Why 99.997% Of Entrepreneurs May Want To Postpone Or Avoid VC
forbes.com
forbes.com
The problem though, is that capital is also a shield against the reality of building a _business_. It saves you from talking to potential customers for a while. You can kid yourself that you're "working on the product", doing the fun stuff like writing code instead of the hard stuff like selling. Many, many tech entrepreneurs conflate "building a product" and "building a business". Making the most amazing product in the world is pointless if you can't market it. If you bootstrap or borrow then you have no choice but to get out there and find real, paying customers because otherwise you're screwed so much earlier. That changes your focus in a very good way.
It surprises me that investors put money into teams of hugely technical people who can't sell the amazing tech they can build and yet don't insist that they expand the team to bring in people who _can_ sell right at the start. It's often almost an afterthought, something that can happen later once the product is "finished". Raising capital _never_ means you won't need to do sales and marketing. Every successful business has to. The earlier the sales team is in place and having input into the business the better.
I disagree.
- Selling from start is difficult (even for good sales people). There isn't any thing to sale at the beginning.
- Building from start is essential.
- Resources are finite for a startup. Good people (Sales, tech both) costs decent amount (equity or $$$)
VC expect founder(s)/CEO to take care of early stage of sales/marketing/advertising etc. till the time scaling on these operations is required. To me it makes sense to avoid (expensive) hiring unless absolutely required, especially in the early days of a startup.
This is a surprisingly common, and extremely easy trap to fall into.
I'm not saying the hypothetical founder needs a sales and/or marketing person on Day One, but he should recognize his strengths and weaknesses, and hire to supplement the latter.
The result is race-to-the-bottom pricing as the "sales" teams "right at the start" that you're talking about are forced to sell unproven or worse non-existant technologies, promising 3 - 6 month take on times that turn out to be 18 months.
In the meantime, an established bootstrapped business trying to charge a working price for real delivery has trouble educating new early adopters in the industry why the promises of these well funded sales teams are unrealistic and why the pricing from these well funded startups is unsustainable. It's even harder once the industry matures a little and the well funded newcos actually can deliver at least some of what the customer needs. At that point it's frankly in customers' interests to be subsidized by the seller's VC money as long as the customer can handle the transition costs when their providers implode or are acquired out from under them.
Put another way, even if your goal is to build a solid working business, if your industry is new enough and big enough, you too need to pursue funding as a defensive strategy so you too can subsidize new client market share just to keep up when new money piles into your vertical. Ideally you need to get that funding before you have enough merely organic growth track record under your belt that VC won't believe you'd know how to execute a hockey stick growth curve with their money.
That said, taking VC money doesn't mean you have to climb on the "go big till you exit or die" train. You can operate a profitable business based on fundamentals, as long as you keep brutally honest track of what your business would look like if you have to turn off the pursuit of market share spigot. Make sure the resources you're using for growth are flexible commitments you can unwind if you have to shift back to self-funded operations, and make sure you have a base of solid loyal customers sufficiently profitable to cover any financing carry costs while still growing organically.
This is the wrong mindset, people often think that raising capital from investors is win, it's not; raising capital does not mean a company will be successful. Raising Capital is one of the steps a company can use to help them win - by using that capital to build a profitable business and/or a successful exit & only then can it be considered a win.
You could make a similar case for mortgage approvals before the financial crisis.
> If you have a guarantee that you will become a home run...
That right there sums it up.
On a side note, I think there's a huge gap between a VC company and a bootstrapped company. I believe most entrepreneurs, including those who get VC money, aren't looking to hit eBay sized home runs. I think many just want to build a successful business.
Their options? Bootstrap or raise VC. Raising VC sounds like an easier road and has all the glitz and glamour. As a result, many entrepreneurs go that route, few get it and most abandon their idea altogether.
Now the entrepreneur is stuck in an odd position of having to pitch and behave as if they're "changing the world".
There's no solution to the problem as far as I know but it's really a lose lose situation. It's too bad because there's a lot of value that disappears in the process because no financing model exists/works for the moderately successful startup.
I disagree: I think Angel funding, coupled with a "bootstrap-hustle-your-arse-off" plan can mean that moderate success makes everyone involved a decent chunk of change.
While some people use "Lifestyle business" derogatorily, personally it's exactly what I'm aiming for with my new business. A few mil in revenue each year, costs and personnel low, and I'll be a happy camper, working on what I want to work on :)
What's the alternative? Funding solves the problem of "entrepreneur needs money to build business". You can't just dump on VC without offering some alternative way to solve that problem.
It's possible that bootstrapping is best, but he doesn't even bother to make that argument.
When we'd started Sensor Tower, we moved to the San Mateo and worked day and night to build out the product, living for cheap on Barilla spaghetti. My co-founder promised to do 20 pushups per each paying customer, our first trial sign up was followed by a hectic phone call "omg!" and literal hopping in the air in excitement. A couple of months later, our attitude slowly changed, and after raising we didn't even bask at Safeway delivery or buying a couch. We still sleep on mattresses without frames, though.
Another thing about raising money is in most cases, when you do it right, you're not giving away your company to the VCs -- you're giving something like 10% away. That, at least, is the advantage of going through YC/Angelpad/etc, you aren't a typical startup when raising, you have the option to draw on the alumni and connections, etc.
So, when you have that great idea, and you see it starting to grow, you better take good care of it. They don't come easy for anyone. That's part of the skill though, recognizing the good from the bad, and knowing when to jump ship, and most importantly, when to try again.
Bad logic and even worse advice.