While at TechCrunch Tokyo I had a good chat with the editor-in-chief of TechCrunch, Erick Schonfeld, who gave a great intro to the conference, discussing the Cambrian Explosion in startups. He asked me to expand on the theme, especially around how the lean startup had given rise to a Lean Finance Model of Venture Capital.
You can click here to watch the video.
The concept: keep funding lean for as long as possible, until the startup has validated its model and is beginning to scale. Usually it takes around six months of metrics to be in position to raise a big round. That “shovel-in” round is where the lean model catches up to the traditional venture model, as shown in the chart.
By using this process, the founders have preserved more ownership as well as their options. Most startups are not suited to become billion-dollar babies, and exit via M&A, often quickly (a “quick flip”). Lean funding makes the quick flip attractive both to the founders, who often each pocket at least $10M, and the funders, who make larger multiples on their invested capital by putting less in. If this happens quickly, the IRR can be quite attractive to the LPs who invest into the lean venture funds. They have learned to be wary of big venture, where their capital is tied up for ten or more years.