Just got this sent to me by one of the organizers:

This was published to my letter.ly subscribers on 5/29. I just published another one yesterday called "Zombie startups, fake liquidity, and flailing VCs". Sign up at letter.ly/dave to get them first.

Today I want to talk about something that hit me pretty hard this past week on the last day of the TechCrunch Disrupt conference: for all the talk about Lean Startup vs. Fat Startups, no one was talking about the Starving startup.

Really quick background on what Lean and Fat startups are. "Lean startup" is this idea that startups who don't have product / market fit should stay quick and agile as they iterate and pivot. For example, don't hire an expensive VP of Sales and a 10 person sales team until you know you've got a product you can sell scalably. "Fat startup" is this idea that in some cases you need to spend heavily to win, because the gap between being #1 in a market and everyone else is large.

What I realized is that all this talk about "lean" was being misinterpreted by many (myself included) as "cheap". Stay small, don't hire unless absolutely necessary, figure out the perfect business model... and then raise a bunch of growth capital and ramp up. I think we've taken it too far and created the "Starving" startup. 

A starving startup typically has 1 product & business focused founder and one technical founder. Following the lean startup concepts, they build, test, and iterate on their product. Since it's just the two of them, it can take 1-2 years to find product / market fit - there is only so much 2 people can do, and typically the bottleneck is in engineering early on as the product gets built. After months or years of effort, they finally achieve product / market fit, as greater than 40% their survey respondents say they would be very disappointed if the product suddenly was no longer available. Congratulations!

Here's the problem: 1-2 years is an eternity for consumer web software, because "fast followers" can generally leapfrog the time you spent making mistakes, copy your successes, and be out in the market quickly. Heck, they might even get to product / market fit faster than you, by copying the general direction you're taking but making key innovations. Suddenly, you're fighting for your life in a crowded market... a market you created!

This is a long-winded (sorry!) way of saying I think startups need to raise more seed money than they have been. $200k (or $350k, the amount we raised) is too little. Sure, it keeps you hungry (literally!), but you're just not moving fast enough. If managed properly, an 8-12 person team with $1.5 million in seed money can make dramatic progress. Basically, an experienced and agile entrepreneur + access to capital is a powerful combination, so take the money! 

From an investors point of view, I can understand the hesitation - you want an entrepreneur to turn assumptions into facts and "de-risk" (hate that word, sorry) before investing significant capital. But if you come across an amazing team and a strong market, I think investors need to convince founders to take on more capital and increase burn to $50-$100k / month, while still practicing all of the agile "lean startup" techniques that Eric Ries, Steve Blank, and Sean Ellis have been preaching. Remember, just because you are thinking lean doesn't mean you need to starve.

(This was the very first paid email newsletter I sent out, a little over a month ago. I'm publishing it here because people have asked for examples of the content I publish to my letter.ly. You can sign up for future newsletters at letter.ly/dave. It'll cost you $4/month — the price of a latte — but as a group you can help get a poor entrepreneur out of NJ.)

This is my specialty pasta sauce. Ingredients: hot italian sausage, artichoke hearts, kalamata olives, capers, fresh plum tomato, fresh basil, fresh parmesan, onions, garlic, canned crushed tomato, canned tomato paste, butter.

Glass of wine is my roommate's. (Those of you who know me know I'm allergic to all alcohol.)

Tonight's appetizer: fresh arugula and mozzarella drizzled with the most delicious olive oil, sea salt, and freshly ground black pepper.

(This was originally sent to my email newsletter list. I'm posting this publicly because people have asked for examples of what I publish. You can sign up at letter.ly/dave)

Hot topic the last few days are VCs railing against the proposed new tax legislation on carried interest. The proposal is to tax the money VCs make on their investments as regular income instead of as capital gains (which is the tax you pay if you were to make money buying stocks on the stock market). The argument for the tax is that it is income, and special capital gains treatment should be reserved for cases when you are investing your own money (a big risk), not somebody elses (and getting paid to do so).

Here's more detail, for those of you who aren't familiar. University endowments, giant pension funds, and the like invest their money in a bunch of different ways to both maximize their returns and diversify their risk. One of these "asset classes" is venture capital. They pay VC firms a fee of 2% of the total money invested to take their money and invest it into promising startups. To encourage VCs to pick the most promising startups, they also give VCs 20% of the profits from the startups that are successful. This is called the "carry". 

From the NY Times article:

"Under current rules, carried interest is taxed federally at a rate of 15 percent because it is treated as a capital gain. That contrasts with the tax rate on ordinary income, which can be as high as 35 percent. The plan approved by the House, which overcame strong lobbying pressure from Wall Street, amounted to a compromise that would tax 75 percent of carried interest as ordinary income and 25 percent as capital gains. It is expected to raise more than $17 billion in tax revenue over the next decade."

The argument against the tax increase is that VCs will immediately pass along the higher tax cost to the LPs in an effort to maintain their profit margins. In the face of reduced revenues, LPs will divert money going to VCs into other asset classes that have higher returns. This (they claim) will result in fewer dollars available to invest into startups, which will result in the creation of fewer jobs. Therefore, the new tax hurts the economy.

I don't buy it, and here's why. First of all, the best startups will always be able to find VC money because VC money isn't disappearing, just shrinking (maybe). And it's the best startups that result in creating the majority of jobs. It's also the best startups that create the 100x returns that VC funds are structured to require. The top funds result in the majority of VC returns, with the rest (over the last decade) barely breaking even or worse. So LPs will be even more competitive to try and get their money into the top funds, and it's the poor performing funds that will suffer. So yes, fewer jobs will be created, in that sucky VC firms will die and the bad investments they would have made will never exist. In my opinion, the projected $17 Billion in tax revenue seems more than enough to make up for it.

My argument breaks down if LPs shift so much money away from VC that it affects the top VC firms. I don't think that will happen, as LPs need to diversify their portfolios and high risk / high reward asset classes like VC are important pieces of that portfolio. The poor returns of VC funds over the last decade will be a good test of this theory - who cares what the tax rate is if your ROI was 0%!

This is definitely a complex issue, and I want to hear your thoughts on the matter, so please reply! 

quoted from Strawberry Filled Cupcakes

Pink has always been a color that was just too girly for me, and I was more of a blue and gray kind of person. I thought pink clothing was uncool, but my wardrobe also consisted of hand-me-downs from my big sister. Explains a lot, right? When I made these cupcakes and the end result was lots of pink, [...]

This might be the best use of Postling's new tracking feature ever! :P

Now this is a graph that makes me happy :)

This one is about the "Starving Startup" and how, with all the talk of "Lean" vs. "Fat" startups, too many entrepreneurs are taking too little money. Click the link above to sign up for future posts.