

A vote for me is a vote for dipshit businesses everywhere - cwilson
http://blog.asmartbear.com/rejecting-raising-vc-money.html

======
buro9
The 9% success rate is uncannily similar to the music business success rate
with major artists. It's long been known that's a 1-in-10 business.

Strangely, within the music business the independent small labels can
frequently achieve 1-in-3 rates. Why? Because when they fail they fail small,
it didn't cost them a great deal. So they don't need a great deal to recoup
those losses. Amongst the indies it's perfectly fine to have a sleeper (slow
but constantly selling) album... they're hits still as they recoup their cost
x5 which makes money for everyone involved.

To me, angels are closer to the indies and VCs are closer to the major labels.
So you've got to ask yourself, is your venture the next big pop/rock act? Or
are you the arty, experimental and original new band with limited appeal but
with staying power?

------
adammichaelc
_Some VC, "When you play it safe you nearly always lose."

To understand what's really being said here, you have to replace the word
"you" with the actual antecedents. So: "When you play it safe you nearly
always lose" should read: "When founders play it safe VCs nearly always lose."

But founders often win._

Money quote.

------
sosuke
Bootstrapping to the end, I didn't start trying to break out to make my own
success to have to take crap from anyone but myself and my customers.

To hear a VC talking about $25 million as a small time exit is disgusting.

~~~
amirmc
To a VC this _is_ a small time exit. I'm not surprised they would be talking
about it this way.

~~~
damoncali
That's only true if they're investing big time money - clearly the new breed
of VC's (aka Super Angels) are going to be just fine with such small time
exits.

The disgusting part is not that they don't want small exits, it's that they're
so arrogant as to suggest that entrepreneurs who don't help feed their out-
dated business model are somehow doing something wrong.

It reminds me of the cable companies back in the day: "But have you _seen_
internet video? It's horrible!"

------
acgourley
It's worth talking about the math the VC community is doing here. They are
seeing this 9% success rate that was quoted in the above article, and thinking
"we need those 9% to be home runs."

This logic makes a huge assumption: the success rate of companies is fixed,
and not related to how hard founders swing.

My hypothesis is that if the investors didn't push the founders for home runs,
the 9% number would grow. If true, it really invalidates the math a lot of
these guys are using.

The attitude really should be about maximizing expected value - and I don't
think we have any data showing that always swinging for the fences does this.

~~~
jtbigwoo
This talk of swings and home runs leads me to a comparison.

Could it be that we're looking at a Sabermetric/Moneyball shift in thinking?
One of the most counter-intuitive parts of the sabermetric approach is to
focus on avoiding outs rather than getting hits. A player that gets on base
40% of the time and hits 10 home runs/year is more valuable than one who gets
on base 30% of the time and hits 25 home runs/year. In a full season, the
second batter will generate ~70 additional outs (enough to fill 2.5 entire
games!)

What if a V.C. decided to avoid "outs" at all costs? What if they managed
their portfolios not to avoid losing money rather than to swing for the
fences? If they could keep their write-offs around 50%, then 3x and 5x returns
become money makers and the occasional 10x return becomes a home run.

~~~
rdl
Costs (due diligence, fund raising, overpriced salaries, legal) would make a
VC like this unprofitable.

Banks are the solution for institutional small-scale low-risk finance, via
debt. Retail/commercial bankers are excessively conservative in some ways now
(due to regulations); the traditional "small town bank" which originated and
held loans to small businesses, property finance, etc. within a specific
community was a much better option. Banks have a low cost of capital (from
deposits), and should have minimal marginal overhead making each loan. By
having "community membership" as one of the metrics for giving a loan (i.e.
you've lived in this town for 20 years, and have been a customer, are known to
be able to run a certain kind of business, ....), due diligence costs for
making a reasonable new loan are a lot lower than for a VC.

Angels (who effectively use sweat equity to cover their own overhead) are the
other.

The thing you are missing is that each series A deal a traditional VC does has
a 50-100% the invested capital cost in overhead, opportunity cost, etc. At
that point, shooting for 3x returns becomes a lot less appealing, especially
over 10 years.

~~~
acgourley
1) The overheard issue is something they can fix, they simply don't have any
incentives to. Limited partners will have to crack down before we see any
change.

2) Are there really many banks ready to fund a technology startup's series A?
Even if its a business model with a high chance of a 5x return?

~~~
rdl
Banks as they exist today are a non option for most business financing. This
is sad, and a big change from the peak of us civilization (18xx to maybe 1969)

Specialist banks like svb and square can use debt to let you stretch an angel
round (equipment financing, maybe invoices on enterprise sales, maybe an a to
b bridge loan) but are not a replacement for equity risk capital in seed or
series a.

------
Detrus
The dipshit business point was made more elegantly before and it's valid. I
remember seeing some video of TechCrunch 50, where Kevin Rose sat at a panel
with other tech celebrities and criticized all the proposals as small ideas or
something along those lines.

In the general population there is an expectation that the word "startup"
implies you're working on something world changing. While the term "starting a
business" implies doing something incrementally better, no huge world change
required.

I also remember 37Signals railing against impractical world changing ideas and
VCs, saying how developers should build quality applications, find a few
thousand users and be happy with that. Chances of success are higher, a few
million is enough money. That seems to be what a lot of startups are doing and
what certain schools of investors are encouraging.

Maybe the confusion is over the word "startup" meaning world changing tech
being separate from "small business" in the popular imagination and that of
VCs.

Now of course many who get angel funding go on to VCs if their idea starts
growing like crazy and VCs would prefer to invest at the earlier stage for
more profits.

But how many of the companies in seed camp incubators have no intention of
being the next big thing? How many people are discouraged from dreaming up a
big idea because of all the talk about 1/20 success rates for those vs 1/4
success rates for small ideas? It does look like a trend against the popular
perception of startups.

------
wheaties
You know, this internets thing is disrupting more than just old-school
businesses. It looks as if it's also disrupting tech-based VC businesses too.
And the world marches on...

~~~
amirmc
Specifically with respect to software. I'm sure there are plenty of
hardware/biotech startups out there that still need VC money to get anywhere
significant.

Having said that I'd be very interested to hear about successful bootstrapped
hardware companies. I think Dell might be an example but my google-fu is
failing me today.

~~~
revorad
"Michael Dell dropped out of school in order to focus full-time on his
fledgling business, after getting about $300,000 in expansion-capital from his
family."

<http://en.wikipedia.org/wiki/History_of_Dell>

~~~
ido
Wasn't that quite a lot of money in 1984 dollars (maybe closer to $1m in 2010
dollars)?

It's less than what you'd normally get from VCs but it's still a lot more
funding than a couple of guys in a basement living off of ramen.

~~~
staunch
$629,483

<http://data.bls.gov/cgi-bin/cpicalc.pl>

------
edw519
Putting aside business models, valuations, and the amount of each investment,
there are 2 reasons this founder would rather talk to an angel:

1\. It's more likely to be his/her own money.

2\. They probably earned it themselves.

Don't underestimate the effect of these 2 points on their relationship with
you.

I would expect a little more TLC from someone who's investing the result of
their own hard work over someone who's more concerned about third party ROI.

~~~
lzw
I'll ad a third:

3) Several experiences watching startups I worked for get:

a) forced by VCs to spend money poorly that resulted lower exits.

b) bent over a barrel playing games trying to get funding from vcs

c) lose direction because the CEO and executives were spending more time
chasing money than focusing on the product

------
chegra
hmm... I agree with the article about the current trends don't seem to favor
VC. To a founder 25million is a win and to a VC it's not.

But my advise is still to swing for the fence.

What I figure is your first company goes towards creating something that can
make you FU money(25million would do). Your second and after goes to hitting
homeruns, google type.

I think VC should now start targetting already successful entrepreneurs, since
making 25 more million wouldn't neccessary cause that much change in the
outcome of their life. As a second time round entrepreneur, you would be more
than likely looking to make your mark on history and by creating disruption.

I think VC can use this to their advantage. Also, a second time round
entrepreneur is more likely to be successful.

------
startupcto
Bloggers should stop writing dipshit blogs so they can sell to Engadget,
Huffington Post and what not.

