

Some companies are best off without VC - danshapiro
http://www.danshapiro.com/blog/2012/01/companies-that-would-do-best-without-venture-capital/

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chalst
A good article, but the thing I liked most about it was following the link to
discover Dave Kellogg's superb blog post, Why Palantir Makes My Head Hurt:

[http://kellblog.com/2011/06/27/why-palantir-makes-my-head-
hu...](http://kellblog.com/2011/06/27/why-palantir-makes-my-head-hurt/)

which, among many other points written up in an entertaining manner, gives the
better summary of how investors look at the difference between service and
product companies:

>That last point [about whether Panatir sends in consultants or research
engineers to its clients operations] is important. Why?

> \- If field technical staff are engineers, then the associated revenue is
> presumably license fees and the cost is R&D.

> \- If field technical staff are consultants, then the associated revenue is
> services and the cost is COGS.

>Why does this matter? Because most software company boards and investors see
the world in a pretty black-and-white way:

> \- License revenue is good. Services revenue is bad. (Largely because gross
> margins run 98% on the former and 20-30% on the latter).

> \- R&D expense is investment and ergo good. Cost of goods sold is bad.

>Almost all Silicon Valley boards will want an emerging enterprise software
company to run with a consulting business that’s no more than about 20% of
total sales. In practice this means a company can have at most about 1.5
consultants (pre- and post-sales) per salesperson. Any work that can’t be done
either as R&D investment or by that small consulting team needs to get handed
off to partners.

So, do you want high growth or do you want to help your clients? The two do
not always go together quite as well as you might have hoped. To rephrase the
point in Dan Shapiro's terms, many of the most worthwhile businesses out there
have reasonable, not outrageous margins.

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richardburton
Lifestyle businesses are not to be sneered at. Small, cash-flow businesses
that can be run at any hour of the day give you _freedom_. I am currently
living in South Africa for 4 months just kiting and coding. Next stop Norway
and then San Francisco. I work 3-12 hours a day depending on wind, friends and
plans. Tim Ferriss's 4-hour work week is very possible and, as I have
discovered, very enjoyable. I know that I want to build a meaningful company
when I have found a concept that I can happily commit a decade of my life to.
I can say that about my kiting but not about any business idea I have found so
far.

I would love to continue the conversation here or on Twitter if you like:
<http://twitter.com/ricburton>

~~~
jasonkester
There are actually quite a few of us here (surfing in nicaragua myself at the
moment.) every month or so another article will come through with somebody
you've never heard from before summing up a year's worth of traveling and
building a business from the road.

Seems it will only get more popular over time, since every one of those
articles has at least one comment along the lines of "ok, screw it, you've
convinced me. I just booked my flight!"

~~~
richardburton
Yeh it is definitely a growing trend. I am not interested in going off the
grid for a year. I _love_ being online all the time. Love it. I just want to
kite and code. I have decided to write more about a few things here:

<http://kiteandcode.com>

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majani
He said that investors pressure you to run at a loss so they can plow more
money in and grab more equity. Sounds like a bit of a conspiracy theory, but
I'm currently running my angel-backed company at break-even, approximately 30%
monthly growth, and investor is pressuring me to run at a 100% loss. Are there
any more experienced guys out there who can say for sure whether investors try
and screw you out of equity by pressuring you to run at a loss?

~~~
webwright
Do you have cash in the bank? Are you running neck and neck with competitors?
Are you leaving growth on the table? Could you survive 100% loss for a few
months?

When you take outside money, there is an implicit commitment to growth and
risk. If you're playing it safe and your competitors are outpacing you, it's
fair for you investor to push. But at 30% growth MONTHLY (which is insanely
good), you can probably comfortably push back. But if there are obvious
investments that could accelerate growth, you should consider making them at
the expense of month to month profit (if you have the cash to do it). If you
don't have the cash, you should consider raising money (at good terms) so that
you have the ability to make this choice.

Good read on startups and profitability here:
[http://www.bothsidesofthetable.com/2011/12/27/should-
startup...](http://www.bothsidesofthetable.com/2011/12/27/should-startups-
focus-on-profitability-or-not/)

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jiggy2011
Do all investors behave like this or is it just more common in SV VCs?

No wonder we have such a boom and bust economy if this is the general
practice.

What is wrong with simply investing a reasonable sum to help a business with a
high probability of success getting off the ground and then make a good
reliable long term return?

Surely that scales better.

~~~
buro9
Banks do that.

VC money is for the high-risk. A lot of their punts fail (companies die), so
you need to make enough money off the ones that succeed that you cover all
your losses and still make a great pile of money on top for future investments
and profits.

The only way to make that stash of cash off the winners is to exit for high
returns, and in the case of backing a winner to increase the stake over time
so that your high returns are multiplied by the stake size.

This shouldn't be news to anyone. Did you think VCs were your friends?

~~~
jiggy2011
I understand that point , but surely if there is a lower risk then you can
afford to not get a higher pay off.

I mean surely there's a case for investing in say a consultancy business and
rather than worrying about a high ROI in 3 years simply take a small % per
year throughout the life of that company?

Either that or consultancy businesses in general have a crappy risk/reward
ratio in which case I am surprised they are so popular.

~~~
SemanticFog
VCs would happily invest in low risk, high-return investments -- that is in
fact what they are looking for.

But wherever there is truly low risk, multiple funding sources will compete,
and returns will be driven lower. Companies that fit the profile you describe
will generally use debt financing, which is not available to venture startups.

------
khadim
Quite an irony, I have met many entrepreneurs who start off to be their own
boss & within few months they start running around to get their new boss (read
VC) Nicely captured Dan, liked statement "You will have a new boss"

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thelostagency
This is certainly an inspiring article. I've seen both bootstrapped companies
grow and VC companies grow and for a personal experience I would say
bootstrapping and doing it right from the ground up feels like the best way.
I've also seen how stressful it can be on people if you have a VC invested who
is demanding more revenue, more sales and better margins.

If your business can generate cash and support itself there needs to be no
reason for a large VC cheque that will add extra costs and stress to your
business. Just as the article talks about a Taxi business getting VC, there
are a number of small web startups that will just never return the capital
quick enough to keep their head above water.

I've also seen investors with personal interests place roadblocks as they want
you to use a particular platform, their services or a related company they own
for your outsourcing. While this can work very well it often seems to work the
opposite and slowly bleed the business to death as the investors draw out
capital.

Many businesses don't operate on double digit growth figures and I don't
believe it's sustainable in most cases to expect all businesses to grow like
Twitter or Facebook.

