
Why 99.997% Of Entrepreneurs May Want To Postpone Or Avoid VC - daegloe
http://www.forbes.com/sites/dileeprao/2013/07/29/why-99-997-of-entrepreneurs-may-want-to-postpone-or-avoid-vc-even-if-you-can-get-it/
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onion2k
Successfully raising capital is pretty much always seen as a win - a group of
professionals have examined you, your team, and your idea and decided that
it's worthwhile risking a sum of money backing you. That gives you a runway to
build a userbase without needing to worry about being profitable. In some
cases it means you can actually build something that you couldn't build
without the money. Capital certainly gives you time to focus and build faster.

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.

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Terretta
There's a flip side to this: if you bootstrap an actually working business in
a new industry and are "only" doubling each year, you run the risk of that
industry getting noticed by VC who may lavish hundreds of millions on creating
new competitors to pursue market share in that new industry. Your environment
will get very tough very fast if you can't ride that out.

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.

~~~
chiph
So.. take VC money so that it doesn't go to potential weak competitors, who
will just add noise and uncertainty to the market?

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jmathai
From reading the article I don't imagine that the author has started or has
the desire to start a company.

> 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.

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girvo
> 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 :)

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jmathai
I agree with you but it's difficult to sell that type of business to angels
from my experience. No exit. No money.

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kevinpet
Right then. I'll just go and build a business without any capital. Maybe my
fairy godmother will just handle salaries and expenses.

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.

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markokrajnc
After seed capital and before 1st round of VC you will already make some
sales. Maybe there is a way to increase sales and cover the salaries and
expenses from the sales... If you can do this, this may be better than taking
the VC...

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diziet
There is an interesting dynamic going on with YC/Angelpad/other incubators or
startups 'in the know' that makes some of these things not apply. The kind of
founders that are building tech companies are technically capable and they do
not need to hire anyone nor need much capital other than initial living
expenses. So there isn't as much pressure to raise money as others might
expect -- there aren't salaries to pay, and your mindset is different with
regard to expenses and things you're willing to try to do to get users.

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.

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ktd
Where does this "you only get one great idea" meme come from? Generating
"great ideas" is a skill, and one that can be trained just like any other.

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logn
Yes, this is what bothered me most about the article. I see ideas just like
jokes that a comedian or writer comes up with. Writers will all tell you they
keep a notebook of ideas, meaning they're constantly capturing every moment
they think they can fit in a standup routine or movie or whatever. I do the
same as a computer programmer. Every time I think of an idea for an app or
business, I note it, and in doing so I've developed essentially a background
process in my brain that's always seeing if my sensory inputs have any good
business ideas. I have a long list now and when I want to make something I
literally just sort the list. And much like a comedian, I have no problem
telling people my ideas, because I have so many of them I'm at the point it's
depressing to think that I'll never live long enough to build them all.

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drinkzima
TLDR: Lots of businesses don't succeed in venture and if you are of the 1-2%
of businesses that receives funding and doesn't succeed than you should have
postponed/avoided VC.

Bad logic and even worse advice.

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kemiller
Only 1-2% of businesses that receive VC are failures? Are you sure that's what
you mean?

~~~
danoprey
I think he means if you are in the 1-2% of businesses that receive VC funding
and after receiving funding you go on to fail...

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Qantourisc
VC == venture capitals

