

Startup Question: Why Venture Capital for Web Startup? - Kaizyn

This is probably a silly question, but this seems a good forum to get an answer:  It seems to be taken as a given that any founder will sooner or later apply for VC funding.  Why would a founder of a web startup ever bother with venture capital?  A web startup can be built by a team of 1-4 people working on it part-time (so no need for anyone to quit their full-time jobs).  The time required to build such a web system would probably be on the order of 12-18 months.  Because servers, bandwidth, and/or hosting services are cheap, this can all easily be self-financed (for ~$5000-$10000?).  What have I missed here in this analysis that makes venture capital desirable or necessary?
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webwright
1) You oftentimes can't afford success. Google and Facebook would've gone
broke without outside funding of some kind, long before they found a way to
generate significant revenue.

2) VCs are advisors, and are likely smarter than you about lots of things--
especially how to sell a company. If you want a lifestyle business (37Signals,
for example), then avoid VC. If you want to sell a company, you'll have a
better chance (and sell it for more money) with a motivated VC.

3) Sales, marketing, and support cost money, for most businesses. If you've
got paying customers, telling them "sorry, I'm at my day job" just won't play.
For a consumer play, this is less of an issue.

4) A lot of ideas (b2b, mostly) just aren't simple enough to bootstrap with 3
people and 18 months. Of course, it's easy enough to avoid those business
ideas. ;-)

5) Businesses are ticking timebombs. Stretch out your development time and
your stretching out the opportunity for disaster. A team member can lose
interest or get a great job, a killer competitor can manifest and snatch up
your customers, etc.

6) Momentum. I can say with experience that it's REALLY hard to keep momentum
going with 3 people working part time (I'm doing it right now). When you put a
startup on the back burner, it's rare that you all get to focus on it at the
same time. When you're rarin' to go, your partner is "really slammed this
week".

7) Necessity drives success. When your startup is your full-time job and you
have an investor looking over your shoulder, your going to work harder and
better. If you've got a job, startup failure is more of an option and delays
aren't very painful.

8) Debt or VC can get you to the point where your growth curve starts quicker.
When you are confident about the fact that you're on track to build a zillion
dollar business, $100k of debt/equity financing get get you there a LOT
faster.

All that being said, I've sold two bootstrapped companies-- it works.

I'd advocate for bootstrapping your way to the point where you know if you're
on to something. If you can prove that the market desperately wants what
you're building, then it USUALLY makes sense to get some cash (via debt or
equity)... Assuming you want to focus on growth/exit events instead of
profit/lifestyle.

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epi0Bauqu
My last company progressed essentially as you described. We went from nothing
to acquisition on $0 of outside investment and essentially $0 of inside
investment. So I am here to say that it is possible.

However, there are a number of reasons taking VC money would be "desirable or
necessary." Here are some I can think of:

1) Good VCs are often hooked into potential acquisition targets. They can get
you noticed and possibly help you fetch a higher price.

2) If you need good targeted seed traffic to get you going, that might take a
substantial amount of money. This can take many forms, e.g. a PR firm,
adwords, traditional advertising, etc.

3) If you have a working customer acquisition channel that requires money, and
more money will help you grow faster, you might want to do it just to grow
faster, outpace competition, etc.

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tirrellp
Because when a competitor comes along that _does_ have venture funding, they
will leave you in the dust. They will be able t do more in less time and scale
faster, while your hobby site remains just that.

~~~
epi0Bauqu
At least in my cases, I have found this to be simply untrue unless it is
related to ad spending. A good hacker or two can develop quality scalable
software as fast or faster than most VC backed companies.

~~~
webwright
And quality scalable software sells itself? Sometimes, but not usually. There
are plenty of examples of lower quality software burying the better product
because of sales and marketing horsepower.

~~~
epi0Bauqu
I never said anything about selling and neither did the comment I was replying
to (at least the way I read it). In fact, see my other comment on this thread
about why I think you might want to take VC funding if you need to blow out a
sales channel.

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rms
Are you guys any good at marketing?

"If you build it, they will come" sometimes applies but not usually.

~~~
Kaizyn
Even if it takes such a site 2x-4x as long to grow as it would with more
expensive marketing, doesn't the fact that what it produces is over and above
one's full time employment mean that growing as fast is less critical? After
all, with self-financing you don't have people waiting to collect their
investment money.

~~~
rms
That's true.

I guess my point is that sites need some kind of marketing to succeed, unless
they build something that "goes viral" and it takes luck and a product people
truly want for that to happen.

An advantage of the VC funding is that the investors will make sure you worry
about marketing. I'm just thinking of a recent post on here where a guy said
"I launched my startup. I need more traffic. What do I do now?" So as long as
these guys have some kind of plan for marketing, they can do it themselves.

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walesmd
You are implying that said startup is nothing more than a basic website (ie.
MySpace, Facebook).

What if the startup includes mobile features (twitter), or deals with
video/music (Slacker, YouTube, etc).

Licensing, lawyer fees, scaling, development costs - they are all relative to
what action your startup is taking.

Yes, if you are just building a blog or the next MySpace-killer (which will
fail and you suck at life if that's what you are attempting) - yeah, you could
pull it off by yourself with a $7 per month shared hosting package.

~~~
jasonlotito
Twitter's mobile "features" are a joke. Twitter is the who's who of easy
technology. Your basic forum site has more technology then Twitter does.

~~~
staunch
I think his point was that Twitter's mobile feature costs them a lot of money
per month in fees, as would a video streaming site.

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chaostheory
<http://www.paulgraham.com/vcsqueeze.html>

<http://www.paulgraham.com/venturecapital.html>

yeah unless you're doing hardware (or some other capital hungry biz), I think
angels are better

It's kind of like multi-threaded programming... don't do it if you can avoid
it

Then again there are VCs with special terms nowadays like Charles Rivers and
Bay Partners....

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jdavid
VC money, gives you capitol weight, and if you wanted to negotiate partner
relationships as part of your business plan, the VC $$ will help demonstrate
that you can execute. If you are working on an app, that requires page views
only, then you might be able to cost through on your own; but if you are
building an app with a new model, you will need some time time to tweak things
for your customer/ partner relationships before the dollars roll in.

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jdavid
IP legal fees might be another one to lead revenue.

