The Endless Science Project
Serving two masters, and the enablement of investors.
Some startups are the Endless Science Project. They start from a “cool” technological idea and work on endless science projects. They run one science project for a while, get tired of it, and move on to another one. Investors enable this to happen, and we, as investors, need to wean the entrepreneur.
What is the Endless Science Project?
The Endless Science Project is the startup that hops from one business idea to the next.
They have a “vision” (although I hesitate to use the term) for one type of business, run on that path for a while, then jump to another “vision” a few months later. The Endless Science Project is usually staffed with people focused on technology, with little or no focus on the actual business value.
One tell-tale sign of the Endless Science Project is that the CEO always wants to get the project further along before we start selling. “It’s not ready for customers, yet. I need to work on the product more…”
There are plenty of enablers for the Endless Science Project.
Once a startup has outside funding, it is very easy to slide into the Endless Science Project. Angel investors are the biggest enablers of the Endless Science Project.
Founders who bootstrap their companies run out of money, so they focus on delivering value to a customer from Day One. Companies who have angel, venture, or – even worse – grant funding can easily fall into the comfortable day to day of working on the Science Project with little regard for ever having to make money.
In regulated industries, the regulator is our most important customer – Johnson and Johnson principle.
No one can serve two masters – Jesus
Dancing with the One Who Brought You.
Once a startup CEO goes from having to hustle and grind for every meal to a salary, their motivation changes. The CEO who successfully raises an angel round or receives grant money wants to do it again.
It is a dopamine hit. And they always want more and more of it.
The bootstrapped CEO thrives on winning a new customer or delivering a new order, because that is the only way they keep their head above water. The bootstrapped CEO has unmistakable incentives to keep selling and generating revenue.
For the investor-backed company, it is very easy to slip into the mode of just raising yet another round. Or the mode of filing that next grant request. Some CEOs get very good at raising money and forget about building the business.
I have seen some angel companies on their 10th round of angel financing. These founders figured out that their real customer was the investor, not someone who paid for their goods or services.
Weaning the Entrepreneur.
Angel investors, like every investor ever, invests on emotion. When a CEO is likeable and has a moderate level of confidence, angel investors love the stories of hope, ambition, and roads to riches. They live vicariously through the CEO’s journey and want to be part of it.
The emotional component makes it very hard for them to hold the entrepreneur’s feet to the fire.
In one of my angel groups, an entrepreneur pitched the group with one of the most bizarre business plans – she was taking people with (too much) expertise in one field and trying to switch to a completely different field where they had zero expertise, connections, or relationships. I didn’t like the company on that basis alone, but the angel group’s fund invested nonetheless.
A year later, the CEO shows up again (!) to raise more money. The first time she showed up, she claimed she was going to do $5M in revenue. The second time she showed up, she had only half that revenue – the excuse was that she was now focusing on unnecessary regulatory approval instead of marketing/sales.
I was astonished. I did not like the company the first time we saw them, but how do you promise $5M in revenue and only deliver $2.5M – then have the gall to come back for more money? Nobody in our angel group had the awareness (or maybe the guts) to tell the entrepreneur “no.”
This CEO was serving the master of the angel investor and not her revenue-generating customers. She learned that it was easier to raise another angel round than it was to actually market and sell products.
The Best Trick – Look at the Old Pitch Decks.
When you see an entrepreneur pitch for the first time, it is all rainbows and dancing ponies. It is easy to get wrapped up in the vision and excitement of the opportunity. Entrepreneurs go through so-called “accelerators” and learn all the buttons to push (e.g., giant “TAM”), then generate thinly-researched “data” that support their unrealistic numbers.
They promise, but do they deliver?
Old pitch decks are the single best indicator of whether the entrepreneur does what they say they are going to do. If they say $5M in revenue for the next 12 months and they deliver, we can believe them. As investors, we need to know if we can believe the founder.
I try to see as many early stage companies as I can. Not because they are interesting, but because I often see them several years later. I always go back to the old pitch decks and see how well they line up. I pay special attention to the revenue and sales. If the CEO can deliver on revenue/sales, they are serving the master of the person who buys their goods and services – this is how it should be.