
Trust customers over VCs - toffer
http://www.37signals.com/svn/posts/1201-trust-customers-over-vcs
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mattmaroon
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.

~~~
dshah
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.

~~~
mattmaroon
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.

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webwright
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?"

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

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dshah
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.

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maxklein
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.

~~~
ericb
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.

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marketer
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.

~~~
webwright
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.

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subwindow
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.

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babul
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.

~~~
azharcs
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).

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

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simianstyle
Didn't they take money from Bezos' fund?

~~~
azharcs
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.

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gscott
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.

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fallentimes
We're dealing with this right now.

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

~~~
fallentimes
You know we're already profitable right?

~~~
maxklein
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.

~~~
fallentimes
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.

~~~
maxklein
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.

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rokhayakebe
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.

