
Should you really get funding? - BitGeek

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BitGeek
I think YCombinator is attempting great things and has a great strategy.
However, after StartupSchool I'm mulling over my intention to build my startup
without getting any funding. Yet, what I saw yesterday was mostly based on the
assumption that a startup has to go thru rounds of funding.

A bit of background: I'm not young, right out of college. I've been working
for startups for about 18 years with a couple periodic stints at major tech
companies. In all the startups I've worked for, the two leading causes of
startup death are 1) Founder friction. 2) Stupid VC tricks.

Founder friction is a risk that I'm sure everyone understands. But the risk of
taking money from a VC is one that I think is under appreciated. Generally
these risks manifest themselves in the form of the VC meddling in the company
to the theoretical benefit of the VC, and the companies detriment. Speaking of
instances I have intimate knowledge of, in one case the investment was
contingent on 1/3 of it being spent on hardware and software from two
companies that the VC had ties to-- overpriced hardware when commodity PCs
would have done, and very expensive software that caused us to hire
consultants (from the company that sold the software of course) to try and
make it work, and ultimately forced us to revert to the original plan and
build it ourselves. Significantly delaying our ability to scale up the
product.

In another case the VC required that we hire a new CEO, and manuvered us into
hiring a friend of the Partners who was non-technical and was fond of changing
company direction quarterly whether we needed it or not, to follow the latest
business fad... no matter how irrelevant it was to our industry. (EG: one
quarter it was "Push" and we were a company that made video game technology...
nothing to do with "Push" but we had to have a "push story" and issue press
releases.)

And of course, you can find lots of other examples of similar things happening
at other companies.

I don't want to paint with too broad of a brush. I recognize that my
experience is limited to the half dozen startups I've worked for, and the
dozen or so VC partners and associates I've known over the years.

But I have a strong impression that these are not people who understand
technology, or the technology business well enough to give good advice.
Further, they have shown a propensity to force companies to go in a direction
that helps their other investments, but may be detrimental to the company.

And, more importantly, is investment really necessary?

In this day and age, you can get servers provisioned easily-- no need to
commit to hardware purchases and long term datacenter leases. The tools are
high level and easy to use and there's a lot of open source to leverage so
that you can focus on the added value part of your product. Leverage has
increased dramatically.

Furthermore, companies are now starting to go without investment, such as
MyBlogLog which was acquired only a few months after launch without doing a VC
round.

Thus I reach the conclusion that the course for me to take is to not seek
investment at all.

This may not be possible for someone who is recently out of college. (And thus
the funding from YC is not the kind of investment I'm talking about here-- the
presusre to use the money to get three months of solid focus on the product is
really positive "interference" especially when backed by the rapid feedback,
networking, and weekly seminars.)

But if you start to get some traction with your product, and you're not
building something that inherently requires massive investment... probably
small angel rounds are the way to go until you can be acquired or reach
profitability.

And while being acquired may always be wise-- reaching profitability is a
milestone that I think truely marks success. Nobody can ever take that away
from you once you've done it-- its victory.

Startupschool was great-- was good inspiration, and much of what was said
checked well with my thoughts giving me a boost in confidence that I'm on the
right track.

I love lists like "5 dos and 5 don'ts" or the X things that cause startups to
fail, or Pauls 16 reasons... love to check those off and go "Yep, Yep, Yep"...
and there were a couple that I need to work on.

Hopefully this little rant is not offending anybody... in summary, I'd say
winning means making a viable business. Getting VC funding shouldn't be the
goal.

~~~
staunch
Get a blog man -- they're free :-)

Funding is great for providing food, housing, servers, bandwidth, etc. If you
can arrange all the practical issues yourself and can work full-time on your
startup it definitely doesn't seem wise to take investment.

Taking investment is a huge risk and it should only be done in a calculated
way. It has to be a net increase in your chances of success and for each
company that calculation varies a lot. I don't think there is any right answer
to this one.

~~~
BitGeek
I failed to make a distinction-- I am not opposed to funding, but think that
VC funding is overrated.

If you are seeing your business as a 1-3 year affair- if you believe that in
that time period you'll either crash or get bought or go big, and you don't
have any resources... then taking VC funding to cover basics like food,
housing, bandwidth, maybe makes sense. I would still say that angel funding is
better. And if you're just out of college then its kind of a no-lose
situation. You get funded, then you've won because you have a job until the
funding runs out and even if you crash and burn, you'll still be well set up
to do another startup.

But if you want to build something that lasts... you have to take into account
all the costs of various types of funding. This I may not have illuminated as
well.

After so many months, the VC funds turn into, effectively, a high interest
rate loan with a lein against your business. If you go to sell, you may find
that they get the entire proceeds. Sometimes they even put a 2-3x liquidation
preference there... so even a success results in nothing to the founders.

The essense of these terms is that the clock is ticking, and you are put in a
position where you have to hit a home run, or die trying. And the VC firm will
guide you in this direction, and replace you if you do not make the choices
that lead that way. They are only interested in home runs, not viable
businesses.

This is also why acquisition is more popular now- the risk reward profile has
changed, or at least people learned form the 1990s bubble.

~~~
staunch
Google is probably the best example of making funding work for you. They took
angel and VC and built a company to last.

 _"...so even a success results in nothing to the founders."_

No intelligent investor would create a situation in which the founders had no
incentive to succeed. They want founder's interests to be aligned with theirs.

 _"...hit a home run, or die trying..."_

That's not necessarily a bad thing. VC money can force you to move at
breakneck speed to prove your idea is worthwhile or not. It's up to you to
decide if its _possible_ to succeed quickly like that, or find investors
willing to build more slowly.

 _"...replace you if you do not make the choices that lead that way."_

Again it comes down to smart investors. Bad ones replace people frequently and
good ones are primarily investing in "the team", replacing you doesn't make
sense when that is the case.

I think you might be interested in building more of a "lifestyle" business
than what most people would define as a startup. I could personally enjoy
doing either type of business.

~~~
BitGeek
Google-- they did, and they also seemed to take their time doing it...

 _"No intelligent investor would create a situation in which the founders had
no incentive to succeed. They want founder's interests to be aligned with
theirs."_

I responded to this, but its been said, and better: _"As things currently
work, their attitudes toward risk tend to be diametrically opposed: the
founders, who have nothing, would prefer a 100% chance of $1 million to a 20%
chance of $10 million, while the VCs can afford to be "rational" and prefer
the latter."_ <http://www.paulgraham.com/vcsqueeze.html>

_"VC money can force you to move at breakneck speed"_

You cannot predict the future- you cannot predict the level of success you
will have in advance. Thus, signing agreements that put a ticking clock on
your business is never a good thing. You can work at "breakneck speed" anyway,
without increasing the risk of breaking your neck.

There is a fundamental limit to how fast you can go. Google was able to take
their time and was fortunate in that regard. Netscape killed themselves with
their speed. In fact, this forced breakneck speed is one of the killers of
startups -- all the billions that were burned up in the space of 2 years
between 2000-2001... much of that money, if spent more wisely, would have
resulted in viable businesses in 2003.

 _"I think you might be interested in building more of a "lifestyle" business
than what most people would define as a startup. "_

I'm not sure what you mean by a "lifestyle" business. I consider the word
"startup" to apply to any business. But since I am building a high tech
startup that is a web based platform, I'm not taking the relaxed approach of
someone opening a hair salon, or whatever.

I'm looking to increase leverage, growth rate, and viability.

In looking for a citation, I cam across the Paul Graham essay cited above-
which I think makes the same essential point I'm trying to make. (So I'm sure
I'm plagerizing him to some extent, mixed with my own experiences and stated
less eloquently.)

In summary, many costs are now lower, thus leverage has increased, and so VC
funds under traditional terms, are less desirable and less needed.

~~~
staunch
Google didn't take time doing anything. They spent millions on building out
datacenters and on bandwidth.

The big thing that separates them from the Netscape story is that they're
apparently smarter and managed to create a financially successful company. Its
quite conceivable that lesser men would have given us Netscape #2.

 _"You cannot predict the future- you cannot predict the level of success you
will have in advance."_

But being forced to try things more quickly than you might otherwise may help
you discover problems and their solutions before others do, like a fast
forward button. If you have a company that can genuinely absorb capital it
seems to work just fine.

 _"...prefer a 100% chance of $1 million to a 20% chance of $10 million, while
the VCs can afford to be "rational" and prefer the latter"_

In that scenario there's still great motivation for the founders to work hard.
In the scenario you presented (no money left for founders) that is not the
case.

Why didn't you just post a link to VC Squeeze essay if that's all you wanted
to say? You're saying some different things and saying other things
differently.

~~~
BitGeek
Paul and I are describing the same scenario... and that incentive only exists
when it looks like there's a possibility for the one in a million payoff.
Otherwise Liquidation Preferences mean that even a successful sell results in
no return to the founders.

 _"But being forced to try things more quickly than you might otherwise may
help you discover problems and their solutions before others do, like a fast
forward button."_

I could write code sitting here with a loaded gun on a timer, pointed at my
head. I'm sure I would find problems in that code faster and "get it done"
faster so that I could reset the timer.... but the code would not be as high
quality, and it certainly wouldn't be more innovative.

And if I reached the point where I knew there was no way to get it done in
time, then I'd spend the time looking for an exit. I'd have no motivation to
get the code done, and a lot of motivation to get out of there.

~~~
staunch
_"I could write code sitting here with a loaded gun on a timer, pointed at my
head."_

In most startups the proposition is metaphorically identical: succeed before
money runs out or die. The kind of intense pressure that exists in all of the
competitive startups I've seen. It's a marathon race, not a stroll through the
park.

The founders motivation is ownership and the potential payout that ownership
provides. If you take so much investment that you can't sell your company for
enough to profit from it then you may as well close up shop (which happens
frequently).

~~~
BitGeek
You're arguing that reducing your chances for success is the only way to
succeed. You presume that if you aren't about to die, then you must be lazy.
You presume that the only model is unprofitability until someone either buys
you or you get shut down.

You presume that reducing the number of scenarios by which a founder will
become wealthy somehow motivates the founders more.

You say business should be shut down if they don't fit in the model you
describe.

This is a very narrow view. Its also a very polarized view-- it seems to be
the perspective that either you're trying to be the next youtube or you're
opening a farm.

There really is quite a spectrum between them... and far more high tech
successes are not youtube type situations. That's an extreme rarity.

You're locked into a mentality that causes you to repeat this perspective, and
you don't seem to be responding to what I'm saying, and I just don't see
things that way.

So, I don't see much point in continuing this thread.

Good luck if you decide to start a company!

------
BitGeek
Some positive things that come from VC funding are:

\-- Greater awareness of your business.

\-- Their investment may validate your business in the eyes of potential
partners, customers, etc.

\-- Due Dilligence is a process that is always good. (In the same way that
dental work is always good.)

------
rajamohan
it is not only about the funding but also about the network. Todays world
information is wealth and information can be collected by network. Hence for
network building funding is necessary.

~~~
BitGeek
Are you sure about that? We're on a network, and I suspect most of us are
building networking tools. Networking is a lot easier now.

Plus, I think networking is a skill, not a service.

And think about the cost- not just the equity, but the strings. It would be
cheaper to pay a highly networked individual a fee for making introductions
than getting VC funding.

I understand the perspective of someone who has no entre into what seems like
a closed community. But having had to learn the skill of networking (and still
not being great at it) I've found that anyone who you should partner with,
sell to, or do business with, is open to at least hearing enough to understand
what your value is. Once I realized this, I started talking to CEOs of
companies that I would meet at various places - conferences, on planes, cold
calling, etc. A few have not understood, some were a bit put off, but this is
the reaction maybe %5 of the time. Everyone else has at least thought about
what I've said, and even when they've said "no", a good number of times
they've given me a name of someone I should be talking to instead.

I think by itself, this isn't a good reason to pursue VC funding. Advice and
introductions are much less expensive elsewhere.

~~~
davidw
"It would be cheaper to pay a highly networked individual a fee for making
introductions "

Do you really think a bootstrapping company could pay someone like PG what his
time is worth? Letting him invest _is_ a way of paying him, but it's even
better because he doesn't collect unless you'r successful.

I'm not convinced being funded is necessary either, just that you have to
weigh the advantages and disadvantages, and do the best with what you have.

~~~
BitGeek
You answered your own question, and I'm not talking about YC anyway. I'm
talking about VCs, and in particular the strings that come with them.

My purpose is to point out the disadvantages, because the assumption seems to
be that its always a good thing to get VC funds.

~~~
davidw
I've seen a number of articles here about how to "go it alone" and why it's
better, although maybe I notice them more because that's pretty much the only
avenue open to me, so I keep an eye out for it.

------
rms
Um... yes?

Let me know if you've got any better ideas.

