Why don’t Silicon Valley investors understand lean startups?

Why don’t investors who need to deliver greater than average rates of return, in order to offset the exceptional rate of failure among startups, favor Lean Startups?

I rephrase the question a bit as you shouldn’t have any problem finding investors for a Lean Startup, in Silicon Valley or not, being Lean has nothing to do with it so much as meeting the expectations of investors with a wide variety of experiences and tolerance to risk.

Where Lean Startups Seem to Focus

Customers are NOT validation of a market opportunity appealing to investors.
Particularly if you can’t first convince a capable team and experienced advisors to invest their time on behalf of what you’re doing.

Customers prove that someone wants to buy something and that you know how to sell to them. A concept generally considered a foregone conclusion in any business – startup, local, corporate – if you can’t build and sell to customers something they want, you don’t even have anything. My neighbor sells fish tanks at the corner strip mall – that doesn’t me the business fundable. The idea that a good sales person can move refrigerators in the Arctic is based on the simple premise that selling to customers isn’t the hard part. Customers in and of themselves don’t validate much of anything.

The challenge with Lean and ideas such as the MVP is that the Lean process is derived from the process of optimizing an existing model. Not starting from scratch.

Starting from scratch, what actually makes a company fundable? Customers? No… customers are part of the operating business and optimization of said business already existing. Customers validating that you have something is merely a means of further optimizing what you have. Whether or not what you have can be accomplished, can compete, and can thrive, for investors, is based on:

  • Team
  • Market share
  • Exit opportunity

Customers may or, frankly, may not be relevant to such a thing.

Thus an MVP more often than not works against founders. Developing an MVP effectively says, “we’re not sure what we’re doing so we’re building something that only represents part of what we want to do so as to figure out what we should do.”

  • The right team would know what to build
  • Market share is determined by marketing, not customer feedback and insight to acquisition
  • Showing demand for a product doesn’t validate that any company would acquire said product nor that an IPO is remotely conceivable.

In short, it asks and answers the wrong questions, pertinent to investors, while all but saying, “what we are now. what we are doing today, isn’t fundable.”

None of that means Lean Startup is bad nor wrong, per se. It answers your question. Easily 4 out of 10 startups I meet for mentor sessions or office hours make a point of saying that they are Lean or that they have an “MVP” as though that matters.

When I hear a startup is Lean, I immediately focus on the makeup of the team, their understanding of the market (competitors, history, platforms, etc.), and whether or not they are building merely a product for a market, a possible solution to a problem, or addressing the market at large.