[MUSIC] So welcome back to module one. As you can see by the title of this week's module, I hope to convince you in this first chunk of the course that seeking and taking money from an angel or a VC investor. At least early in the life your venture is an exceedingly bad idea. But wait a second, John, you say, I have a problem. I need money. I need money to get my business off the ground. Or I need money to jump start my growth now that I've proven that my technology works. I have a husband and children to feed, or maybe a dog and a pet rattlesnake too, or whatever. Don't you understand, John. If I only had the money good things could happen. Okay. I acknowledge all that, because I've been there too. After several years in the 1970s helping to build GAP into a fast growing retailer that dominated the casual apparel business in the USA, I founded two more startups and one of those I took public, although that one failed. So believe me I learned a lot of lessons there. And with a win, a loss and a draw to my name, I know just how hard it can be to make payroll on Friday. But stay with me here, you may think that a winning investor who shares your vision, is an answer to your prayers. But consider this, if you ask any experienced early stage investor, how their best deals have panned out, here's what they'll tell you. Most of the time, what worked was not the plan A so lovingly articulated in the business plan that got funded. It was plan B or plan C, or even plan Z. For Max Levchin, the founder of PayPal, what eventually worked was his plan G. The sixth pivot, that is the seventh plan on his original idea to put is world class encryption technology, because that's what he had, to work. Well here's problem number one. Most angels are new to angel investing. And they don't really understand that it's plan B or plan G that's going to work. So, once you convinced them of the wonderful idea that you're planning to pursue with their money by the way, they're going to expect you to pursue exactly that plan. No deviations please and of course pursue the plan flawlessly. But one you burn some or all of their money on your probably flawed plan A, it's going to difficult to go back to them and say, you know, trust me. Plan A wasn't quite right. But now I'm on the the track. One more check please. So I pursue plan B. And having burned one angel's money. Words going to get around. Now fortunately, Peter Thiel who invested in Max Levchin can understood that plan A isn't always right. So we gave Max plenty of rope to find a plan that would work. You may not be that fortunate. So that's one problem with taking money too early before your concept is proven in the marketplace. And it's a big problem. I think you'd agree. But that's not the only problem. Here's the second one. According to the latest research, three out of four venture capital backed companies fail to return the capital that goes into them. And fewer than one in ten deliver anything like what they promised to their investors. Thus, the second problem and it's the big one is this. Your odds even after you've taken VC are dismally bad. In fact, Fred Wilson, one of the most successful venture capital investors in the United States, puts it this way. The fact is, that the amount of money startups raise in their seed and series A rounds is inversely correlated with success. That's right. The more money you raise early, the less likely you are to succeed. That fact may surprise you. So I suggest we pause here so you can ponder what I've just told you. I'm sure it's not exactly what you expected to hear. In fact, let me stop talking for a minute and ask you to answer a question. Here it is. If Fred Wilson is right, why is he right? Why might this be so? Why don't you pause the video. Take 60 seconds to think about it. Make yourself a short list of the top two or three reasons. And then we'll explore this issue further. Okay, I'm not sure what each of you might have come up with. But I'm guessing some of you see it kind of this way as I do. Number one. Too much money makes you sloppy. Maybe even stupid. You spend money on the wrong things or maybe on too many things. Plan A rarely works as I noted a minute ago. But what happens to your mind set when an investor writes you a check for plan A? Finally, somebody shares my vision. I must be on the right track. But sadly, most of the time, you're not. And your naive investor expects you to put your head down and stick to your knitting. Okay. Have I convinced you that taking money from an angel or a VC maybe isn't such a good idea? Are you willing to stick around and hear me out? If so, the obvious question you're going to ask of me is, okay John, that's fine. I get it. But is there a better alternative? So as I mentioned in the introductory video, there's a better answer. In fact, there are five better answers. Five distinct ways today's entrepreneurs are starting financing, and growing their startups with their customer's cash. And you can do it too. Now here they are. Now as you can see, the customer is at the center of this diagram. And I know that a couple of words on your screen don't tell you enough about what each of these models means. So let me briefly explain each of them. Pay-in-advance models are models where the customer simply pays you before they get the goods. Just as consultants do. If you hire a consultant to do a project, there's going to be a first payment paid before the consultant starts. If you want to remodel your kitchen, you're going to pay the builder or the designer to get started on the work. And that's what Michael Dell did as I mentioned in the first intro video. Matchmaker models are like eBay, and AirBnB. You don't ever own the hotels or the spare couches, or the stuff from your attic. You just make it possible for these buyers and sellers to come together and because you don't own the goods or ever touch the goods even you don't need much cash. Then there's subscription models. And of course we all subscribe to things, right? Periodicals, Netflix all those sorts of things. When do we pay for the subscription? Well we start paying at the beginning and maybe then we pay over time. So again, the company that's selling the subscription has our money in advanced. The scarcity based models like Zara for example, the global retailer. If you shop at Zara of course, you paid for the clothes the day you buy them with a credit card or with cash. But Zara doesn't pay its vendors until typically 60 days later. So, again they have your money before they have to pay the person who made the clothes. And then there are service to product models, where a service business, like Microsoft in its early days, transforms itself from a service business into a product business. That's what Bill Gates and Paul Allen did to really create the value at Microsoft. Now, note again what's the center of the diagram? t's your customer. Now, you might say John, is there anything new here? And actually there isn't. This is not new. These models have been used widely for a long, long period of time. But the problem is, that nobody talks about them because the entrepreneurial lime light has been stolen by the VCs. And nobody understands exactly how to apply. So I'm going to pause here to let the messages I've just delivered sink in. You might want to start exploring them on the discussion board. You might want to find out how they resonate with the rest of our group too. And then, after that, or if you want to just get going, click on the next segment and I'm going to tell you what lies ahead. [MUSIC]