It’s a good sign and bad sign, but net net, it’s a bad sign.
The fact that the startup has raised, say $10m, before it’s even got going is pretty obviously a damn good sign. It shows some smart investors have that much confidence in the idea and the team.
But Facebook, Snap, Google, LinkedIn, Uber, AirBnB, Apple, Netflix, and every tech unicorn that immediately comes to my mind raised substantial rounds after their MVP’s, not before. Sure, there are exceptions, but they are exceptions.
The lean period of testing, pivoting, testing, pivoting, i.e. the period up to the MVP where the startup learns from customers as it builds, is an important part of making a great, explosive product. During this stage the founders passionately get details right, understand the business by being intimate with it.
When a product has a large round of funding before the MVP there is an urgency for growth at the outset – that lean learning period will essentially be eliminated and thus the product will not likely be great and explosive even in the early growth stages – money will be driving growth not the product itself. The passion and intimacy of a product that would have come about from a lean process would not be there – the money can help alleviate this, but in most cases it won’t make up for it.
It gets worse. The very fact that the company has started with a huge funding round shows a blatant disregard for the iterative process of learning from the customer – it’s just the wrong attitude – this US$10m startup has already decided that the idea will work.
The proof, as always, is in the pudding. Not only did the unicorns I mention above not have large funding rounds before the MVP, but all the biggest failures in tech history that immediately come to my mind had huge funding rounds before the MVP:
- Color Labs raised US$41m in 2010 before the MVP – closed down within 2 years.
- Boo.com raised US$134 in 1999, before its MVP, closed down having spent all of it 18 months later.
- Pets.com raised US$300m in 1998, before its MVP, closed down 2 years later.
- Karhoo.com reportedly raised US$250m in 2014, before the MVP, closed down in 2016 after spending it all six months after the product was released.
I’m confident that if you search around you’ll find that a disproportionately large number of big tech failures have had huge funding rounds before the MVP.
A long iterative lean period are the foundations of an explosive startup. Startups with a large funding round before the MVP typically don’t have those foundations.
This article was first published on Author’s Linekdin and has been reproduced here with his permission.