Zencoder plays MoneyballDave McClure, one of our investors, wrote an infamous blog post last summer that coincided with the launch of 500 Startups. The post is called MoneyBall for Startups: Invest BEFORE Product/Market Fit, Double-Down AFTER. Dave argues that startups are changing and technology is changing, but VCs are slow to adapt. Startups no longer need $3M to get a product out the door - products are cheaper and faster to build, marketing can be done inexpensively, and many startups can start making revenue on day one. When you think about it, it should be obvious that technology companies are easier to start today than they were 20 years ago. The internet, open source software, and (now) cloud services empower smart people to build amazing things with very little money. But venture capital in 2011 looks suspiciously similar to venture capital in 1991. Dave outlines a new model for financing startups, in three stages.
1) Product: $0-100K, 3-6 months to develop basic MVP that's functional & useful for at least a few customers. Get to small product/market fit. 2) Market: $100K-$2M, 6-12 months to test marketing & distribution channels, understand scalability & customer acquisition cost, conversion to some non-zero revenue event. Get to large product/market fit. 3) Revenue: $1-5M, 6-24 months to optimize product/market fit and get to cash-flow positive.This is exactly - to the numbers - what happened at Zencoder, with the addition of a Step 0. 0) Bootstrap Zencoder spent two years as an unfunded side project. We built Flix Cloud during that period, but otherwise, like most side projects, we didn't get real momentum until we moved to the next stage. 1) Product. We raised $20,000 from Y Combinator, supplemented this with personal savings, and completed a working beta in 4 months (January-April). Zencoder launched in May of 2010. 2) Market: Just after launch, we raised a convertible debt round from Chris Sacca, Dave McClure, and others. We used this money to hire a team, get Zencoder to product-market fit, and start making meaningful revenue. After about 4 months, things really started to click. Customers now love Zencoder almost universally, and revenue and usage have been growing quickly. After this clicked, we began working hard on our sales and marketing alongside of continued improvements to the product. 3) Revenue: We just closed $2M in funding. We'll use this money - and I quote the Moneyball post - "to optimize product/market fit and get to cash-flow positive." Give 500 Startups credit: this isn't just talk. They first invested in Zencoder before product/market fit, and they doubled down after. So did a number of our angels. This approach to fundraising would have been difficult in the 20th century, or at least rare. But it's not unusual today, and it's only going to become more common.