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Trust customers over VCs

37signals.com

51 pointstoffer28 comments

Though I at least partially agree with the overall sentiment, he seems to be forgetting two things.

1) Much greater than 1 in 10 VC-backed companies succeed (from the founders' perspective). 1 in 10 return the fund, as Fred Wilson would say. Many others score a multiple that is lower for the VC, but in general if a company returns a VC 2-3x, the founders made millions.

2) Many startups change ideas midstream. This is largely why VCs invest in people. Whatever that silly game that eventually became flickr was called, it had users. But it wasn't going to make anyone rich.

Of course past performance doesn't indicate future results, so you can't simply say "50% of the startups this firm funds get rich, so my chances are 50% if they fund me." But I'd guess that the average funded startup still has a much higher EV, from the founders' perspective, than ones that aren't.

If a startup returns 2X-3X, the founders won't necessarily make a lot of money.

A lot depends on the liquidation preference in the financing terms. Although not common these days, there was a time when VC deals were structured such that a large percentage of an exit went straight to the investors before the founders saw any money.

That's why I said in general. It definitely depends on your valuation and terms (participating preferred can rape a 2x exit) but if you take a few mil in VC money on a few mil premoney, then sell for 3x, you probably got rich.

Dude, what YC business were you involved in? I never did find that out...

draftmix.com

That'd be Game Neverending.

And a truly wonderful game it was. Me and many others still miss it terribly!

Any way you slice it, you need to have money for a product business.

You can use VC money if you can bootstrap yourself to a little bit of traction without giving up control of your company. VC gives you valuable validation and connections if your business is a big opportunity.

Or you can consult, which saddles you with distraction (less of a big deal if your v1 product is simple enough). This gives you a bit more control and all of the equity.

Each path is great for different businesses, depending on factors like the size of the opportunity, the cost of getting to a v1, whether there's an opportunity for early/scaling revenue, and (OF COURSE!) the goals of the founder(s) etc.

There are stupid VC paths (getting vast piles of money too early, giving up board control, etc) and there are stupid bootstrapping paths (letting the project drag along, letting consulting take over, not giving enough love to the idea).

I think the best entrepreneurs don't sit down and say, "Gosh, should I go with lifestyle biz or a shoot-for-the-moon biz?" They have something they want to build and (if they are smart) ask the question: "Does this idea NEED financing to pull off effectively?"

A software startup doesn't need money. Maybe a few bucks for a server.

Raising venture capital proves exactly one thing: that you can raise venture capital.

Market validation in terms of paying customers or masses of addicted users is more valuable than the vote of confidence of a limited set of investors (even really smart ones).

Disclaimer: I've done startups both ways, and my most recent venture has raised $17 million in VC.

Now, I don't believe in capital either, but David sometimes speaks as if his situation is typical. It's not, it's very atypical, and not because of some clever strategy, but because he kind of drifted into it. And now he just seems to be preaching all the time without giving real information.

David may have drifted into it, but much of what he says is espoused by the 37 Signals founder, Jason Fried. Jason has some interesting podcasts out there, which you may also find preachy. If your criticism is that David drifting into 37 Signals detracts from his credibility, you can hear the same ideas from Jason, who founded rather than drifted into 37 Signals.

I tend to agree with DHH on this one. Raising VC money shouldn't be use to justify your idea. That's a dangerous game to play. Validation by the market is much more realistic than by an investor.

The validation a VC provides isn't around whether people want the product. It's about whether (theoretically) smart folks think it's a big opportunity with likely liquidity... Which is helpful and encouraging validation if liquidity is your goal.

You should only fully trust the opinion of a VC if they are the target audience of what you are building.

Otherwise, they're just some person with a lot of money. The fact that they have a lot of money actually makes them a worse source of advice, compared with your average Joe.

Didn't they take money from Bezos' fund?

But they had enough leverage, which most of the early start-ups wont have. So they will pretty much get in a situation where it will be a win-win situation for VC's.

Basically reiterates Adams points.

But at least Adam and Heroku get more exposure via the 37Signals blog.

Perhaps all startups should do this - disagree with 37Signals/DHH, post on YC, await blog attention.

I think that is what most people in comments try to do too, but they hardly get any attention. Attention is given to the people who deserve it. Someone can hardly get any attention if he is disagreeing with someone for no reason(Zed Shaw is funny though).

Yeah to really get attention you need to come up with a Top X list of whatever and submit to Digg.

Maybe Adam got more attention because he got some venture funding:-)

I define the person who gives you your income as the customer, the VC is your customer if without there funding you would be out of business.

We're dealing with this right now.

Your particular product is something that SERIOUSLY needs paying users. Paying users will remould your path into one that can become seriously profitable.

You know we're already profitable right?

If you're salary-for-everyone profitable, then that's excellent and hats off to you on that. If you're just above-expenditure profitable, that's easy to do and does not count as profitable.

Small salary-for-everyone profitable - yes. Luckily, Tom and I have other sources of income that can be saved while our "salaries" go towards apartment rental, groceries, utilities, insurance and other living expenses.

We really just need a few months of operations (since we've only been launched ~10 days) and we'll go from there.

That's good, I'm sure you guys will be fine. Just don't let the project be an all or nothing thing - let it grow without putting pressure on you. I predict that you'll soon reach a ceiling. Your income is going to stop growing, and your business will either fail at that point, or you will stick even more effort in and break free to really grow big.

A startup that is able to generate enough revenue to cover its operation and living costs before outside funding, is more likely to succeed than one that received a 2M dollars check without generating one dime from customer and want to focus on growth.

Growing what?

Most startups focus on consumer products knowing that it is super hard to extract money from these. If you glance at most VCs portfolio you will see that their enterprise focused companies do better than the consumer focused startups.

Most entrepreneurs want to create cool products for consumers. If you are doing your first startup I would advise creating something you can sell and make money. On your second startup, do something cool and fun as you are not worried about deciding between peanut butter/jelly sandwich and ramen for diner.

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