
Startups Rejecting Venture Capital - daegloe
https://www.nytimes.com/2019/01/11/technology/start-ups-rejecting-venture-capital.html
======
eis
VCs win if enough of their bets make it big enough to offset the ones that go
under. Naturally the big hits are few and the ones that fail are numerous.
That means the big hits need to be huge and the failures need to have a
certain cap. The latter also means you can't run a company for 10 years in
slowmo until they get profitable. And the big hits need to be huge which means
they need to take over a nice chunk of a market which you can only do with
good funding and moving faster than everyone else.

VCs were able to control the startups they invested in to a pretty big degree.

What does that mean for founders? It means that you are putting all your eggs
into one basket. A founder does not found 20 startups at the same time in the
hope that one succeeds. A founder puts his effort usually into only one. So
founders take a larger risk than VCs. They make it big or go bust. And the
vast majority goes bust when running in supercharged mode.

What does that mean for startup employees? Well, they got the worst of all
worlds. High risk and little to no upside. Their eggs are also in one basket
as they work for only one company AND they don't have the huge upsides that
VCs and founders have.

The whole game favors only VCs and founders who like big bets. But for the
vast majority of people (which includes employees), the VC game is not a great
game to play.

~~~
hn_throwaway_99
I think your point about employees is especially true, particularly since the
large tech companies pay disproportionately so much more. If you are a senior-
level software engineer, even if the startup _is_ successful in the "unicorn"
range, for most people that means an equity payout on the couple hundred K to
the $1 million range for all but the very largest successes. Not bad at all,
but when the FAANGS are already paying in the 250-500k range, going to a
startup is you are not an exec or founder is almost always a poor financial
decision. And remember, the vast majority of startups still fail outright.

~~~
dunpeal
Precisely. A senior engineer can certainly hope to make $400k or more per year
for good performance. Not just in FAANG either - plenty of other profitable
businesses are competing for the same grade of talent and thus pay in the same
range.

Only a handful of almost surefire unicorns can reasonably come anywhere near
matching that, and that only in the eventuality that they don't pull a
Zenefits and leave you hundreds of thousands of dollars to millions of dollars
short and in need of a new job.

Anecdotally, last year I was contacted by such a surefire unicorn for a role
that was actually very interesting. We crunched the numbers together, and the
best case scenario was them effectively matching my current comp. Which was
actually a great proposition for startup comp, the best I've seen. Still,
nowhere near compelling enough to upend my life for a higher risk position
without any financial upside.

I worked in startups for the early part of my career, including a fairly well
known one that exited. Neither me, nor any of my colleagues in that startup,
nor any of the many other startup employees in my network, ever made more than
a few hundred thousands on our options. Many very talented engineers made
nothing at all on large quantities of options granted by several promising
startups.

It's no wonder that none of the recent graduates I interview nowadays is at
all interested in startups. When I ask where else they are interviewing, it's
always FAANG and other high-flying profitable businesses. Even more so for
senior engineers, whose opportunity cost is even higher, typically in the
hundreds of thousands per year.

~~~
megaman8
> "hope to make 400k"

Even with 10-20 years of experience in the bay area at small, medium, large
size software companies, I've never ever made anything close to that amount.

~~~
mosdl
don't listen to them, the FAANG pay thing is only for select few and is
obviously a bubble waiting to pop

~~~
realbarack
People are talking about total compensation, not just cash.

------
lpolovets
Caveat: I'm a VC, so I definitely have a horse in this race.

A few misc comments:

\- VC is not for every company. Most VCs will be the first to tell you that:
if you're not trying to build for a specific type/size of outcome, then VC
funding is going to suck for you, and it's going to suck for the VC. It's not
at all in a VC's best interest to invest in a company that has no desire to
fit the VC model.

\- I think the VC model itself is a great development from the last century.
The fact that someone can raise millions (more than most people earn in a
lifetime!) with an idea enables a lot of innovation that would be hard to
nurture otherwise. But because the failure rate is high, VCs have to bet on
outlier outcomes. That works for the VC but isn't always ideal for the
companies they fund (because the founder is all-in but the VC can absorb many
losses as long as at least one of their investments is a big winner).

\- Many VCs add value and are great, but many other VCs subtract value and are
awful. I've met people from both groups over the last 6 years in this job.
It's not different than most jobs: there are amazing and awful teachers,
politicians, engineers, doctors, etc.

\- I love all of the new models coming up: revenue-based funding (SaaS
capital), funding for ad-based acquisition (Clearbanc), Indie.vc, etc. The
more types of investment models there are, the better off everyone will be. If
the only companies that look for VC funding are the ones that require VC
funding because no other funding model would work, then that's a good scenario
because no one is wasting each other's time or looking for suboptimal funding
options.

~~~
luxmanR1050
What's the _smallest_ annual net income target (say, within 10 years) for a
company that you would suggest VC is a good fit for?

~~~
lpolovets
If you think you only need that first round of funding ($1m-$3m seed round)
and would never need to raise again, then $25m+/year would be reasonable. A
company like that could exit for $150m-$250m in 10 years, and if the seed
investor is getting 20x or 30x on their investment, they'll be happy.

However, 1) a lot of seed stage companies predict that "this is the last round
of funding we'll ever need" and that's rarely the case, and 2) because of #1
it's hard to convince investors that you'll never need to raise more money.

For most VC-backed companies -- the ones that raise multiple rounds before an
exit -- $100m+/year in revenue is a good 10-year goal. That's about the level
required to go public or exit for $1b+.

Investors won't be unhappy if you shoot for $100m in annual revenue but "only"
hit $40m or $6m. The nature of startups is that most don't end up going
public. But it's hard to see _any_ path where you could end up with
$100m+/year in revenue within a decade, then most VCs will pass.

------
peterlk
This might be an unpopular opinion, but my view of VC money has changed
significantly in the last couple years.

Raising money is a failure mode. If you are raising money it is because you
failed at something and you need the money to catch yourself. This is more
true for software companies than, say hardware companies, but I think is still
generally true.

For example, if you are raising because you need to hire people. You have
failed to find small team to cofound the company with, or you have failed at
developing the necessary skills yourself.

I'm not saying that no one should ever raise money, I just want entrepreneurs
to stop seeing it as some kind of badge of honor. I hear people measuring
themselves on how much money they've raised way too often. You don't build
great things by raising money, you build great things by building them.
Measuring your company on the number of customers it has is _much_ healthier
than measuring your company on how much money it has raised.

Focus on profit and quality.

~~~
ABCLAW
>Raising money is a failure mode.

If you're trying to build a lifestyle business, yes. That's correct.
Incrementally building your recurring revenue is rewarding and doesn't require
outside investment and comes with no strings, which keeps the cognitive and
administrative overhead of the enterprise low.

If you're making a play to win in an emerging market against seriously
capitalized contenders, you might not fare so well.

In software, most of the product development is fairly bespoke, but in many
other industries you require access to capital assets to do anything. Having a
portfolio of well placed leases is critical for a retail play. Having capital
or leverageable equity is essential for an industry consolidation play. One
wouldn't pretend that the founder of a junior mining company 'lacks skills'
for issuing a raise on public markets to develop a mining site.

By extension, where the value add in an enterprise is not generated from the
value of a software product, but by the integration of tech with some other
vertical, obtaining serious cash infusions may be the only way for the
business plan to succeed.

~~~
AndrewKemendo
I agree with the OP here, and I think it's an interpretation of terms.

If a company is "raising money" that means, in almost all cases, that they are
actively soliciting or courting investors. They are doing the "Sand Hill Run"
or some other such intense, grueling process which attempts to "pitch" the
startup to investors in a gamified way.

I agree with the OP that this is a failure mode because in almost every case
I've seen the company can't survive without it in the short-mid term.

If VC are literally hunting you down like Sequoia did with Whatsapp, I
wouldn't consider that "Raising Money." They could have done without VC and
been perfectly fine - probably better off long term.

~~~
mdorazio
This is pretty narrow thinking. The #1 reason founders _should_ be raising VC
money is to grow faster than they possibly could without it. Could Uber have
grown organically without raising millions of dollars? Yes, probably. Would
they have been outcompeted by competitors with significantly more money to
throw at driver and user acquisition? Absolutely.

You have to look at the high-growth startup market as an exercise in game
theory rather than as a single-company market. It matters a large amount what
other companies could and would do if you _don 't_ take funding and grow as
quickly as possible.

------
nabla9
All new companies are not startups. Startups need to have scalable business
model.

Not all new companies with a scalable business model have the skills or risk
taking ability to be a startup that actually scales.

Calling every new company that sells products in the internet a startup waters
down the meaning of startup. Gradually growing and maybe becoming mid-sized
business may be the best option for most. Gambling to become a very rich or
starting from scratch again is low probability game. You can do it only few
times and only small percentage can succeed.

------
trjordan
I get the disdain for VCs -- it's a specific model with a specific set of
failure modes. So that's fair.

What I don't understand is this dislike for investing ahead of growth or
success. Why is the expectation that everything can be done bootstrapped or
constantly profitable?

Companies take investment. If you're building a product that will be valuable
for a long time, there will always be a period at the beginning where the
entity requires somebody to put their investment into it. If the idea is small
enough that one or two rich dudes with Google money can do forgo their
salaries, that's great. But even a team of five for 18 months is a significant
investment, and somebody needs to pony up. Should startups only consist of
rich people who can afford to roll the dice?

Instead of fully rejecting the model, I believe that companies should take VC
money with a finite plan towards profitability. If you take $2mil in seed
money and hire a team of 8, get to $2m / year in revenue. If you want to take
another bite at the apple, there will be VCs who fund you at that point. If
not, you're not dead.

Real progress takes real investment. Ignoring that fact ignores a wild world
of interesting, viable companies.

~~~
jchrisa
Free healthcare, free college, and a UBI would go a long way toward making
starting a company realistic for more people.

~~~
sturgill
Paid for by?... I distrust free anything. VCs aren’t free money; healthcare is
paid for by someone; professors have a salary even if tuition is waived; UBI
requires cash to materialize from someone’s efforts...

Further removing people from the most important parts of life and entrusting
those to a benevolent central authority is a risk I’d personally _not_ take.
The lessons I learned from the most recent US presidential election is how
grateful I am for separation of powers and limits on the scopes that any one
person (or branch of government) can actually impose on my day-to-day life.

I’d prefer to not see UBI furloughed because two parties I’m not connected to
would prefer to grandstand over a budgetary rounding error than solve
problems.

~~~
danielcarver
UBI needs to be furloughed. UBI aka just a scheme to keep the money flowing
from the prole’s wallet into altman’s pocket. Universal basic EQUITY is a
different thing. But he’s not offering that.

~~~
pazimzadeh
"I think that every adult US citizen should get an annual share of the US
GDP." -Sam Altman

[http://blog.samaltman.com/american-
equity](http://blog.samaltman.com/american-equity)

~~~
danielcarver
Oh fuck. I’m totally wrong. I take back what I said. My bad. Thanks for the
link. Altman is a boss

------
locklock
It's a testament to the propaganda that VCs set up in the last ~20 years that
this is even a newsworthy article. Since the first dotcom boom, basically, the
popular idea of a startup has been synonymous with taking venture capital and
then building your business based on making the VC firm fabulously wealthy in
the relatively near term. Of course there are a million other ways to build a
successful business, but for a while this was the predominant one in the
startup world. I'm glad it's changing.

------
calbear81
I agree with the general point of the article that taking VC money leads to a
"get rich or die trying" binary mindset which may not be right for all
startups. For many startups, it's not necessarily to become a unicorn to be
successful, bring riches to their employees, and in general build a better
world.

However, there are some points that I don't agree with especially this: "Would
Facebook’s leadership have ignored warning signs of Russian election meddling
or allowed its platform to incite racial violence if it hadn’t, in its early
days, prized moving fast and breaking things? Would Uber have engaged in
dubious regulatory and legal strategies if it hadn’t prioritized expansion
over all else? "

Of course, this is subject to survivorship bias but I think it's generally
agreed that part of the reason Facebook was able to grow so quickly and Uber
was able to capture markets and be the market leader were exactly those
things: Moving Fast, Breaking Things, and focused on growth above all else. In
hindsight, if they hadn't done that, it's possible that we wouldn't care at
all what they did because they wouldn't be the giants they are. There are
tradeoffs with every strategy and these two unicorns chose the ones that led
to their dominance even if it came with some headaches later on.

------
neom
To be fair, the NYC VC scene is also abysmal. From what I've experienced there
are less than 5 established VC firms (on their 3+ fund) in the city with an
eye for vision investing and really want to get behind Founders. I think I
made fundraising much much much harder for myself by focusing heavily on
raising in NYC. Sadly, many SF folks won't invest in NYC startups due to
proximity, so then you're faced with moving your company to SF.

~~~
strgcmc
Just curious, if you're dissatisfied with NYC and the ~5 established funds
you've experienced, have you expanded your search parameters a bit? Meaning,
looking around in a bit wider regional area, or looking at little-less-
established firms? For example, across the river in Newark, NJ, there's :
[https://newarkventurepartners.com/](https://newarkventurepartners.com/) .

------
diego
One thing that not many people talk about: there's an oversupply of VC funds
spawned by the technological waves of the 90s (internet), 2000s (mobile) and
everything in between. Today there isn't a clear wave, yet those funds need to
deploy capital. Now there are too many funds pursuing not enough VC-worthy
opportunities. The VC bubble will pop sooner or later.

~~~
sonnyblarney
'Oversupply' could simply be communicated in a different supply/demand
equilibrium.

Cheap capital is probably not such a bad thing for Entrepreneurs. More bad
companies get funded, but that's not so bad. More good companies that wouldn't
have seen the light of day will also get funded.

There's only a 'bubble' if there can be a significant correction. If the US
economy goes into heavy recession, then maybe there will be a steep pullback
in VC. But otherwise, VC as an asset class may just not get the returns of
yesteryear, which is fine.

~~~
theseatoms
Sounds like the typical terms need to be negotiated in the direction of
founders, away from VCs.

------
ergothus
As an outsider, I find myself disappointed everytime a company goes public,
and VCs seem to be (1) a stepping stone to that and (2) motivated by the same
concerns.

As a consumer, I find that the shareholders never have my interests at heart,
not even indirectly (everyone wants to make money, but a private company seems
more likely to decide they make money by actually providing me value). This
feels like a massive failure on either (1) my understanding or (2) the market
as a whole.

Am I wrong about VCs being the same basic issue, only with fewer players?

~~~
padobson
I think what you're describing is really a part of the decision making process
by founders and initial investors who are taking the company public or
shopping equity to VC.

The default mode of a company is to increase shareholder wealth, but a company
that clearly communicates to potential investors and the market as a whole
that they have a different metric of shareholder value (e.g. social
conscience, environmental concerns, customer experience) can still be
successful in taking a company public or raising funds from VCs, they'll just
be selling equity to a different, if overlapping, group of investors.

Companies that want to do good and don't think through how going public or
taking investment will change the incentives on which the company operates are
destined to end up in the default mode.

As always, try to put both your consumer and investment dollars in companies
that understand that.

~~~
ergothus
> a company that clearly communicates to potential investors and the market as
> a whole that they have a different metric of shareholder value (e.g. social
> conscience

You're talking about things like Ben & Jerry's social contract. I think those
are great. But here I'm talking about values like "We want to make money by
making great widgets people are happy to buy". Most companies say such things,
but after they go public the value seem switch to "find every way to increase
the margins and take the lowest thresholds of quality and customer
satisfaction that we can have and still remain in business". Compare, say,
what Comcast says about customer service and what customers say.

The ideal of capitalism is that you can have profit AND happy customers. And I
know it's possible, I've seen it any number of products...but I also see tons
of successful companies get "killed" by short term greed, even if that company
sticks around and is profitable - compared to what it was, it is dead.

------
mr_puzzled
Reposting my question :

So let's stay I start a startup, grow and manage to take it public, what
happens next? Is the company expected to keep growing indefinitely? What
happens if growth is stagnant, but the company is profitable?

I also hear about the mid-life and late stage of companies. Can you explain
what these terms mean and how being in these stages affects the company?

Are there any good examples of publicly traded companies which have lasted a
long time (more than a few decades) with minimal impact of the "we have to
keep growing" mindset?

Finally, what are the pros and cons of being private without vc funding and
being a public company?

And what role does VC play in the broader economy? Does it manage eg pension
money? Are there good resources to understand the lifecycle of VC funded
companies and what role VC plays in the broader ecocomy?

~~~
chillacy
> Are there any good examples of publicly traded companies which have lasted a
> long time (more than a few decades) with minimal impact of the "we have to
> keep growing" mindset?

Are there publicly traded companies which _didn't_ have a thirst for growth?
By definition, companies which go to the lengths of raising money on the stock
exchange are exactly those who grew beyond small business / private equity
levels. So this question seems paradoxical to me.

~~~
mr_puzzled
I should have worded it differently: what I was trying to ask was - publicly
traded companies by definition have to keep growing and have the "we have to
keep growing" mindset, and this often negatively impacts the products eg-
facebook showing ads way too often, collecting more user data and it's parly
driven by the desire to keep growing and earning more ad dollars. Fb is a
perfect example of a product going downhill as it grows. Are there companies
which continue to make products loved by users even though they have the "we
have to keep growing" mindset? One example was Apple, but they are starting to
faulter, increasing prices way too much. Some gaming studios are publicly
traded and seem to be doing fine. The WWE company also seems to be doing fine.
I'm looking for such examples but companies which have been around longer than
that.

~~~
chillacy
I see, something like sacrificing long term viability for short term growth?
Since jacking prices may give you a great quarter but destroy your brand in
the long run.

My understanding is that big value stocks which pay dividend have less
pressure to grow, while growth stocks use growth rate to justify their extreme
PE ratios, and so might seek it more.

------
tozeur
Vinod Khosla recently stated that 90% of VCs add no value, 70% add negative
value[1].

[1] [https://blog.ycombinator.com/vinod-khosla-on-how-to-build-
th...](https://blog.ycombinator.com/vinod-khosla-on-how-to-build-the-future/)

~~~
sonnyblarney
He said that in the context of adding value on boards, i.e. providing
strategic direction.

The fundamental impetus of VC's, i.e. 'capital' is generally a good thing for
Entrepreneurs.

~~~
tozeur
I’m aware. I thought was implied. The primary function of VC of course is to
provide the C.

------
sudosteph
Good for them. I'm not going to pretend I'm actually in a place where I even
have the ability to make the choice that these founders made, but I've been
reflecting deeply on whether I will seek VC support in the future, and I'm
pretty set against it. At least I'm set against any VC's based in SV.

I don't think they're bad people or anything, and even quite like some
individuals who work for VCs. But the way they operate, seems to perpetuate
monoculture and wealth inequality. I know first-hand there are brilliant,
ambitious people outside of the SV/NYC bubble, and I don't think VCs really
give any care about those people besides perhaps offering to pay to relocate
them. As a result, the mindset of these VC people is increasingly isolated
from the nation and world as a whole. I've read so many stories about how they
are encouraging diversity by funding immigrants who went to Stanford, as if
race/sex/nationality is the whole picture. Where are the founders who grew up
in trailer parks or projects? Who speak with a noticeable apppalachian,
southern, or AAVE accent? Who worked their butts off in the military and
community colleges/state colleges, because those are actually the most
accessible doors to learning for Americans not from privileged backgrounds?
Where are the people who want to build things, but value their family,
extended families, local and religious communities more than the promise of
extreme wealth in in a few select cities?

Those people are out there, and they are capable and ready. I know it's still
just talk, but very soon, I'm going to put my money and my body where my mouth
is and return to NC. I'm going to build things with those people. If by good
fortune we see success - the money won't go towards making rich californians
richer.

~~~
opportune
lol yeah if you're talking about "diversity" in terms of who VC funds I can
guarantee it will be a combo of white+indian+east asian men for the next
couple decades in terms of who gets the phat funding

There are a lot of women-only funds but in terms of total capital + efficacy
so far they are essentially nominal

------
NickBusey
My current startup has taken VC funds. Never again. What a nightmare.

~~~
jarjoura
My take on work is there's always someone who will be your boss and dictate
what you can and cannot do. If you bootstrap, then it'll be your paying
customers. If you take family/angel/seed money, then it'll be them and their
expectations. If it's VC money, they will have a seat on the board and expect
you perform. If it's the public market, then every quarter you'll be expected
to show significant results.

I fail to see how a nightmare isn't just code for, I don't like what this
person wants me to do, I did this startup to get away from having a boss, but
feel free to correct me if I'm wrong.

~~~
NickBusey
I appreciate the thoughts, but no. That's not what is going on here. Without
going into too much detail, if anything the problem is essentially the
opposite of what you're describing.

------
jarjoura
For everyone bitching about VC's demand on speed and profits, it wouldn't be
any different working inside of FAANG. Your team is given a time limit on how
fast it can work and it will need to make the parent organization money
otherwise it'll get shut down and re-org'd after a year or two.

If you bootstrap a company, and it's successful enough to turn a profit,
you're still at the mercy of finding a steady stream of customers. Most
successful bootstrapped companies usually find 1 or 2 anchor companies that
then start dictating how your company should run so that you can get paid and
continue the relationship. Also, companies will prefer to have other options,
so your bootstrapped company will be one of many options. (or replaced
internally)

There really is no magical solution to working and making money. You should
just approach this problem as, I want to build a company, I believe in this
idea so much I'm willing to risk a lot to make it happen. If a VC gets you
what you need but forces you to get there in 3 or 4 years time, but you think
you need 5, it's not like you have a better option to prove your idea, so
figure out how to get there in 3 or 4.

------
Mikho
It's easy -- you build a lifestyle business or you build a big, usually
scalable, business. If you are building a lifestyle business, VCs most
probably even won't give you money. To grow one needs money. If you are
building a big business the options are to take money as a credit or get VC
money. Usually, banks do not credit those risky assets. So, the solution is
obvious.

Another thing -- for a lifestyle business it's just very hard to hire anybody
good without options that have no chances to be executed. Also, a good
business model without aggressive growth could be copied easily by a big
company that targets the same audience. Yeah, it's difficult to build a
Basecamp. There are just so many examples that managed to do that. Even
Atlassian took VC money at some point to be able to secure stability for the
team.

So, there is no sense in the article. If founders were clueless enough not to
understand what they get into by taking VC money, maybe they deserve the
results.

It's important to understand from the get-go that VC money is just a tool that
serves a very particular goal. If one does not target that goal, not need to
get the money.

------
lordnacho
From the investor point of view, there's a clear problem with the VC model as
described.

How do you establish that a VC has any skill? If the game is to throw a load
of money at different firms, in the hope of getting 99 losers and a massive
winner, how do you tell the good ones from the bad ones? Keep in mind there's
noise; a guy with alpha might have a bad day before going to meet Uber or
Facebook. He then gets 100 losers instead of 99. Or vice versa.

This is called skewness in traditional markets. People can sell options and
make money quite often, until they blow up, ie the reverse of what I described
above.

There also seems to be opportunity in less-than-insane growth. I've invested
in a couple of firms personally, via connections. Small businesses, with a few
sticky customers, and decent scale potential (they both sell via the internet)
that need a little bit of cash to grow. You can't throw a few million bucks at
any one of them, but you can get a reasonable rate of return. I suspect
there's opportunities like this everywhere, but the VC theme creates so much
attention people forgot there was an investment world before VC was a thing.

~~~
hsk0823
Define reasonable because to the VC taking the large risk, 5% YoY isn't the
goal.

~~~
lordnacho
Tens of percents.

------
bayesian_horse
One problem with rejecting venture capital (or any other form of external
capital) is that the founders (and likely the early employees) are investing
in the company, in the form of lower pay.

Which is all fine and dandy, but the founders are likely risking most of their
net worth, including the potential income of some of their best years. Taking
outside capital not only means growing faster, but also diversification.

~~~
jarjoura
Another problem this article misses is that it's quite arrogant to assume a
founder has other means to build a company. Most founders are quite honestly
usually young and that also means they lack capital, but would otherwise be
brilliant and the perfect person/team to create the next Facebook/Uber.

~~~
bayesian_horse
I think most startups who don't use external money try to grow from their own
cash flow. Which in turn means lower payout and wages to the founders or early
employees.

"No VC" can also mean the founders take on loans, angel investors or
friends&family.

------
zackmorris
From the article:

 _Aniyia Williams, who started the nonprofit Black & Brown Founders, said a
venture-funded system that encourages many failures for every one success is
particularly unfair to black, latinx and women founders who “are rarely
afforded the opportunity to fail, period.” Members of these organizations, she
added, see more value when whole groups in their communities thrive, rather
than venture’s winner-take-all model._

The transition from good-of-the-few to good-of-the-many means we might be at a
crossroads in finance. Agism, nationalism and even wealthism (among many
others) have been running rampant for centuries. Discrimination is so
interwoven into US culture and history that the major issues of our time (like
wealth inequality) probably require revolutionary rather than evolutionary
solutions.

I've also been watching a lot of VICELAND lately and have been following the
mantra of: cultural revolution requires personal evolution.

------
tixocloud
We've tried going down the VC route but no one's really been interested. So
we're pushing on to get customers to help us fund it out.

~~~
keithwhor
That’s just the way VC works. HN posters who have never raised a round of
financing in their lives love to pontificate about how cheap money is these
days and how easy it is to get funded. It does look that way from the outside.
However, this is actively harmful to the psychology of struggling founders,
because raising money is objectively difficult. The people who don’t treat it
as such are in for a world of hurt and / or disappointment in the future.

Get customers. But also, ask founders for advice and seek accelerator programs
for mentorship if VC is something you want to pursue. Financing is _much_ more
nuanced than HN / movies make it seem. There’s tremendous selection bias
around advice because a good proportion of founders who succeed at it are
unreasonably lucky. A good chunk more, though, just grinded it the hell out —
and those in this category will often just tell you they worked really hard
and got lucky.

Be persistent. Build your company. Luck comes to those who position themselves
to be lucky.

~~~
tixocloud
Thanks. Indeed, I've found relationships and building trust to be incredible
factors of success that often get missed out in all the entrepreneurial advice
out there. And trust comes from just working really hard for your customers.

I've also found that some VCs don't get what we're doing (because they're not
part of the industry) and some do. At least here in the UK anyway. So I've
shifted my strategy somewhat to try and leverage corporate VCs while also
getting them to bring us into the enterprise market.

------
LogicX
We raised on indie.vc terms, but not with Indie.vc - just a group of angels.
Best decision we made. Now we’re profitable, and get to be in control of our
future decisions - including whether to raise more or not.

Highly recommend folks checkout the indie.vc terms - I describe it as even
more founder friendly SAFE note. Not every investor will be comfortable with
it. Took us longer to raise and lost out on potential investors and plenty of
funds as a result; but was still worth it in the end IMHO.

------
ngngngng
One thing I don't understand about VC money, and i'm not even sure how to
phrase this, are the founders of startups able to pay themselves enough that
they're set even if the business fails? What's to stop intelligent people from
getting funded, paying themselves large salaries, and then not really caring
if it fails or not because you're a couple hundred thousand dollars richer?

~~~
zby
VC try to filter out such founders - but it happens and it is the reason of
why VCs want quick outcomes and avoid the middle ground of slow growth
profitable companies. They want their companies either go down quickly or grow
up enormously also quickly, because the more time it takes the easier it is
for the founders to make good life out of it without giving back anything to
the investors.

This is the principal-agent problem and VCs have a particular way of working
around it, traditional private equity has another way and banks have yet
different one (and crowdfunding does not [https://medium.com/@zby/the-problem-
with-crowdfunding-81b53f...](https://medium.com/@zby/the-problem-with-
crowdfunding-81b53f963387)).

~~~
ngngngng
Thanks for this, now I know exactly what I was trying to ask and the answer. I
wonder if more companies moving away from VC opens the door for more founders
to take advantage of the principal-agent issue.

------
ThomPete
As someone who helped design than a 100 startups in various capacities and has
been heavily involved with the whole VC scene one of the things that I kept
seeing was the misalignment between the founders and the VC's type of skin in
the game.

A founder for most startups is either trying to find product/market fit or
raising money. Many VC/Angels are great for the operational/financial side of
the advice but at least in my experience when it came to finding a proper
market for your company their advice often sounded right but wasn't possible
to implement for various reasons as it was very generalized.

One of the primary and perfectly reasonable reasons is that VC's are thinking
about an entire portfolio of companies and doesn't have the same kind of skin
in the game as the founder which mean they will think differently and less
contextual about the companies.

There is definitely an argument to be made for the fact that it's not the VC's
job to care about the specific company more than they need to and there are
plenty of VC's out there who are perfectly able to care properly but it's also
a very exaggerated market and let's be frank not everyone who has money to
invest have a lot of experience in "the work".

After I left Square in 2017, I wanted to find a way to help both with getting
much faster to product market fit but at the same time also having the
opportunity to provide capital alongside which I believe will align my
interest with the founders much more.

So I ended up deciding to set up a creative venture studio which so far has
been a great decision as it allows me both do my own and invest either capital
or sweat equity in other companies AND I get to meet some really amazing
people from around the world.

------
wensing
The Babe Ruth effect of VC's needing big hits and the entire industry being a
hits-driven business (unicorns, PG's Black Swan Farming, etc.) is a relic of
the VC industry being not-long-tail compatible (i.e. offline). This will
change, and more money will be made in the fat long tail than the hits.

I've been writing at length about this movement ([https://medium.com/swlh/the-
new-bootstrappers-how-alternativ...](https://medium.com/swlh/the-new-
bootstrappers-how-alternative-funding-models-are-embracing-founder-lifestyles-
bd66a6656120)) and the kinds of startups that will emerge as smart investments
([https://medium.com/swlh/rise-of-the-transformers-
db7887c2668...](https://medium.com/swlh/rise-of-the-transformers-
db7887c26689))

~~~
tdaltonc
Your links don't go anywhere.

~~~
wensing
Thanks! Fixed, I think ...

------
systemBuilder
Most heavily-VC funded companies die Young, even if they make it to IPO, like
SGI (now reconstituted as NVidia). VCs don't care about companies, they want
to make a quick buck and get out. Most successful startups are self funded for
most of their life, e.g Microsoft, Dell, Google, Amazon.

~~~
elefanten
Microsoft, Google and Amazon took vc. Seems Dell may not have, according to a
brief glance at wikipedia

~~~
adventured
The parent made a point about self-funding. Microsoft was entirely self-funded
out of operations, post the initial capital put in by Gates & Allen. It was
wildly profitable, with extraordinary margins, at the point where it took a
tiny bit of VC. They didn't take VC because they needed it to finance the
business, they took it for the relationships they were trying to cultivate to
lure talent.

The famous Fortune article about the IPO covers all of this:

[http://fortune.com/2011/03/13/inside-the-deal-that-made-
bill...](http://fortune.com/2011/03/13/inside-the-deal-that-made-bill-
gates-350000000/)

They also didn't IPO because they specifically needed the money from the IPO.

The parent comment carefully qualified their statement this way:

"Most successful startups are self funded for most of their life"

Emphasis on most of their life. Amazon was financed by VC for only about the
first 2 1/2 years. Uber for example is nearly a decade old and still drinking
from the VC tap; Quora is another example of that. Amazon's IPO was just under
three years after the founding. Thereafter most of their business expansion
was financed by operations in one form or another (including a bunch of debt
they took on).

------
ig1
The real problem is that we don't have a more effective capital model. While
there's lots of experiments in funding going on, no-one's really figured out a
risk model that works in good times let alone bad.

Fundamentally new businesses fail at a high rate, it's the nature of new
businesses. But that means cost of capital is going to be high to cover the
cost, but without high-growth it's hard to justify that cost (and that's not
even getting into things like fraud which are a big reason new businesses
can't get financing)

------
joncrane
I remember about 8 years ago when I was founding a company to repair cell
phones. The local municipality had a program where I could meet with a mentor
to help me set up a company. Create a business plan and estimate costs and
revenues, which could serve as input to a loan application with a local bank.

In this scenario, the bank charges interest and does not get an ownership
stake nor input into how the company is run.

Whatever happened to this way of doing things? What is it about VC that is so
much better than small loans from a traditional lending institution?

------
tylertringas
If you find these critiques of VC are resonating but also feel like a bit of
capital, a mentorship group, and shared resources would help you build a
sustainable profitable business, then I'd love any questions or comments on
our Shared Earnings Agreement structure: [https://earnestcapital.com/shared-
earnings-agreement/](https://earnestcapital.com/shared-earnings-agreement/)

------
stanfordkid
What is Zebras Unite or any of the startups/venture firms mentioned in this
article ... and why are any of them considered meaningful or impactful
organizations?

The idea that startups are rejecting venture capital en masse on the basis of
interviewing a hodge podge of random startups and micro VC's this journalist
seems to be friends with is absurd.

------
frankdenbow
Love that this message is getting out and resonating with so many people. If
you're interested in seeing some more talks from companies in this realm, we
have videos at
[http://inflectionconf.com/blog](http://inflectionconf.com/blog)

------
michaeldorian
If money is the soul reason you're working, it's pretty hard to beat FAANG.
Came from FAANG and now doing the startup thing. The experience you learn at
startup is priceless. But don't come in thinking you'll get rich. That's the
gravy part.

------
DGAP
Seems strange to have a NYT article about this without mentioning Basecamp/
37Signals. They've been a proponent of the bootstrapping model for a decade.

~~~
antaviana
AFAIK, they received seed money from Jeff Bezos (although perhaps they did not
really need it).

------
nicholast
There are some games where it's simply not possible to compete without 'jet
fuel' if you will. The key is understanding if this applies.

------
avi990
venture capital should be minimal in initial rounds. Nowadays most of the
startups know their potential, good or bad. They understand how their
competitors are making and how much their startup will be worth. So, I see the
point why they are rejecting the VC funds. Most startups nowadays are looking
for buy outs or acquisitions on different terms

------
noddy1
Moving towards the model where a portion of early VC investment goes straight
into the pocket of the founders and early employees, as bird has done.

If I've built a company with an implied valuation of 200 million, why can't I
bank a couple of million for a rainy day?

I've heard VC's state with a straight face that this is a misalignment of
incentives.. apparently if the founder is financially comfortable they aren't
"hungry".. this from a venture capitalist who is guaranteed a juicy carry
whatever happens to their fund I find this insulting.

~~~
TACIXAT
Any links on what the Bird founder did?

------
halfway
How dangerous is the hypergrowth mandate for startup that has product-market
fit and a solid GTM?

------
simplecomplex
Hard to turn VC money down when it’s practically free.

None of the founders I know that raised seed capital even had a business plan.

Hard to turn down $1,000,000 when all you have to do for it is say yes. Maybe
go to a few meetings, make a PowerPoint. I mean really. Some of these
investors haven’t even asked for any metrics, a web app was enough. It’s...
shocking how cheap VC money is.

~~~
hsk0823
VC money is not free, there's a real cost to it, it's written on the term
sheet.

VC money is relatively easy money to obtain versus trying to grind for the
same amount of capital yourself, but there's certainly a cost to any
transaction.

~~~
ti3
Have you raised VC money recently or in the past? Raising is far from easy -
in fact the opposite in my experience.

It's a full-time job for 1 person for months, or even the better part of a
year. That's one founder taken away from keeping customers happy and building
on the product.

The cost off the term sheet is real.

------
crb002
VCs are the equity equivalent of loan sharks.

------
adventured
Reasons why I'll probably never take traditional venture capital again:

\- Costs are low enough I don't need them for much if anything.

\- I'm unwilling to accept any form of liquidity preferences. Not under any
circumstances. They don't get to further offload risk upon other owners like
cowards, they have to ride the same risk train as every other owner. Liquidity
preferences and the various types of abuses deployed through them are the
greatest scams going in the VC world. In a typical start-up there is no
greater way that VCs cheat the other owners.

\- I don't believe in vesting the founders in cases where they've built the
initial product over time (eg 6-12 months). I found the company, I build the
product, I launch the product, the VC gets to ride my train, then they want me
to vest my existing ownership. Nope. My shares are already fully vested, it's
my company. These days I only allow VCs to pitch me, I never pitch them. If
you build something that matters at all, the VCs seek you out anyway. In the
US there's a hundred billion dollars in VC money every year desperately
looking for ventures, make it beg for your attention.

\- VCs are only allowed to have common shares. They ride in the same boat as
everyone else. They get no choice in the matter.

\- There is a lot more money chasing few decent start-ups. That equation is
only going to continue to get worse in the favor of the founders. There are a
lot of reasons for this, including the cost of starting up being low, and also
the requirement for the Fed to keep interest rates permanently low so the US
Government doesn't collapse (that will perpetually keep money sloshing around
the system looking for returns, feeding bubbles, etc). Just ~4% on a soon-to-
be $30 trillion in public debt would collapse the US Government, they can
never allow that, which tells you how they're going to be forced to behave
over time. There will be periods of ups and downs to this, however it's going
to be higher ups and higher lows for loose capital over the near term, due to
the Fed flooding the system with liquidity (at least for the next few decades,
who knows beyond that).

These terms are non-negotiable. The VCs can take a hike if they don't like it.
For practical purposes there's an unlimited supply of other capital and other
VCs, especially if you have something good at all.

This is how all start-ups should deal with venture capitalists for the next 20
years or so, until something breaks with how the Fed is going to be forced to
finance the US Govt with perma low rates. Capital is in a begging position
during that time, use that fact to your advantage.

------
dzonga
DHH and Jason from Basecamp have been talking about this since day 0. Even now
we've indiehackers owned by stripe.

