
The Big Lie of Venture Capital - brault
http://www.montrealintechnology.com/the-big-lie-of-venture-capital/
======
tptacek
I got through this whole thing and I still can't figure out what "the big lie"
is. That it's hard to get funded as a first-time founder? No shit. In the
post-YC era it seems pretty close to impossible to close a round with a
professional VC firm without first having done some kind of syndicated,
social-proof-collecting round of angel investors --- so if that's seriously
what you were playing with doing, I automatically have a hard time taking your
experiences as guidance. And since hundreds of credible startups get
introduced to angel investors through accelerator programs, it's hard to skip
the accelerators and avoid signaling risk.

Is the big lie that you should be careful about trying to execute a funding-
first startup plan? Hasn't every bootstrapper been saying that for over a
decade?

"Nobody is going to invest in you unless your wealthy family plowed a bunch of
money in already" is horseshit.

~~~
ryandrake
I think the “big lie” the article is talking about is that venture funding is
largely meritocratic rather than largely class/pedigree based:

> unless you come from money, attended a prestigious university in the States
> or sold your previous startups for a lot of money, you should assume that
> you’re never going to raise early-stage capital.

Not sure where the author got the idea that it’s meritocratic, but that’s
what’s printed.

~~~
danenania
Well, it is pretty meritocratic in the sense that if you have enough traction,
everything else will be overlooked. Pitching/networking are also skills that
can be learned and improved, so that's somewhat merit-based.

But yeah, if you don't have some combination of traction and pitching skills,
you better have something else going for you. If you don't, you're definitely
better off focusing on traction (merit) than trying to play the decidedly not
merit-based game of pitching VCs on vaporware.

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whoisjuan
This reads like a rant out of frustration for not being able to raise money
(and newsflash, if raising money is hard, no doubt raising in Montreal is near
to impossible), but I think the author nailed it with this paragraph:

"The problem, with the Big Lie, is that it kills a lot of startups that end up
building their strategy around a capital infusion that will never come, and
end-up wasting a lot of time trying to fundraise. Some of those startups would
have had a better shot had they focused on sales. It’s still super hard, but
the odds are better. The problem is that bootstrapping success stories often
remain unknown, as the valuation of those startups is never announced in press
releases."

This is so true. Most people I know that have founded startups that later
failed were working towards having something decent to show to institutional
investors instead of focusing on understanding their customers.

~~~
asdfman123
This is just another article that causes me to kick myself. I graduated from
Stanford in 2010 but now am a pretty average, non-Silicon Valley programmer
because I didn't want to do anything after graduating from college.

~~~
jdoliner
Why does this make you kick yourself? This is a guy writing an internet rant
about how frustrated he is with the life you choose not to live.

~~~
blihp
I think the implication is that as a Stanford grad he had a pedigree that
would have increased his chances of getting funded... but he didn't have any
ideas, so now he's using his name-brand degree to do the type of work that a
degree from any school would have been fine for.

~~~
bootstrapping
If he or she does have some good ideas later, that real-world industry
experience might come in handy.

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jacquesm
That's a pretty extreme position to take. Sure it's _harder_ if you can't show
some prior validation or backing, but it isn't impossible. Hook up with any
one of the accelerators, sign up for some mentoring programs and you'll get
your introductions sooner or later if that is what you desire, provided your
start-up has some merit.

And then there is the dumb money, of which there is plenty floating around,
and which keeps on surprising me with the stuff that gets funded. Really, if
you want to get funding you _probably_ can, but it will come at a cost and it
may not be a good fit in the longer term. Be careful of what you wish for.

------
kyaghmour
This article misses the fact that the "startup ecosystem" is different on the
east coast vs. the west coast. And it's especially brutal when you compare the
funding sources available to Canadian startups vs. US startups. See 2016
Analysis of 20,000 startups by Vancouver-based Yaletown Partners (here:
www.yaletown.com/wp-
content/uploads/2016/06/Canadas_Technology_Investment_Gap_Yaletown2016.pdf):
“In 2015, U.S. companies raised three times as much on average compared to
Canadian companies.”

Just like the author, I tried to raise money from Montreal and Toronto VCs ~10
years ago _after_ having received substantial angel funding (~1.5M CAD).
Contrary to what's asserted in the article, previous access to such funding
didn't help us much. Albeit this was around the financial crisis, but still,
there was no additional openness to listen to us. In fact it felt like a
handicap. They wanted to see real sales, conversion ratios, etc. ... pencil-
pushing sort of data in general. But I digress.

The more substantial issue that I found is that most VCs in Montreal/Toronto
are extremely conservative. After we closed the startup I mentioned earlier I
started travelling more actively. That was round 2010 where everyone was going
to become a gazillionaire with a new "app". I was at a conference on the west
coast and I stumbled on a startup that had raised 10M$ for an app. When I
asked about their business model the answer was: "We're focusing on acquiring
users for now. We'll figure out monetization later." THAT would never fly for
raising capital in Montreal/Toronto. In fact I was recently talking to one of
the VCs I had pitched to way back 10 years ago and I told him this story. His
answer? "Oh boy, that's one I would've killed right away."

So the biggest mistake from my point of view east coast startups can make,
especially if they're based in Montreal/Toronto is to believe what they read
about "startup funding" on the Internet. What flies in the Valley doesn't
necessarily fly anywhere else. There's a willingness/ability to suspend
disbelief that is _unique_ to the Valley, both in terms of funding and in
terms of recruiting top talent.

In short, if you're trying to build a startup on the east coast (and
Montreal/Toronto specifically) then focus on making money from real, paying
customers, not angels nor VCs. Or just pack your bags and head west.

~~~
debacle
> In short, if you're trying to build a startup on the east coast (and
> Montreal/Toronto specifically) then focus on making money from real, paying
> customers, not angels nor VCs. Or just pack your bags and head west.

This is true in Philly and to a lesser extent Boston as well.

------
danvoell
"preparing our equity crowdfunding campaign. Yep, we’ll raise money directly
from our users" \- Unfortunately, crowdfunding is also probably a lie, by your
definition. Here is a different concept, how about charge your users for your
product?

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austenallred
> So, unless you come from money, attended a prestigious university in the
> States or sold your previous startups for a lot of money, you should assume
> that you’re never going to raise early-stage capital.

Most founders are none of those things. It’s hard to raise money, of course,
but the author makes it sound like it’s impossible. I’ve seen plenty of crappy
companies with not much to show raise an angel round on nothing but fairy
dust.

OP also argues that less than 1% of companies raise money. Does that mean that
less than 1% that try to raise money are successful? I highly doubt that. That
might be about the percentage that get into YC or raise from a prestigious
fund in their seed round _maybe_ , but it seems like what percentage of total
businesses raise a seed round, which is a stupid thing to measure.

~~~
AmericanChopper
The whole article is just an I-fail-because-the-world-is-so-horribly-unjust
whinge, and to make himself feel better, he wants you to believe that you will
also fail if you try, because that's a much easier way for a person to digest
failure.

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fersab
While there is some truth when it comes to elitism etc, my own (hard learned)
view regards this subject is, that there simply is somewhat of a "gut-feeling"
if you should or should not be raising money. This is not the same as that you
"feel a need", i mean everybody always need money. The "should" is usually
there when you have sales flowing in and you just need to hire help etc. Many
founders already know the answer deep down(and they are good at ignoring it),
even before the pitch.

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mi100hael
VC is a con-job for the most part anyway. They've convinced first-time
entrepreneurs that raising money (and thereby giving away a portion of your
ownership) is a great signal that your business is a good idea. Naive founders
dream of getting into YC or getting funded to prove to everyone that they're
smart and talented.

In fact, making money is the only signal that matters. Try doing that instead.

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ggg9990
Getting to the early signs of success (product, revenue) is cheaper than it
has ever been in this industry in most problem domains, and growth and
customer acquisition is harder than ever. Before a VC invests in you to tackle
the second, why wouldn’t they expect to see the first?

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asdsa5325
It's not a "lie"\- do people honestly expect VCs to just hand over money
willy-nilly? Obviously, it is an _investment_ , and they expect to make a
_return_ on their investment. I blame dumb Founders, not VCs, for thinking
otherwise.

~~~
rayiner
> It's not a "lie"\- do people honestly expect VCs to just hand over money
> willy-nilly?

The article takes exception to the practice of funding people who
disproportionately have friends and family wealthy enough to make a first-
round investment, who are disproportionately white men, who disproportionately
come from a handful of educational institutions, etc.

It's an odd dichotomy to assert that funding decisions that ignored those
factors would be "willy-nilly."

~~~
tptacek
It seems to me that the only observation being made here is that in the
absence of any financial or meaningful social proof for your business, you're
not going to get funded as a first-timer. There are marginal bits of financial
and social proof that privileged people start with, sure, but who does that
surprise? That's true of every competition in society.

The answer isn't to call out "the lie" (I mean, the market for funding is
pretty dishonest, but calling it out isn't especially productive). It's to
recognize how the modern startup financing market works and plan accordingly.

1\. Apply to reputable accelerators as a hail-mary.

2\. Execute a plan that works without external funding and accumulates the
proof you need for financing.

3\. Repeat until accumulated proof suffices for talking to investors directly
(by which point you may be on the Mailchimp trajectory anyways and won't care
anymore).

The role of VCs as gatekeepers is, I think, pretty overrated, and gets more
overrated every year.

------
gnicholas
The real tension is that if you go out and focus on signing paid customers
instead of growing at all cost (literally maxing out your credit cards),
you'll be less attractive to many VCs.

They'll say you're a "mom-and-pop business" and not one that can achieve
venture scale. Basically, they want to write big checks to companies that are
swinging for the parking lot (not just the fences) — not companies that want
to take as small a check as will get them to break-even.

~~~
tptacek
I think this is just false. If you pitch a VC on a business that grows in a
nice linear line to tens of millions of dollars in revenue, they're going to
turn you down no matter what your go-to-market is, because the math of a
venture capital firm simply doesn't work unless the few winners win so
spectacularly that the gains swamp the losses from the losers who make up the
majority. You have to commit to shoot the moon to get them interested, but you
don't have to _start the business_ so committed.

But nothing stops you from building a stable business and then using it as a
platform for a shoot-the-moon pitch.

~~~
gnicholas
I'm confused — what exactly do you think is false? It seems like you're
agreeing that VCs aren't interested in a "stable business" — only the shoot-
the-moon idea that might be built on top of that. But as you say, they're not
going to fund the stable business since it would never become the unicorn that
they seek.

~~~
askafriend
You said "The real tension is that if you go out and focus on signing paid
customers instead of growing at all cost (literally maxing out your credit
cards), you'll be less attractive to many VCs.".

I think what @tptacek is saying is that you absolutely CAN go out and focus on
signing paid customers instead of growing at all costs. You can 100% start/run
your business that way for as long as you want. However, the moment you want
to seek venture capital, you have to sell a different story. You can't sell
the same linear growth story that got you to this point. That's the only
difference between seeking VC and not seeking VC.

Your original quote implied that all businesses have to be started or be run
in a particular way far before raising venture money, but that's not the case.

~~~
gnicholas
Huh, I thought it was clear that I was pointing out a tension between building
the type of business that the author suggests and building the type of
business that VCs fund. I don’t think I indicated that if you build a stable
business, you can’t then build a venture-fundable business on top of that.

Regardless, I’d be curious to hear about businesses that started out stable
and then raised VC money to build a moonshot!

~~~
tptacek
What's the "big lie" of VC's not funding businesses that you literally can't
finance with venture capital?

But that's not why I replied. I replied because you suggested that actually
trying to build a business would make you less attractive to VCs. It will not.
Even people who eventually hope to raise should still use common sense and
basic good business planning to acquire customers.

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vinceguidry
I think anyone familiar with how class dynamics works would have seen the
writing on the wall for the startup ecosystem a long time ago. There's just no
way that venture-capital funds are going to willingly march into a regime
where their money goes into systematically making anyone else rich but their
own.

