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up vote 4 down vote favorite

I was thinking about this question recently:

http://answers.onstartups.com/questions/4094/advice-resources-on-performance-reviews-for-employees

I also enjoy this article: http://www.newyorker.com/reporting/2009/05/11/090511fa_fact_gladwell?currentPage=all

I will also be referring a bit to Peter Senge's five disciplines: http://www.infed.org/thinkers/senge.htm

Basically, as startups we are David, and we should be preparing to fight against Goliath. If you are in a field that there is no Goliath I expect that that will be a warning sign, unless you are so cutting edge that others are all behind you.

So, my desire is to create my business as a learning organization, which is defined thusly:

…organizations where people continually expand their capacity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are continually learning to see the whole together.

But, I don't see how performance reviews would fit into this model, and that got me to thinking about how startups could break various rules that most companies follow, and see if there is a better way to function, even as the company grows larger. Performance is just one rule, that people should be measured in some way, just as a company is often evaluated based on it's stock price, or a startup by how much it's evaluation has increased in each round of funding.

So, what would be the negative impact if I ever decide to try for VC funding if my business structure is not a traditional one, but, based on the agile way of thinking (which I believe was heavily influenced by Deming) flexible to the needs of the business and all the stakeholders, as a learning organization should be, IMO.

To me this is the best way for David to win the battle, not by following the rules that were made by Goliath, and that favors the incumbents, but to change the rules, but VCs I expect expect the rules of Goliath to be the best approach, and may look down on someone that wants to challenge companies in the market as well as in how they are structured/ran.

Update

The question is in bold above.

I forgot a question mark, so it can be confusing.

Update 2:

For a simple definition of Kaizen you can look at this page: http://www.valuebasedmanagement.net/methods_kaizen.html. I mentioned it in a comment so I thought I would give a link, as many may not be familiar with it.

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@Tim - I highlighted the question, put it in bold. – James Black Nov 28 '09 at 4:23
@James Black: I would like to chime in if I can; but I don't get the question. What is this 'Agile business structure'; in which concrete ways is it different from any conventional startup funded by VC money?? I assume that the bolded words "business structure" should mean the form of incorporation / ownership or something else intimate to the company itself, and not merely the founders and employees having an agile mindset? (Because, obviously, startup people should have an agile mindset.) – Jesper Mortensen♦ Nov 28 '09 at 12:46
@Jesper Mortensen - The bolded words is the question, actually. A learning organization is, in theory, agile, and if you extend it to include ideas from Kaizen, then you have a business structure that can be very flexible, so how you market, or what you market, or how you approach clients may change, ideally in a continuous change, rather than sudden evolutions. – James Black Nov 28 '09 at 20:59

5 Answers

up vote 3 down vote accepted

After James' update to my comment, I think I can answer (somewhat).

VC's don't care (that much) about the method, they care about the probable end result. So will VCs care that I'm using a continuous improvement product development methodology? Well, there is no way to answer that question in general, it comes down to the specifics of each case.

The most important aspects would be expectation management of the VC's, and how much the end product deviates from the initial investment idea. If I sell the VCs a investment in a software company, and then show up with a surprise biotech product, they will most certainly care in a bad way.

I think that recently things changed in the world of software development. Before recently, VC's looked for business ideas that were:

  • Novel, original and of a kind not seen before, i.e. completely virgin market.
  • Riding on the back of a disruptive or patent-able technology. (Assuming that a strong technology advantage would be needed to survive against established competition.)

Today, building a startup in some (web-) market niches has gotten dramatically cheaper. If your startup can convincingly be built with small'ish investment (say a couple of million US dollars at most), then VCs might consider investing in you even if you don't have one of the 2 above advantages on your side.

In all cases, I think a structured product development methodology that emphasizes rapid, customer-driven improvement can only work to your advantage with VCs. And Jason has already answered that part well.

So to summarize, I think today there is a chance of obtaining funding for startups that are either:

  • Novel idea, virgin market or
  • Disruptive tech or
  • Cheap to build and have already established end user traction or
  • more than one of the above.

However, there is the question of the timing. When you approach VC's with your Kaizen or lean startup methodology (Steve Blank / Eric Ries) startup, then the core business idea should already be pretty solidified. Again, see Jason's 2 examples. So the agile methodology works to your advantage with VCs, but the results are what you really sell to VCs.

Of course, there can be exceptions to this. (Paypal comes to mind. They began as 'an electronic wallet in your PDA', and became, well, Paypal.) But in general, especially in todays' investment market, I don't think VC's want to pay for customer discovery and validation unless the market is virgin or there is a strong technology advantage involved.

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up vote 1 down vote

Having a different point of view is probably an advantage when raising money.

I know everyone thinks VCs are "dumb" and stuck in "old ways." But that's increasingly not the case.

For example, Steve Blank just wrote about how being "lean and agile" is exactly how to raise money nowadays.

Better example, Steve tells us how Cafepress raised money specifically by showing how agile they were (with their pitch deck even!).

Investors want to know you can learn and be flexible. Sure, not all of them want that, but there's a critical number of those who do, and those will be far more impressed with you acting like David.

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up vote 0 down vote

I think a lot of start-ups are structured and think this way. One of the advantages of having this mindset and agility is that it's the only way to compete with Goliath.

Will it hurt your chances for VC? Probably not. But when and if VC comes, don't expect to be able to keep these rules and philosphies. After all, by that point, you'll become Goliath and the folks giving you all the money will dictate how you should play.

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1  
If I have to be Goliath then it seems I will have lost the soul of the business. I guess that would be what it means to 'sell out'? – James Black Nov 28 '09 at 5:54
up vote 0 down vote

Great article. I agree that David needs to wage war on his own terms.

I think you will limit your funding options if you insist on an breaking the commonly-accepted corporate rules. And your investors will not tell you all their biases up-front. You will exchange some of your autonomy for money and you may find, 3 years later, that the entity to which you gave the autonomy has different ideas about how to run a business.

But if you consistently demonstrate greatness (through unconventional corporate practices or otherwise), then (1) you will have so many funding options that you can select one most-aligned with your philosophy and (2) your investors can be persuaded not to try fixing something that's not broken.

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up vote 0 down vote

Unconventional business structure (idea/revenue model/organization) - Yes! (see mint.com)

Unconventional legal structure (ownership, incorporation) - Kiss of Death. All of a VCs/Angels lAPI (legal API - contracts) are already defined for standard legal entities.

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Thank you, the business organization is what I am looking at, I can't think of an unconventional legal structure, they seem to be pretty much locked in stone, since they are legal entities and legal agreements. – James Black Nov 28 '09 at 20:56
What is a legal API? I have never heard of that term. – James Black Nov 28 '09 at 20:56
that's because I made it up :) - but it's accurate. Law, specifically "business" law, has what amounts to a set of API's. The difference being, instead of getting a 404 or 500 error, you get fined, taxed or worse. – Bob Walsh Nov 29 '09 at 23:28

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