The Big Lie of Venture Capital | Hacker News Reader

The Big Lie of Venture Capital

montrealintechnology.com

55 pointsbrault38 comments

I got through this whole thing and I still can't figure out what "the big lie" is. That it's hard to get funded as a first-time founder? No shit. In the post-YC era it seems pretty close to impossible to close a round with a professional VC firm without first having done some kind of syndicated, social-proof-collecting round of angel investors --- so if that's seriously what you were playing with doing, I automatically have a hard time taking your experiences as guidance. And since hundreds of credible startups get introduced to angel investors through accelerator programs, it's hard to skip the accelerators and avoid signaling risk.

Is the big lie that you should be careful about trying to execute a funding-first startup plan? Hasn't every bootstrapper been saying that for over a decade?

"Nobody is going to invest in you unless your wealthy family plowed a bunch of money in already" is horseshit.

What's that logical fallacy where you take what someone said, twist it into something completely different and more extreme and then defeat that extreme argument? Strawman?

What he said was "Another thing investors like" is when the investor himself puts his own money into the startup.

Well that's a no-brainer. If I were an investor, I would definitely say putting your money where your mouth is, is a positive signal. I'd specifically avoid wealthy founders who don't pony up - seems like a strong negative signal if they themselves don't want to take a risk on it!

He later says "So, unless you come from money, attended a prestigious university in the States or sold your previous startups for a lot of money, you should assume that you’re never going to raise early-stage capital." Given the statistics that he quoted, that's sound advice. The odds are strongly against you, so unless you check all the boxes that VCs look for, you're effort is likely better spent elsewhere. If you can get that hockey-stick growth going, it doesn't matter what boxes you tick or not, now you're speaking their language and have things on your terms. It's smarter to do the stackoverflow thing and take the company as far as you can before seeking investment. At the least, you'll raise much more, with less time investment, and less equity expended.

I think if you don't have real signals for investors to focus on, they'll look for tea leaves to read.

Agreed, because what else do they have to go on. Best focus on getting those real signals as strong as you can. Then go talk to VCs. In my opinion VC should have nothing to do with starting a company and everything to do with accelerating the growth of a proven startup. Angel investment is a little different and has a definite role to play in allowing people to get the company to the point where it can demonstrate some traction.

I think the “big lie” the article is talking about is that venture funding is largely meritocratic rather than largely class/pedigree based:

> unless you come from money, attended a prestigious university in the States or sold your previous startups for a lot of money, you should assume that you’re never going to raise early-stage capital.

Not sure where the author got the idea that it’s meritocratic, but that’s what’s printed.

Well, it is pretty meritocratic in the sense that if you have enough traction, everything else will be overlooked. Pitching/networking are also skills that can be learned and improved, so that's somewhat merit-based.

But yeah, if you don't have some combination of traction and pitching skills, you better have something else going for you. If you don't, you're definitely better off focusing on traction (merit) than trying to play the decidedly not merit-based game of pitching VCs on vaporware.

Re the lie. Maybe he means something like this?

https://blog.nugget.one/upstart/entreporn-the-fallacy-that-w...

My thoughts exactly, and the article even acknowledges this up front: only 0.91% of start-ups end up raising from angel investors and only 0.05% from venture capital firms. The only lie here is the lie our every member of our generation tells themselves ad nauseam: I am the exception, it doesn't matter that the stats say only .91% of startups ever raise anything, I am a member of the .91%, because I am the exception. (And if I prove not to be the exception it proves someone is prejudiced against me.)

This reads like a rant out of frustration for not being able to raise money (and newsflash, if raising money is hard, no doubt raising in Montreal is near to impossible), but I think the author nailed it with this paragraph:

"The problem, with the Big Lie, is that it kills a lot of startups that end up building their strategy around a capital infusion that will never come, and end-up wasting a lot of time trying to fundraise. Some of those startups would have had a better shot had they focused on sales. It’s still super hard, but the odds are better. The problem is that bootstrapping success stories often remain unknown, as the valuation of those startups is never announced in press releases."

This is so true. Most people I know that have founded startups that later failed were working towards having something decent to show to institutional investors instead of focusing on understanding their customers.

This is just another article that causes me to kick myself. I graduated from Stanford in 2010 but now am a pretty average, non-Silicon Valley programmer because I didn't want to do anything after graduating from college.

Why does this make you kick yourself? This is a guy writing an internet rant about how frustrated he is with the life you choose not to live.

I think the implication is that as a Stanford grad he had a pedigree that would have increased his chances of getting funded... but he didn't have any ideas, so now he's using his name-brand degree to do the type of work that a degree from any school would have been fine for.

If he or she does have some good ideas later, that real-world industry experience might come in handy.

Well, take heart that just being from Stanford isn't a guarantee. If anything the middle-of-the-road job you have now is more of an ironclad guarantee than any VC-funded startup. Plus, you got to do what you wanted after college instead of flailing around and getting burned out.

On the other hand, a Stanford degree is a signal, and will still serve you well for quite a few years yet. My name-brand diploma is decades old but I'm pretty sure it still gets me second looks and interviews more often than I'd care to admit.

> bootstrapping success stories often remain unknown

Bingo. I don't even want to be noticed (hence this throwaway account).

My startup has taken over an entire national B2B SaaS market segment but our major competitor hasn't realised yet. They deal in many segments and are a classic incumbent dinosaur, and were recently acquired so their attention is elsewhere. We've done no marketing, never been mentioned in any press, raised no capital. All growth purely by referrals. The more market share we can collect before the dinosaur notices I kicked its tail, the better. We're 100% bootstrapped, debt and dilution free and planning to stay that way, and to remain submarine as long as possible. As a result I'm entirely focused on serving our customers and improving the platform and our organisation to suit them, not running around wasting founder energy chasing investors and trying to dress up the company to look pretty for VCs.

Sounds like a good strategy. Are you profitable at this point?

That's too bad about "bootstrapping" - it's a good userID!

That's one thing about bootstrapping, your P&L practically mirrors the cashflow statement so we had to be profitable from the get-go. We're well past that take-off stage where I was unsure if the business was going to fly or not, so now I'm following the Bezos strategy of re-investing all earnings back into the company (sure beats coughing up income taxes). So yes, with the caveat that I'm not paying myself a cent, since as majority shareholder I think of equity as my comp, it's profitable.

It helped a lot that on Day One we had $5000 of AWS credits, two founders with spare time and tons of business & tech experience, a market segment ripe for the picking, an enthusiastic (and well-connected) launch customer for the MVP, and disruptive home-grown IP that created more customer value (even in MVP form) than anything else on the market. I couldn't have asked for better initial conditions for a bootstrapped company.

(yes I was surprised the account ID wasn't taken already. maybe I won't throw it away)

That's a pretty extreme position to take. Sure it's harder if you can't show some prior validation or backing, but it isn't impossible. Hook up with any one of the accelerators, sign up for some mentoring programs and you'll get your introductions sooner or later if that is what you desire, provided your start-up has some merit.

And then there is the dumb money, of which there is plenty floating around, and which keeps on surprising me with the stuff that gets funded. Really, if you want to get funding you probably can, but it will come at a cost and it may not be a good fit in the longer term. Be careful of what you wish for.

This article misses the fact that the "startup ecosystem" is different on the east coast vs. the west coast. And it's especially brutal when you compare the funding sources available to Canadian startups vs. US startups. See 2016 Analysis of 20,000 startups by Vancouver-based Yaletown Partners (here: www.yaletown.com/wp-content/uploads/2016/06/Canadas_Technology_Investment_Gap_Yaletown2016.pdf): “In 2015, U.S. companies raised three times as much on average compared to Canadian companies.”

Just like the author, I tried to raise money from Montreal and Toronto VCs ~10 years ago after having received substantial angel funding (~1.5M CAD). Contrary to what's asserted in the article, previous access to such funding didn't help us much. Albeit this was around the financial crisis, but still, there was no additional openness to listen to us. In fact it felt like a handicap. They wanted to see real sales, conversion ratios, etc. ... pencil-pushing sort of data in general. But I digress.

The more substantial issue that I found is that most VCs in Montreal/Toronto are extremely conservative. After we closed the startup I mentioned earlier I started travelling more actively. That was round 2010 where everyone was going to become a gazillionaire with a new "app". I was at a conference on the west coast and I stumbled on a startup that had raised 10M$ for an app. When I asked about their business model the answer was: "We're focusing on acquiring users for now. We'll figure out monetization later." THAT would never fly for raising capital in Montreal/Toronto. In fact I was recently talking to one of the VCs I had pitched to way back 10 years ago and I told him this story. His answer? "Oh boy, that's one I would've killed right away."

So the biggest mistake from my point of view east coast startups can make, especially if they're based in Montreal/Toronto is to believe what they read about "startup funding" on the Internet. What flies in the Valley doesn't necessarily fly anywhere else. There's a willingness/ability to suspend disbelief that is unique to the Valley, both in terms of funding and in terms of recruiting top talent.

In short, if you're trying to build a startup on the east coast (and Montreal/Toronto specifically) then focus on making money from real, paying customers, not angels nor VCs. Or just pack your bags and head west.

> In short, if you're trying to build a startup on the east coast (and Montreal/Toronto specifically) then focus on making money from real, paying customers, not angels nor VCs. Or just pack your bags and head west.

This is true in Philly and to a lesser extent Boston as well.

"preparing our equity crowdfunding campaign. Yep, we’ll raise money directly from our users" - Unfortunately, crowdfunding is also probably a lie, by your definition. Here is a different concept, how about charge your users for your product?

> So, unless you come from money, attended a prestigious university in the States or sold your previous startups for a lot of money, you should assume that you’re never going to raise early-stage capital.

Most founders are none of those things. It’s hard to raise money, of course, but the author makes it sound like it’s impossible. I’ve seen plenty of crappy companies with not much to show raise an angel round on nothing but fairy dust.

OP also argues that less than 1% of companies raise money. Does that mean that less than 1% that try to raise money are successful? I highly doubt that. That might be about the percentage that get into YC or raise from a prestigious fund in their seed round maybe, but it seems like what percentage of total businesses raise a seed round, which is a stupid thing to measure.

The whole article is just an I-fail-because-the-world-is-so-horribly-unjust whinge, and to make himself feel better, he wants you to believe that you will also fail if you try, because that's a much easier way for a person to digest failure.

While there is some truth when it comes to elitism etc, my own (hard learned) view regards this subject is, that there simply is somewhat of a "gut-feeling" if you should or should not be raising money. This is not the same as that you "feel a need", i mean everybody always need money. The "should" is usually there when you have sales flowing in and you just need to hire help etc. Many founders already know the answer deep down(and they are good at ignoring it), even before the pitch.

VC is a con-job for the most part anyway. They've convinced first-time entrepreneurs that raising money (and thereby giving away a portion of your ownership) is a great signal that your business is a good idea. Naive founders dream of getting into YC or getting funded to prove to everyone that they're smart and talented.

In fact, making money is the only signal that matters. Try doing that instead.

Getting to the early signs of success (product, revenue) is cheaper than it has ever been in this industry in most problem domains, and growth and customer acquisition is harder than ever. Before a VC invests in you to tackle the second, why wouldn’t they expect to see the first?

It's not a "lie"- do people honestly expect VCs to just hand over money willy-nilly? Obviously, it is an investment, and they expect to make a return on their investment. I blame dumb Founders, not VCs, for thinking otherwise.

Hey! As a non-white non-Ivy League person I take umbrage at your characterisation of me as "willy-nilly".

> It's not a "lie"- do people honestly expect VCs to just hand over money willy-nilly?

The article takes exception to the practice of funding people who disproportionately have friends and family wealthy enough to make a first-round investment, who are disproportionately white men, who disproportionately come from a handful of educational institutions, etc.

It's an odd dichotomy to assert that funding decisions that ignored those factors would be "willy-nilly."

It seems to me that the only observation being made here is that in the absence of any financial or meaningful social proof for your business, you're not going to get funded as a first-timer. There are marginal bits of financial and social proof that privileged people start with, sure, but who does that surprise? That's true of every competition in society.

The answer isn't to call out "the lie" (I mean, the market for funding is pretty dishonest, but calling it out isn't especially productive). It's to recognize how the modern startup financing market works and plan accordingly.

1. Apply to reputable accelerators as a hail-mary.

2. Execute a plan that works without external funding and accumulates the proof you need for financing.

3. Repeat until accumulated proof suffices for talking to investors directly (by which point you may be on the Mailchimp trajectory anyways and won't care anymore).

The role of VCs as gatekeepers is, I think, pretty overrated, and gets more overrated every year.

Companies are taking a risk by investing- so if they find people who come from top schools, and who already have gained initial seed funding and completed work, then that lowers risk. My point still stands.

The real tension is that if you go out and focus on signing paid customers instead of growing at all cost (literally maxing out your credit cards), you'll be less attractive to many VCs.

They'll say you're a "mom-and-pop business" and not one that can achieve venture scale. Basically, they want to write big checks to companies that are swinging for the parking lot (not just the fences) — not companies that want to take as small a check as will get them to break-even.

I think this is just false. If you pitch a VC on a business that grows in a nice linear line to tens of millions of dollars in revenue, they're going to turn you down no matter what your go-to-market is, because the math of a venture capital firm simply doesn't work unless the few winners win so spectacularly that the gains swamp the losses from the losers who make up the majority. You have to commit to shoot the moon to get them interested, but you don't have to start the business so committed.

But nothing stops you from building a stable business and then using it as a platform for a shoot-the-moon pitch.

I'm confused — what exactly do you think is false? It seems like you're agreeing that VCs aren't interested in a "stable business" — only the shoot-the-moon idea that might be built on top of that. But as you say, they're not going to fund the stable business since it would never become the unicorn that they seek.

You said "The real tension is that if you go out and focus on signing paid customers instead of growing at all cost (literally maxing out your credit cards), you'll be less attractive to many VCs.".

I think what @tptacek is saying is that you absolutely CAN go out and focus on signing paid customers instead of growing at all costs. You can 100% start/run your business that way for as long as you want. However, the moment you want to seek venture capital, you have to sell a different story. You can't sell the same linear growth story that got you to this point. That's the only difference between seeking VC and not seeking VC.

Your original quote implied that all businesses have to be started or be run in a particular way far before raising venture money, but that's not the case.

Huh, I thought it was clear that I was pointing out a tension between building the type of business that the author suggests and building the type of business that VCs fund. I don’t think I indicated that if you build a stable business, you can’t then build a venture-fundable business on top of that.

Regardless, I’d be curious to hear about businesses that started out stable and then raised VC money to build a moonshot!

What's the "big lie" of VC's not funding businesses that you literally can't finance with venture capital?

But that's not why I replied. I replied because you suggested that actually trying to build a business would make you less attractive to VCs. It will not. Even people who eventually hope to raise should still use common sense and basic good business planning to acquire customers.

I think anyone familiar with how class dynamics works would have seen the writing on the wall for the startup ecosystem a long time ago. There's just no way that venture-capital funds are going to willingly march into a regime where their money goes into systematically making anyone else rich but their own.

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