Entrepreneur Office Hours - Issue #130
The problem with trying to build an amazing product
If you’ve been reading my content for a while, you’ve surely noticed how I’m getting increasingly bull-ish on content creation as a form of entrepreneurial opportunity (e.g. TikTok or Instagram or Medium or even this Substack newsletter you’re reading). In other words, rather than spending all your time trying to create amazing products (i.e. product-focused entrepreneurship), I find myself advising entrepreneurs to focus on creating content (i.e. audience-focused entrepreneurship).
When I preach the gospel of content creation, I do so alongside what I hope is a compelling explanation of why. Although I always use the same explanation when talking with people, I’ve never written it down… until now.
To understand why “create content” is, perhaps, a better entrepreneurial strategy than “build a product,” read my first article in this issue of EOH. Even if you don’t come away from the article planning your TikTok strategy (which, to be clear, isn’t the goal), it’ll at least give you a different way of thinking about growing startups and hopefully help you understand why product-focused entrepreneurship has some major flaws.
-Aaron
The “Garage Startup” Is Officially Dead
Sure, some of the world’s most famous companies began in garages, but times have changed, and what worked for those entrepreneurs might not be the best option for you.
The Lawyer Who Loved Music
Most digital music pioneers encountered lots of resistance from the large record labels. In fact, many of their companies were sued out of existence. But not eMusic. Learn how eMusic's founder, Mark Chasan, avoided the same fate on the new episode of Web Masters.
Listen now on:
…or search “Web Masters” wherever you listen to your favorite podcasts.
FROM THE ARCHIVES…
Managing Increased Conflict and Tension in Remote Working Teams
I wrote this article less than a month into the COVID lockdowns as everyone was adjusting to remote work. More than two years later, the core points still hold up, especially as the world has moved toward allowing more remote work, so it’s worth a read (especially if you’re part of a somewhat dysfunctional remote working team).
Office Hours Q&A
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QUESTION:
In your last Q&A you used the phrase “funding train” and said once you’re on the funding train you can’t get off.
What do you mean by the funding train and why can’t you get off of it?
- Ezra
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Ah… yes… the “funding train.” This is something I didn’t fully understand or appreciate about VC when I closed my first round of capital, and I wish I had. I don’t think it would have changed my decision to raise capital, but I would have better understood what I was getting myself into.
Once you take venture capital, you’re pretty much committing to a venture-style approach to building a company. Specifically, you’re committing to rapid growth at the expense of profits. You’ll use whatever money you raise from VCs to expand your ability to gain market share as quickly as possible, and any money you make you’ll invest back into your company in order to continue its (hopefully) rapid growth.
While rapid growth sounds fun (and, indeed, can be lots of fun), it’s also very expensive. In fact, it’s more expensive than the amount of revenue you’ll generate. As a result, you’ll be constantly losing money.
Assuming your company is scaling successfully, losing money won’t be an unsolvable problem. But the solution isn’t very fun. You’ll have to take more venture capital.
This constant need for more venture capital is what I’m calling the “funding train.” In order to survive, your company will constantly need more money than it’s producing, which will force you to keep going back to your VCs. They’ll happily give you more money in exchange for more equity. But the reason they want equity is because they’re expecting an exit as quickly as possible. As a result, the only off-ramp for a venture-backed company is a big exit or a big crash. That’s it. You can’t just happily run your company.
In other words, if you’re imagining a world where you take a little cash from some magnanimous investors who simply want to help you live out your dream of being an entrepreneur while running a profitable company for the next 40 years, you need to understand why that world doesn’t exist. Investors invest money in order to get returns on their investments. As a result, once you take money from investors, your primary goal isn’t to build a great business. Your primary goal is to create a successful (and profitable) exit for your investors (surprisingly, those two things aren’t necessarily related).
That’s the “funding train.” It can be an exciting ride, but it can also be terrifying.
Got startup questions of your own? Reply to this email with whatever you want to know, and I’ll do my best to answer!
Terrific explanation of the venture funding path. I've often been curious about the actual profitability of companies that boast unicorn status. I think you've just answered my question.