Andres Rodriguez: I’ll tell you the short answer. For young entrepreneurs today, they can do it but they have to have technical people in the team that have lots of equity in the company. The one thing that an investor wants to see is the proof point that you have a concept. This is for the kind of company that you were just telling me about where what you’re trying to prove is a concept. It’s really about getting traction or users. I don’t think it has changed as long as you can get a technical team that can work. A group of two or three engineers can build a lot of value to prove a concept in six months. An investor will fund that. That is the way to do it with no track record.
Sramana Mitra: You’re right. That’s a very interesting observation. You can build if it’s a group of highly-skilled engineers who are willing to work for equity and do not cost a lot of cash. You can get to a certain level of validation working with customers and build technology. That is a scenario that can be funded. What I’m saying is, that’s not a concept financing, that is a business financing.
Andres Rodriguez: The business may still not be ascending. You’re just demonstrating that the concept appeals.
Sramana Mitra: You have built a product. You have got validation from customers that they’re interested in the product.
Andres Rodriguez: That is correct.
Sramana Mitra: It’s not a concept. It’s not a set of Power Points. Serial entrepreneurs with track records are the only ones who can actually just get a concept financed.
Andres Rodriguez: I would concur with you.
Sramana Mitra: We just published a book called Bootstrapping Using Services, which is a technique that you have used in your first company. That is a very viable way of building fat startups. It’s interesting because one of the first major stories that I did on Bootstrapping Using Services as a case study, was the company called Finisar, which is an optical components company. Optical components is a very capital-heavy industry. Normally, people won’t think about bootstrapping companies like those but Finisar was 100% bootstrapped by the founders, Frank Levinson and Jerrry Rawls, by doing services project that got them really close to the customers. They started understanding the problems of the customers, started selling by doing projects, and then productize from then on. The company went public a few years later. They didn’t raise a cent of financing until right before the IPO.
Andres Rodriguez: That is wonderful. I don’t know the whole story but that’s great. One of my top guys at Abuzz took his money from Abuzz and started a small consulting company. It’s a company called Formulatrix and they build robots for pharmaceutical companies. They are very successful private company that employs 300 people around the world. He’s built a great business out of it, never raised a cent of venture money, and built the whole thing on the backs of professional services.
Sramana Mitra: I think what we are synthesizing are a few different options for entrepreneurs to do what we call fat startups. If you’re a serial entrepreneur, you can get a concept financed. Bootstrapping using services is one way to get close to customers, get cash flowing, and then build a product from there on. Another option is if it’s a group of engineers who are willing to work for equity and without salary for a period of time to build a product, that’s also potentially a fundable situation.
Andres Rodriguez: That’s right. In today’s world, it seems to me, anything that’s in a computer is called a high-tech startup. It’s very important to understand whether you’re building a high-tech startup or a media startup. There are different amounts of capital.
Sramana Mitra: E-commerce is very big but it’s not exactly e-commerce. E-commerce and media are not necessarily not high-tech anymore because if you’d want to do personalization with a significant e-commerce company, that’s very high-tech.
Andres Rodriguez: No, you said it before. The components are already built.
Sramana Mitra: E-commerce today doesn’t really do any personalization of any significant caliber. The personalization that e-commerce does today is very rudimentary and not available off the shelf.
Andres Rodriguez: Right. Building a dynamic HTML web server requires high-tech and engineers who know what they are doing. In today’s world, anyone can do it. That’s no longer high-tech. You should focus on adding value in the layer where you can add value. Instagram is far more a media entity than a high-tech entity.
Sramana Mitra: Yes, so if you’re building a little app on top of an existing platform, like on Android or iPhone, that’s not very high-tech. We recently did a story on a company called TextMe, which is a communication app on top of iOS. That is very high-tech because they’re doing real time communication using the iPhone iOS platform. They have serious communication technology involved.
Andres Rodriguez: Absolutely. That’s the way to think about it. It depends what layer you’re in. The biggest mistake that entrepreneurs and investors make is thinking that some media concept companies are high-tech companies. High-tech companies are very slow to move and require more capital. High-tech companies are much more boring 12 to 15 hour a day engineers who are coding. Media companies are fast moving. It’s all about finding exactly the tweak and adjustment that you need to make the customer happy. When you’re talking about a company like Uber, that’s not a high-tech company. It’s a wonderful, beautiful e-commerce media company.
Sramana Mitra: Uber is a logistics company – neither a media company nor an ecommerce company. It’s kind of a logistics company.
Andres Rodriguez: It’s not a high-tech company.
Sramana Mitra: But it’s not a high-tech company by any stretch of the imagination.
Andres Rodriguez: Marketing is important. Having creative people is important. Experience is important because they do help bridge to the real world. Instagram is a perfect example of a company that is beautiful pure media company. That is the kind of company that I could never hope to dream of. You need artists and designers. You need UI people to think of things like that and what’s important with things like that.