Shoes of Prey’s collapse reveals the difficulty of understanding customers, and why startups need the right fundraising strategy

Your startup is like a small fire (it feels that way too). Initially, it’s just embers, and you slowly add more wood to it over time so that it grows.

Venture capital is a huge barrel of petrol. You pour it on the fire.

There can be two outcomes. Either the fire becomes really big, and you need to start felling trees to keep it going, or the whole thing explodes in your face.

There’s been a trend toward ‘indie startups’ lately, sometimes called ‘lifestyle businesses’ (note: if you want a good lifestyle, don’t be a startup founder). These startups are the ones who eschew ‘traditional’ capital sources and instead usually grow more slowly, adding wood to the fire over time.

Sometimes that means raising a seed round, other times it means self-funding from ‘credit card equity’ and cashflow.

Neither path is more right than the other. Some businesses need a lot of capital to grow, because their fires just aren’t strong enough early on without it, or someone else with deeper pockets can beat them to market.

Shoes of Prey co-founder Michael Fox recently wrote an article about the end of their journey. It has a few interesting lessons in it, and I highly recommend reading it. Kudos to Michael for writing it, as there are few ‘why I failed’ posts but many ‘why I succeeded [so far]’.

Every business has its challenges and unknown factors. For Shoes of Prey, one of them was whether the mass market really wanted customised shoes. It was a fact that some portion of the market loved their products — but nobody knew how big that portion was, and if they could grow it over time.

Startups are high-risk bets on unknown outcomes

The founding team and early employees of a startup believe something others think is plainly false. If it was obvious that you can succeed, everyone would be doing it and any return will inevitably regress to the cost of capital (see dropshipping e-commerce companies as an example of this).

When you don’t know if the customer wants your product, you generally do two things:

1. Market research (ask them if they want it); and
2. Make sure you have runway.

Market research is easier said than done, and is not just ‘do a survey’ or ‘do some phone calls’. Customers frankly don’t know what they want, and certainly, are not good at telling you what they want.

This is particularly the case when it’s a new category. If it’s ‘give me email but better keyboard shortcuts’, the vision is easier to understand. Shoes of Prey was in a difficult position where few people bought custom designed shoes before they existed, so they didn’t really know what was involved.

Runway generally involves going and raising capital. Particularly when trying to do a ‘category creation’ piece, as creating a category is outrageously expensive. (This is part of where ‘fast follower’ companies often do well. The original business spends big to create the category, the follower doesn’t have to spend the same amount.)

As Michael’s piece highlights, the hardest thing to decide is whether you need petrol on your fire.

Looking at things retrospectively it’s easy to say ‘this should have never raised capital’, but for every case where you think that there are others that don’t and should have, or ones that succeeded.

We won’t ever know if Shoes of Prey would have succeeded if they hadn’t taken funding, grown at ‘blitzscale’ rates, and swung for the fences.

As founders, we make bets like this every day. Is it time to expand? Should we wait? Is that a sign of product-market fit? (It almost always is not.) Do we gun for cashflow profitability or raise another round? Is that new product extension going to be a hit or a flop?

Sometimes you get it wonderfully right and pat yourself on the back for having such great foresight. Other times you get it totally wrong.

Alternatives to venture funding continue to emerge

New models of startup capital are starting to emerge in the US for businesses wanting optionality — namely, a seed round that you can (mostly) ‘buy back’ through revenue over time.

It’s exciting to see what happens to the category over time, and I hope that it will unlock all kinds of businesses that were perhaps previously ‘unfundable’.

Equally, the rise of these funds and funding types is not the death of venture capital.

A good VC or investor adds huge value to their portfolio and every company.

A startup having a big pot of money can often mean the difference between success and failure. Founders who have only ever bootstrapped companies seem to rarely understand the value a good venture investor can add to the company.

You need to decide which path you want to take. Neither is more correct or righteous, and just as many businesses fail when following one path as the other.

The important thing is to make this a conscious decision on the path, which means understanding the business model of VC and what it means for you.

VCs are in the business of home runs. Typically, between one and three companies (the ‘unicorns’) return the bulk of the capital, while everything else is written down to zero (or has a small but meaningless to the fund return).

That means they optimise for people who want to swing for the fences and take their chance at building the next huge company, and things start getting difficult as soon as a startup looks like it won’t get there. The portfolio approach of VC offsets the huge level of risk they take when they invest (however, if you know the next five unicorns for certain, please call me).

Almost everyone who previously raised venture capital will tell you that next time they’ll bootstrap or only raise a seed round and almost all of the bootstrappers will tell you next time they’ll raise VC. The grass is always greener.

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