany. Blank, a veteran of eight startups, outlined a ground-breaking argument: Writing business plans and raising venture capital might actually hurt a startup’s odds of success.

Cheaply printed and ridden with typos, the book’s heretical contentions were easily dismissed by business school faculty and close-knit venture financiers. But Blank’s treatise quickly became a cult favorite. Entrepreneurs whispered about it to one another, and Blank began using the book as the textbook for a University of California-Berkeley class on entrepreneurship. He evangelized a simple message. Startups were uncertain “visions” built on sets of not-yet-validated assumptions. Startup founders’ initial objective should be to understand those assumptions, document them, and turn them into testable “true or false” hypotheses. Entrepreneurs should interact with prospective customers and test the hypotheses. And only then should they go chasing big money.

Today, some of the Triangle’s most successful start-ups are following this model. Raleigh’s Trinket, started in the Hillsborough Street coworking space HQ Raleigh (formerly HUB Raleigh), is one. The startup recently raised $375,000 to build an open source repository for teachers to store their lesson plans – after the founders had launched the product prototype and had more than 200 users.

“You can create a software application on Amazon Cloud with a credit card and basic coding skills,” says founder Brian Marks. “The barriers to creating technology are so low that instead of telling customers about your idea, you put a product in front of them and get their real reaction.”

Marks knew that the traditional approach of shutting himself up in an office to write a long, well-researched business plan could easily produce false assumptions. Most dangerously, that process would provide few opportunities to invalidate them.  And he knew that if he raised big money to fund those assumptions, he’d face pressure to prove them right.

In a few “hit” cases, like Google or Facebook, when an entrepreneur truly has lightning in a bottle, this approach can make sense. In most cases, it leads to premature growth – and failure.

Take Webvan, a “dot com”-era company in pursuit of the online grocery market. A “dream team” of managers and a roster of highly credentialed investors, including Goldman Sachs, poured massive amounts of capital into Webvan – with almost zero customer feedback. Webvan signed contracts to build more than 20 distribution centers before serving its first customer. There wasn’t a problem with Webvan’s market. (FreshDirect, Peapod, and Amazon now profitably offer online grocery shopping and delivery to millions of customers.) The problem was that Webvan’s assumptions about customer demand, customer needs, and distribution costs were poor guesses. Instead of testing those assumptions early on, Webvan’s leadership spent all its energy and money preparing to grow, based on the business plan. Webvan paid the ultimate price: bankruptcy.

Blank’s genius came from a simple insight. Like Webvan, most startups failed. The typical entrepreneur could save years and millions (or in Webvan’s case, hundreds of millions) by testing the startup’s ideas with the scientific method first.

Chris Heivly knows all about this. He is co-founder of The Startup Factory, a technology incubator in Durham’s hip American Tobacco Campus. Applicants accepted into the program receive office space, access to mentors, and $50,000 – enough capital to move through one or more learning cycles. Heivly, previously a co-founder of MapQuest, told me that “lean startup” thinking is the “basic methodology” for his program. Instead of pitching the “perfect” business plan in the hopes of winning a $5-million check, applicants share models and prototypes of their business ideas. In attracting applicants, The Startup Factory touts its access to mentors as much as the investment money.

One of its recent successes, TabSprint, launched its product just one month into the program, with only $50,000 of funding. TabSprint’s technology allows customers at bars to use their mobile phones to order drinks and pay for them. Some 40 of the Triangle’s nightspots – including Raleigh’s Lonerider, Chapel Hill’s Top of the Hill, and Durham’s James Joyce Irish Pub – use the software. Instead of hunkering down for 18 months and building feature upon feature in secret, the founders gathered input from actual customers in real time on how to improve the product. “Continuous customer feedback kept us from tunnel vision. Our customers had hesitations about the first version of our product. We listened to feedback and observed the customers’ problem, kept improving the product, and gradually this has taken off,” says founder John Chipouras.

Chipouras and Marks are just two local entrepreneurs turning the traditional model on its head. As our local community of entrepreneurs continues to boom, the trend stands to ignite even more growth. It’s fitting for a university cluster like ours that the most important currency of a startup is becoming recognized not as money, but as learning. Because raising lots of early money intensifies the pressure for quick growth, it may decrease learning, and increase the odds of startup failure. Entrepreneurs need enough cash to fund learning cycles, but not much more.

Gradually, Blank’s logic has won over entrepreneurs and investors who have experienced the pain of premature scaling. It has also set forth a “capital lite” method of new business formation that appeals to entrepreneurs who can’t access deep venture capital pockets. This quiet revolution has particularly profound implications for the Triangle, far removed from the venture capital hotspots of Silicon Valley, Boston, Austin, and New York. The “lean startup” movement offers Triangle entrepreneurs a way to bypass the time-consuming, low-success-rate VC gauntlet and increase the success rate of startups. That, it turns out, may be even better than a few million bucks in venture capital.

Zach Clayton is CEO of Three Ships Media, a data-driven digital marketing agency. He is passionate about using Internet technology to disrupt old industries.