A vote for me is a vote for dipshit businesses everywhere
blog.asmartbear.com
blog.asmartbear.com
Strangely, within the music business the independent small labels can frequently achieve 1-in-3 rates. Why? Because when they fail they fail small, it didn't cost them a great deal. So they don't need a great deal to recoup those losses. Amongst the indies it's perfectly fine to have a sleeper (slow but constantly selling) album... they're hits still as they recoup their cost x5 which makes money for everyone involved.
To me, angels are closer to the indies and VCs are closer to the major labels. So you've got to ask yourself, is your venture the next big pop/rock act? Or are you the arty, experimental and original new band with limited appeal but with staying power?
To understand what's really being said here, you have to replace the word "you" with the actual antecedents. So: "When you play it safe you nearly always lose" should read: "When founders play it safe VCs nearly always lose."
But founders often win.
Money quote.
To hear a VC talking about $25 million as a small time exit is disgusting.
The disgusting part is not that they don't want small exits, it's that they're so arrogant as to suggest that entrepreneurs who don't help feed their out-dated business model are somehow doing something wrong.
It reminds me of the cable companies back in the day: "But have you seen internet video? It's horrible!"
This logic makes a huge assumption: the success rate of companies is fixed, and not related to how hard founders swing.
My hypothesis is that if the investors didn't push the founders for home runs, the 9% number would grow. If true, it really invalidates the math a lot of these guys are using.
The attitude really should be about maximizing expected value - and I don't think we have any data showing that always swinging for the fences does this.
Could it be that we're looking at a Sabermetric/Moneyball shift in thinking? One of the most counter-intuitive parts of the sabermetric approach is to focus on avoiding outs rather than getting hits. A player that gets on base 40% of the time and hits 10 home runs/year is more valuable than one who gets on base 30% of the time and hits 25 home runs/year. In a full season, the second batter will generate ~70 additional outs (enough to fill 2.5 entire games!)
What if a V.C. decided to avoid "outs" at all costs? What if they managed their portfolios not to avoid losing money rather than to swing for the fences? If they could keep their write-offs around 50%, then 3x and 5x returns become money makers and the occasional 10x return becomes a home run.
Banks are the solution for institutional small-scale low-risk finance, via debt. Retail/commercial bankers are excessively conservative in some ways now (due to regulations); the traditional "small town bank" which originated and held loans to small businesses, property finance, etc. within a specific community was a much better option. Banks have a low cost of capital (from deposits), and should have minimal marginal overhead making each loan. By having "community membership" as one of the metrics for giving a loan (i.e. you've lived in this town for 20 years, and have been a customer, are known to be able to run a certain kind of business, ....), due diligence costs for making a reasonable new loan are a lot lower than for a VC.
Angels (who effectively use sweat equity to cover their own overhead) are the other.
The thing you are missing is that each series A deal a traditional VC does has a 50-100% the invested capital cost in overhead, opportunity cost, etc. At that point, shooting for 3x returns becomes a lot less appealing, especially over 10 years.
2) Are there really many banks ready to fund a technology startup's series A? Even if its a business model with a high chance of a 5x return?
Specialist banks like svb and square can use debt to let you stretch an angel round (equipment financing, maybe invoices on enterprise sales, maybe an a to b bridge loan) but are not a replacement for equity risk capital in seed or series a.
Therefore VCs aren't going to encourage having more of these deals unless the VCs can find ways to reduce their ongoing time commitment. (I note that YC invests in lots of companies with much less of an ongoing time commitment than VCs have. But YC has a very different value proposition and business model.)
In the general population there is an expectation that the word "startup" implies you're working on something world changing. While the term "starting a business" implies doing something incrementally better, no huge world change required.
I also remember 37Signals railing against impractical world changing ideas and VCs, saying how developers should build quality applications, find a few thousand users and be happy with that. Chances of success are higher, a few million is enough money. That seems to be what a lot of startups are doing and what certain schools of investors are encouraging.
Maybe the confusion is over the word "startup" meaning world changing tech being separate from "small business" in the popular imagination and that of VCs.
Now of course many who get angel funding go on to VCs if their idea starts growing like crazy and VCs would prefer to invest at the earlier stage for more profits.
But how many of the companies in seed camp incubators have no intention of being the next big thing? How many people are discouraged from dreaming up a big idea because of all the talk about 1/20 success rates for those vs 1/4 success rates for small ideas? It does look like a trend against the popular perception of startups.
Having said that I'd be very interested to hear about successful bootstrapped hardware companies. I think Dell might be an example but my google-fu is failing me today.
It's less than what you'd normally get from VCs but it's still a lot more funding than a couple of guys in a basement living off of ramen.
Interestingly, Cuban's entire keynote was on why you shouldn't take VC money (at an event sponsored by VCs). Nothing that hasn't been said here before, but still quite good.
1. It's more likely to be his/her own money.
2. They probably earned it themselves.
Don't underestimate the effect of these 2 points on their relationship with you.
I would expect a little more TLC from someone who's investing the result of their own hard work over someone who's more concerned about third party ROI.
3) Several experiences watching startups I worked for get:
a) forced by VCs to spend money poorly that resulted lower exits.
b) bent over a barrel playing games trying to get funding from vcs
c) lose direction because the CEO and executives were spending more time chasing money than focusing on the product
But my advise is still to swing for the fence.
What I figure is your first company goes towards creating something that can make you FU money(25million would do). Your second and after goes to hitting homeruns, google type.
I think VC should now start targetting already successful entrepreneurs, since making 25 more million wouldn't neccessary cause that much change in the outcome of their life. As a second time round entrepreneur, you would be more than likely looking to make your mark on history and by creating disruption.
I think VC can use this to their advantage. Also, a second time round entrepreneur is more likely to be successful.