
Why I Turned Down $5 Million in VC Funding - ph0rque
http://www.groovehq.com/blog/turning-down-vc
======
ernestipark
Well written article. In my brief stint with YC and other startup circles, I
think one big takeaway I've had is that most (or at least many) people who
want to start a startup or hit it big with a startup actually really want a
lifestyle business. Hyper growth isn't the goal of the founders. Their goal is
to create a good product that helps people and allows the founders to live
comfortably and be happy with their work. Raising VC funding is not counter to
many of those goals, but it's not the only (or best) path to them in most
cases.

~~~
talkingquickly
I wish I could upvote this more than once. What's more because of the focus on
hyper growth, I think a lot of people are discouraged from working on valid
problems which lack immediate potential for that kind of growth.

~~~
byoung2
That sounds like a conversation I just had yesterday with a coworker. We were
translating Visio diagrams into user stories in Jira and we thought it would
be cool to have a visual project management tool that had an interface like
Visio that created tickets and managed dependencies, etc. He joked that he
would only invest in it if you could apply Instagram filters to the diagrams
and the Jira tickets disappeared after you viewed them.

------
waterlion
I just see a HUGE ad asking for my email address and a passive-aggressive "No
thanks, I don't want to grow my business", the rest of the page blacked out. I
can tell there's content underneath but screw that, I'm not reading it after
that.

~~~
alexmturnbull
Sorry about that, should have only popped up if you left the page :( Gonna
have to talk to bounceexchnage.com about this...

Thanks for the heads up.

~~~
waterlion
FWIW I opened it in a background tab.

Still completely unacceptable.

(EDIT: as in, your site is giving a value proposition and I don't accept it if
it includes a massive popup)

~~~
thejosh
Sorry your hacker news experience was ruined today, perhaps you can ask for a
partial refund for your troubles.

~~~
waterlion
I'm not going to copy and paste my answer to girvo, but that. I didn't have to
take the trouble to give feedback.

~~~
thejosh
Hey, I agree that it's a PITA - I didn't get it when I loaded the page - and I
hate pages that do that,

Writing "Still completely unacceptable." makes you come across as though you
were ripped off in some way..

~~~
rfnslyr
Are we really at a point where we get deeply offended at some sort of UI
change when we visit a page? Inspector it, remove it, read the article, and
move the fuck on.

~~~
rhizome
First, tell us where you're getting "deeply offended" from any of this. Is it
that it became a subject of criticism at all?

------
codegeek
I really like reading groovehq's blog. The writings are very specific with lot
of actual details. This one is no exception and great piece of writing. The
actual customer email screenshots are a gem. Just one suggestion: To get rid
of the pop up that comes up first time when you visit the page, you have to
click the cutesy "No Thanks I don't want to grow my business". This even
though is trying to be different does not look professional enough to me. I
would just re-word it to "No Thanks, take me back to the page where I was".

EDIT: Found one typo in the blog where it says "4) How Much are You Willing to
Get Dilluted?". Should be Diluted right ?

EDIT 2: Typo has been fixed.

~~~
alexmturnbull
Good catch :) Fixed...

~~~
codegeek
np. So are you thinking about re-wording the "No thanks I don't want to grow
my business" thing OR you believe strongly in it :)

~~~
alexmturnbull
to think about :)

------
pytrin
Ultimately, this is a decision every founder must make for themselves. Without
knowing the specifics of the offer, it's also hard to really know what went
behind it.

Having said that, the rule of thumb is that you want _at least_ 12 months of
runway, and that's at the rate you want to go at. It takes typically around 6
months (if things go well) to raise VC money (unless they come to you - which
is pretty rare).

From what I understood, Groove had 8 months at _the current_ runway - before
hiring the additional people they want to bring on board. That's typically
when you start raising before you go into the danger zone with your runway.
Also, considering the current perceived drought of Series-A funding, a $5M
offer for a business generating $16k monthly is an outlier.

Of course, I hope Groove does well and never needs this money. Also, it's
possible the deal terms were not favorable, though it's not mentioned
specifically in the post. If that was not the case, in my opinion they had a
chance to significantly derisk their business and they choose not to take it.
Time would tell if their gamble pays off or not.

------
danielweber
> Importantly, with eight months of runway, Groove didn’t need the money.

Geeze, stop right there.

If you _need_ the money, _IT IS TOO LATE_.

You get money because you can _use_ it, not because you _need_ it.

Sorry if this comes off as a rant. I was at a dysfunctional start-up once and
I guess it comes out at odd times.

~~~
frandroid
Also: If you _need_ the money, you're going to get fucked in the negotiation.
You should be able to walk away from an investor who talks to you, otherwise
they'll use your desperation against you and dilute the hell out of you.

~~~
michaelt
There's a distinction between "need the money" as in "cannot achieve the
business plan without investment" as compared to "running out of runway can't
meet payroll"

For example, if you need $$$ to build a nationwide network of warehouses, or
to get your new electric car through safety testing, or as a bond for your new
bitcoin bank's banking license, or to order the first batch of widgets from
your manufacturer, you "need the money" because you can't achieve your
business goals without it, but you aren't in a desperate hurry and you can
shop around.

If you need the $$$ to meet payroll and keep the lights on and the rent paid,
but your business plan basically calls for you to keep doing what you're
doing, you probably don't have a lot of time to shop around for investors.

If you're not in either of those categories raising more capital now is
optional, and you've got to consider whether it's worth what you'll have to
pay for it.

------
ChuckMcM
During the dot com boom it was a always an issue if your company took too much
VC money. Having a fat bank account balance can make you lazy, you can spend
on things you don't need (Aeron Chairs for Everyone!) and you don't "sweat the
details." but a lot of the things startup teams need to learn how to do are
the exact opposite, spend only when necessary, sweat all the details,
understand where every dollar of your monthly burn is going and ask yourself
every month "Did that dollar work as hard for me as it should have?" With too
much money it is easy to lose the discipline to keep the business at the
forefront of your thoughts.

~~~
GrinningFool
I really dislike the specific way in which Aeron chairs have come to symbolize
all that was bad about the dot-com era. The nature of that chosen symbol
speaks volumes about the values our culture holds.

Spending a thousand dollars on every employee to keep them comfortable while
they sit at their desk and work for your company all day?! The epitome of
profligate spending! A shining example of decadence! For shame, for shame!

~~~
janlukacs
I'm sitting on one and i'll never buy one again. Overpriced crap.

~~~
GrinningFool
I got one about a year ago, and am actually pretty happy with it. It's ended
the continual parade of mid-range uncomfortable Office Depot chairs through my
workspace, at any rate.

------
jc4p
I loved the post and was not done reading your concluding statements before I
got a giant pop-up that asked me to give you my e-mail to read the exact same
post I was reading. I understand pop-ups like that work for making mailing
lists but can you at least make it come at the _bottom_ of the page not in the
middle of the last paragraph? That combined with clicking the "No thanks, I
don't want to grow my business" button being the only way to get out of it
made me leave the page without even finishing your article.

~~~
alexmturnbull
Sorry about that, should have only popped up if you were about to leave the
page...

Fixing now. Thx.

------
mrgreenfur
Between this and the recently reading about the Expensify team taking a month
trip every year, I have this question: how do people get jobs at these well-
meaning, intelligently planned companies? Seems like every startup I've worked
at is more of the "OMG GRAB ALL THE CASH ASAP" kind, not the "Lets build happy
users for a quality product".

~~~
edash
The new job board from 37Signals would be a good start:
[https://weworkremotely.com/](https://weworkremotely.com/) They've been
beating this drum for a long time now.

------
PMan74
> Are you taking funding for the sake of taking funding, or do you actually
> need the money?

"Needing the money" probably needs to be defined here. If you're going to the
VCs because you "need the money" as in the lights will go out pretty soon,
unbutton your slacks and bend over because you are in no position to
negotiate.

On the other hand if you "need the money" because, in spite of the fact that
your runway looks very very healthy, you can foresee a point well down the
line where you will actually need the money then that's a much better scenario
to be going to a VC.

------
frankdenbow
Great post, love the series on groove.

Question on convertible notes: doesnt a 1M seed round on a note suggest that a
second round needs to happen? How do the investors feel about not having a
second round to set the price and convert to equity?

------
jasonkolb
So here's a question... with the new rules around fund-raising, why wouldn't
he just throw up a box to this side of this article that says something like:

"By the way... now that you've seen our numbers, if you're interested in a
buying a small piece of equity in our company, leave your email address and
we'll let you know terms."

Is there any downside to an approach like this? Setting your own terms and
then selling equity if you find people interested?

~~~
melvinmt
Publicly advertising an investment opportunity is simply not allowed.

~~~
jasonkolb
I thought the recent rule changes allowed this now... isn't this what Angel
List is essentially doing?

------
sheetjs
> Importantly, with eight months of runway, Groove didn’t need the money.
> There were great arguments to be made about how we could use the money, but
> weren’t running out of cash.

No other reason is needed. If you don't need the money, and if you believe in
the business, you don't need to justify turning down external investment. In
fact, I'd argue that turning down money is harder than accepting it

------
howeyc
Probably off-topic, but something I've never understood reading these things:

How does this funding actually work? From what little I know (the stock
market) you'd sell an equity stake in your company for a certain amount and
you have money in your personal bank account.

But it sounds to me like all these funds somehow go back into the company??
how?? what am I missing?

~~~
mattzito
Okay, so yes, you are mechanically correct in that if you sold 10% of your
shares for $1m, you would get the cash not the company.

However, the way funding events work in real life is that new shares are
created _by the company_ and then sold to the investors.

As a very math-simple example, I have 1m shares in my company, and I own 100%
of them. Some VCs want to take a ~33% share of the company for $5m. My "board"
(me) creates 500k new shares, and sells/gives them to the investors for $5m.
Now there are a total of 1.5m shares, of which I own 1m, and the VCs own 500k.

EDIT: sometimes, though, a founder will sell part of their shares to the VCs
during a funding event. That's usually to help give the founder a little
liquidity and cash.

~~~
draz
I think it's more typical to issue, for example, 10M shares, take 3M for
yourself, and leave the rest for employees/VCs/whatever (rather than issue new
ones, in a first round)

~~~
mattzito
Yeah, you're right, that's often the case, especially when you have cofounders
and early employees that you don't want to dilute during the first funding
round.

 _However_ , I just wanted to keep the example simple, I thought it was easier
to talk about creating shares than deal with the "who owns the unissued
shares" notion.

But yeah, that's a good clarification.

------
misterparker
Great writeup. I'm so sick of hearing about VC funding, growth-hacking, hock-
sticks, and user-acquisition and all in the name of an exit strategy. I hope
to see more and more companies take this more bootstrap-ish approach to
building sustainable businesses, solving a real problem for real people.

------
inthewoods
One element that this misses is the fact that it isn't always clear what size
business (or something even what business) you have at the beginning. Meaning,
you might take $5m thinking you've got a high growth business only to
discover, a long way in, that you've really got a slower growth business. I've
seen this happen multiple times where the founders say things like "I love
this business - if I was just running it myself, I'd really love it, but the
funding makes it a constant fight." Truth is, high growth, highly scalable
businesses are probably a bit rarer than we'd all like to admit.

------
nhangen
TLDR;

I turned down 5 million so that I could practically name the investor, get
attention for my startup, and still make page 1 of HN.

\----

I wonder how investors feel about posts like this. If you are an investor,
would it change the way you feel about the CEO or the company?

~~~
beat
Who cares? It's not like he's taking their money.

edit: I'm not losing sleep over someone hurting the feelings of venture
capitalists by publicly saying he didn't take their money when offered. Just
as I doubt they're losing sleep over the companies they turn down.

~~~
nhangen
I'm simply curious, that's all.

------
yesimahuman
I'm excited by companies like this. I think you actually get the ability to do
something that transcends just making a product and selling it. You get a
chance to change what it means to grow and run a business. Groove might end up
being very influential and meaningful beyond just customer support, like
37signals has. That's hard to do if you are shooting for an exit in 3-5 years
just to be swallowed up by a big company.

------
yetanotherphd
The only point that didn't ring true was on scaling. I think it makes more
sense to scale while you have the money, and use that same money to deal with
the issues that arise as you do so. Otherwise, you are leaving customers
without your product for longer than you have to. And that could be their
loss, not just yours.

------
Codhisattva
Worth while read. It's great to see an entrepreneur want to build a company
instead of a product to sell to investors.

Go Groove!

------
smoyer
This series is great but I wish it had the number for each part of the series
somewhere in the URL. Or perhaps a sidebar (ruining a really clean site) with
the series listed in order.

Of course, my best recourse is to read each one as soon as the announcement
shows up in my e-mail client's inbox!

------
juskrey
I think that VC funding principle is an upside for VC funders and downside for
majority of fundraisers. What VC funders basically do is a transferring of
economic fragility to fundraisers, while hunting for positive "tail events".

------
not_that_noob
Great stuff. It's hard not to buy into the standard startup myth of raising
money and going big. 'Lifestyle business' is not a positive term. So I for one
salute your courage.

------
grosbisou
I find this so refreshing compared to all the "super todo app raises $30m"
news.

And I love these blog posts. So much information and facts about how they try
to grow. Please keep going.

~~~
alexmturnbull
thx! really glad you enjoyed it :)

------
xfax
First rule of taking VC funding - be aware that you're on someone else's
schedule once you do.

------
dblacc
I started the article: He's a mad man. I ended the article: Hmm.. I never
looked at it that way.

Refreshing read.

~~~
alexmturnbull
haha, I am mad though :)

------
georgiecasey
These huge rounds are crazy, a $5 million exit would be life-changing for most
founders.

~~~
TheBiv
It wasn't an exit, it was a funding event.

~~~
georgiecasey
I know, that's my point. These funding event amounts are big enough to be
great exits for most founders.

~~~
TheBiv
Very rarely, if ever, will a founder take money off the table in such a small
funding round that is used to accelerate the business.

------
mswe
Funding is overrated.

