“Fail fast” seems to be the theme at Pioneer Square Labs.
It’s been about one year since the Seattle-based “startup studio” launched after raising a $12.5 million round from 13 venture capital firms and more than 50 angel investors.
Backed by premier investors and led by an experienced team with accomplished entrepreneurs, PSL uses a unique innovation model to rapidly test and validate new startup ideas before recruiting an executive team to build out an actual spin-off company.
PSL starts with an original idea and spends roughly four months working hard to quickly validate it, using the fresh investment round it raised for financial support. That means building prototypes, talking with customers, doing market analysis, etc. — a “fail fast” process that helps separate signal from noise. Then it recruits an appropriate executive team to build off the work that’s already been done and ultimately spin the new startup out of PSL into its own entity.
Co-founder Greg Gottesman, who started the studio with Geoff Entress, Mike Galgon, and Ben Gilbert, revealed some details about the past year at PSL during a fireside chat at the GeekWire Summit last week in Seattle. He said that the studio worked on 25 separate startup ideas, killing all but three over the course of a year.
One of those ideas was LumaTax, a company that aims to automate sales tax reporting for small businesses and last month announced a $2 million financing round from Madrona Venture Group, Greycroft Partners and angel investors.
Another was Jet Closing, an app that helps streamline the real estate closing experience.
So what happened to the 21 other ideas?
Gottesman, who served as managing director at Madrona Venture Group for 18 years before moving to a part-time role so he could focus on PSL, said that the studio typically looks to make a decision on an idea within four months.
“Our hit rate is actually relatively low because we are really looking for product market fit and customer validation,” he said. “We are really quick to kill.”
“Fail fast” is a well-known phrase in the startup world — or “fail forward” and “fail better” — used by many entrepreneurs and investors to describe the process of rapidly identifying bad ideas and iterations as a way to ultimately arrive at a successful solution.
Some people, like venture capitalist Marc Andreessen, don’t like the mentality. Speaking at TechCrunch Disrupt in San Francisco last month, Andreessen said “fail fast” makes sense for tactics — “if a tactic doesn’t work, find another tactic.” But not so much for longer-term goals.
“I think ‘fail fast’ is catastrophic if it is applied to strategy and goals,” Andreessen explained. “A lot of founders talk themselves out of what are going to be good ideas in the long run because they aren’t getting immediate traction.”
But PSL is much different than one startup, or an accelerator or incubator — and “fail fast” seems to be working well thus far.
The studio looks for ideas that can be tested in a small way to get a sense for early traction.
There’s not a particular industry that Gottesman and his colleagues are honing in on, but they aren’t looking at long-term plays in industries like deep enterprise software or life sciences, for example.
Even after months of testing, it’s not easy to predict if a given startup will find success. But one metric PSL tries to focus on is unit economics — something that investors are starting to prioritize when assessing startup ideas.
For example, one of the 22 ideas that didn’t come to fruition was an eSports company that helped gamers receive instruction from a professional, much like an athlete might find a coach to improve his or her ability on the basketball court or golf course.
People loved the service, and there were many repeat customers. But the unit economics didn’t quite work out — a typical user had to go through 10 coaching sessions for the company to break even.
“The unit economics didn’t feel right, so we killed that business even though a lot of things about it were going well,” Gottesman said. “That’s a typical reason we might kill something — there may be a problem we are solving, but we just can’t make enough money for it to make sense in terms of being a big business.”
Ironically, a customer using that eSports platform launched something similar under a different name a few weeks later and was able to raise several million dollars in venture capital financing.
“Maybe someone else saw something we didn’t,” Gottesman said. “But we didn’t see it.”
On that note, asked if entrepreneurs should keep their startup ideas to themselves for fear of someone else stealing the concept, Gottesman said he doesn’t think so.
“I’ve always been of the belief that I’d rather take the risk of telling a lot of people about my idea — if they can out-execute me, I was going to lose anyways,” he said. “Even though there is a risk and people do copy other people’s ideas, I think getting that smart feedback from customers and investors is always worth it.”
PSL will reveal details about its two other spin-outs in the coming weeks, so stay tuned to GeekWire for those announcements.