

The Best Equity is Sweat Equity  - sayemm
http://blogmaverick.com/2008/01/02/the-best-equity-is-sweat-equity/

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dmk23
The money quote -

    
    
      These investors, including myself, know what you don’t, and they are not telling
      you. The minute you ask for money, you are playing in their game, they aren’t 
      playing in yours. You are at a huge disadvantage, and it’s only going to get
      worse if you take their money. The minute you take money, the leverage completely
      flips to the investor. They control the destiny of your dreams, not you.

~~~
sayemm
But if you've done all the hard work of building your business, proving your
market, and crushing revenues or hitting profitability, then talking to
investors becomes more like a partnership discussion than it does one where
you're a poor, starving founder begging for money (you bring zero value to the
table).

Github is my favorite example. They bootstrapped themselves all the way
through, and in the process, they maintained their own identity and culture,
built a great product and killer team, and were minting $$$. Then when the
right time came for them to scale up to the enterprise and move fast, they
decided to take VC money.

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StavrosK
This post sounds like a lot of hindsight bias and confirmation bias. There are
companies that raised money and went on to become Google and Facebook, too.
Namely, Google and Facebook.

~~~
akg
Right, but I think Mark's point was that great companies can also be built
slowly. These may not be the "best" companies but great one's can be built
brick-by-brick. I feel that most startup founders today strive for a large
funding round before focusing on building a solid business foundation.

For some businesses, it is not possible to create value until you have a large
amount of capital in-hand (e.g., Aerospace, Automobiles) but for most it is
and we shouldn't lose sight of that. People solve problems, not money; and it
is unlikely that a large pile of cash will be the solution to your problems if
you don't first start with a good business model.

~~~
eirikm
Reminds me of this article.
<http://www.joelonsoftware.com/articles/fog0000000056.html>

~~~
sayemm
Thanks, that was a great read.

And therein lies the big risk-reward decision as an entrepreneur. I think that
decision rests most heavily on whether you've got product-market fit or it's
very clear to you that this is a land-grab opportunity, and you must move
quickly.

Either way, funding should always be looked at as a huge accelerator.
Sometimes you could start off slowly, then once the model's figured out and
growth necessitates it, pull out the big guns with lots of funding to scale up
(e.g. Facebook, Github, Zynga), or you make a really high risk-reward bet from
the get-go like Amazon did (then again, that was also during the 90s, and it
was smart since it filled a huge hole and everyone was moving fast towards
dominating the internet space).

Very different environment today... I think we're going to see more and more
Github scenarios in this recession. And a lot of bloodshed for startup
founders trying the Amazon model today.

------
michaelochurch
I think the real calamity is that VCs are a clique and they all talk to each
other in all kinds of inappropriate ways. They're like high school girls in
the sense that if a few like you, they all do. That gives them a shocking
amount of power for a supposedly "meritocratic" industry. VC-istan is still
more meritocratic than most other industries, but only because the competition
in that dimension is ridiculously soft.

If you had a few hundred _independent_ decision makers, you'd probably have
something that looks like a legitimate market. Instead, you end up with
something where the VCs hold all the cards (because they can turn off
supposedly unrelated interest with a phone call) and _still_ don't do well
financially. The financial underperformance exists because of the morale
problems inflicted by their disproportionate power; startups are staffed with
enormously competent people, but the good ones are viciously careerist-- and
why shouldn't they be?-- and you get evaporative-cooling problems if you don't
have an well-above-normal (~1%) ability to lead in such an environment.

We revitalize the startup world by moving power away from active, power-hungry
investors focused on making their careers and back in favor of passive
investors interested in making money.

So, I'd like to see Kickstarter or something like it succeed. Right now,
average people with $0.1-2.5M net worth ("mom-and-pop investors") can only
invest in securities related to massive corporations, in which case the only
good option is to invest in a broad-based index fund (90+ percent of "stock
pickers" leave you worse off than an index fund; and these companies are just
too complex for individuals to get a consistent advantage by "knowing the
company") or they can invest in individual small businesses (restaurants
started by people they know) but that's extremely risky. Some diversified way
for average people to invest in small-business talent and get the potentially
well-above-normal returns available in doing it would be great.

