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Investment – the ultimate Vanity Metric?

January 18th, 2012 · 2 Comments

The one thing about The Lean Startup by Eric Ries that makes me cringe
The Lean Startup is a great book. It’s well written and convincing, and the more I read the more eager I am to put it to the test on TroopTrack, AuthorGate, and my client work. Part of the reason it appeals to me is because it jives with my own experience struggling to create a product people want on TroopTrack.

There is only one thing that bothers me about Eric Ries’s book. Many positive case studies end with some version of the following phrase: *Startup X* was able to raise *large amount of money* from *VC name* and is now one of the hottest startups in Silicon Valley.

This phrase is often provided as evidence that the lean startup approach is working for Startup X. This really bothers me, partly because the book starts out by referencing massive .com failures and, both of which managed to raise huge sums of money. This is ironic in a book that teaches about the dangers of vanity metrics, false indicators of success in a startup.

Investment is THE Vanity Metric of Success
Do I really have to prove this? Aren’t there enough case studies in the lore of the last decade to make this a given? The fact that some rich guys are willing to give you money to keep working on your idea doesn’t mean that you are being successful as a business. The only situation in which this is not true is when your only business goal is to raise money, which isn’t really a very healthy goal.

When does the “We Can Make A Profit Doing This” assumption get tested?
At one point in the book Eric Ries says something like this (I’m paraphrasing because I’m listening to the audio book and can’t quote exactly):

As a result of innovation accounting, our revenue increased to millions of dollars per month, which allowed us to raise even more money from *some VC*

Seriously, you’re making more than a million dollars a month in revenue and IMVU needed outside investment? Is that really an indication that you are being successful?

I’m not saying IMVU is a failure. I’m just saying that investment and success are coincidental at best. That’s all.

So, shouldn’t a startup also be testing this assumption, that they can actually make a profit? Wouldn’t that be important? To me, waiting until you are generating $1M EVERY MONTH in revenue feels a little bit late. I’m just sayin’.

Profitable businesses have infinitely long runways
The Lean Startup talks about the importance of a startup’s runway and redefines it as the number of pivots a company can make before they run out of money. This is a pretty important and useful redefinition from the old definition of cash / monthly burn rate. You can extend your runway by shortening iterations, focusing on validated learning, and using innovation accounting to figure out what is really working. It’s freaking brilliant, actually.

I’d just like to make a simple point: profitable businesses have an infinitely long runway. They can pivot as many times as they want, as long as they don’t go into the hole for extended periods of time.

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2 responses so far ↓

  • 1 Michael Westover // Jan 18, 2012 at 1:37 pm

    Great point. The book does seem to be a bit boastful, and raising capital seems to be the measurement of success in Silicon Valley.

    One of the companies in the book he touts as being a big success, just recently “pivoted” for the third time to a completely opposite business model.

    I’m a big believer in the process, but wholeheartedly agree with your observations.

    BTW, if your not done with the book, don’t bother reading past the first few pages when he introduces the Five Whys. The book goes downhill fast, and you’ve got what you need by then. It feels like the publisher said we need an extra 100 pages.

  • 2 David Christiansen // Jan 18, 2012 at 2:41 pm

    Ha ha. I hate starting a book and not finishing, so I’ll probably listen to the five whys against your advice, but I will at least not feel guilty for daydreaming about how to apply innovation accounting to TroopTrack and AuthorGate.

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