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Why I Turned Down $5 Million in VC Funding (groovehq.com)
242 points by ph0rque on Nov 21, 2013 | hide | past | web | favorite | 111 comments



Well written article. In my brief stint with YC and other startup circles, I think one big takeaway I've had is that most (or at least many) people who want to start a startup or hit it big with a startup actually really want a lifestyle business. Hyper growth isn't the goal of the founders. Their goal is to create a good product that helps people and allows the founders to live comfortably and be happy with their work. Raising VC funding is not counter to many of those goals, but it's not the only (or best) path to them in most cases.


I wish I could upvote this more than once. What's more because of the focus on hyper growth, I think a lot of people are discouraged from working on valid problems which lack immediate potential for that kind of growth.


That sounds like a conversation I just had yesterday with a coworker. We were translating Visio diagrams into user stories in Jira and we thought it would be cool to have a visual project management tool that had an interface like Visio that created tickets and managed dependencies, etc. He joked that he would only invest in it if you could apply Instagram filters to the diagrams and the Jira tickets disappeared after you viewed them.


Music to my ears. It may not be as sexy to talk about bootsrapped businesses that are profitable and creating great lifestyles for the founders and employees... but that's what I'd choose for myself over the the VC route any day. It's two completely different universes - but one is falsely glorified.


Maybe we can all thank WallStreet and their “infectious greed”.


PG represents the growth angle perfectly here: http://paulgraham.com/growth.html

DHH represents the other side perfectly here: http://www.youtube.com/watch?v=0CDXJ6bMkMY


I think one big takeaway I've had is that most (or at least many) people who want to start a startup or hit it big with a startup actually really want a lifestyle business.

I think that's an important question that potential startup founders need to answer before diving in. $20k/month coming in from a lifestyle business sounds less stressful than being CEO of a startup with a billion dollar valuation.


$20k/month coming in from a lifestyle business sounds less stressful than being CEO of a startup with a billion dollar valuation.

It is also a lot more likely.


You can do a lot more than that even. With a high margin SaaS product, you can make a LOT of money by just being smart about your pricing and pricing model, and learning how to be okay at marketing. Many products have tiny operating costs, often hosting for less than $100/mo. There is a lot of opportunity out there, and VC money seems more unnecessary every day.


No doubt about it. I wonder how many people give up on promising projects because investors wouldn't be interested in a business that would only attract a 'tiny' market of 1000 people paying $20/month. But if one or two guys can run it and it doesn't take more than a few EC2 instances, why not pursue it?


Do you happen to have any examples of those kinds of products? I'd love to see what kinds of small SaaS apps are being run by one or two people as a lifestyle type of business.


Well, my company Drifty (http://drifty.com/) was largely that (we are 6 people now), though I don't use the term lifestyle business. Not that I don't think it's cool, but it doesn't fit what I want out of the company (I'm addicted to growth).

It's not really about just being a lifestyle business though. The point is that there is so much opportunity out there right now that you can just be a few people, with no outside capital and make way more than $20k/mo. I would think followgen was one example of that. I'd be surprised if they weren't doing way more than $20k by the time they shut down the v1 service.

Even if you want to go it alone, this guy is going to making way more than $20k a month soon, if I guess right: https://www.baremetrics.io/


Thank you, more examples if you have them please; this is inspiring stuff for someone who just wants a lifestyle biz working at home doing my own thing.


I run a B2B business with 2 other people. Our monthly costs are sub-$100/month and we pull in a little over $10K/month in profit.

The business has only been operating for 4 months..and has been profitable from day one.

Although this was successful from day one, it was a result of 2 or 3 pivots over 3 years. All of the failures and successes from those pivots were fine-tuned and put into the current company.


Tell me more.



Great example, if you know more like this selling SaaS webservices by one or two people please do share.


Tell me about some of this opportunity; as a dev I have a ton of skills building stuff, and would love to launch a SaaS biz, preferably some kind of API that can allow me a lifestyle biz but I'm not so good at seeing what things people need, finding those niches.


Well, if you focus on building a product with retention and low operating costs baked right in, you can really grow a big business with little capital or head count required. Imagine signing up 10 people every day at $20/mo. After a year you've accumulated at most $73k per month in recurring revenue. Of course you won't retain everyone, but if you can retain a good amount of those customers, you could easily build yourself a $1M business just on your own.


Of course, but the issue as always is where are those niches, what do people need that's simple enough to be built by one or two people? How does one find such a niche? I'm a developer and thus practically by definition I can't think like my customers, things that might seem easy or worthless to me might not be to someone else, or maybe not.

Having a SaaS product with monthly subscriptions would be my ideal, but you gotta know what people want and will pay for and how to find them.


Well, I think the trick is to not think in terms of niches. A great way to start is to find something people already use, and then make it better. The trick is it should actually be better, otherwise it'll be a crappy clone.

Then, you are entering a market where people already pay for stuff, and they can hopefully understand why yours is better. If you get their attention, you have a good chance of starting to build a subscriber base.

Being unique and new is great, but it's a incredibly tough way to get off the ground.


For anyone wishing to pursue this route I recommend the "Start small, stay small" book - http://www.startupbook.net/


I just see a HUGE ad asking for my email address and a passive-aggressive "No thanks, I don't want to grow my business", the rest of the page blacked out. I can tell there's content underneath but screw that, I'm not reading it after that.


Sorry about that, should have only popped up if you left the page :( Gonna have to talk to bounceexchnage.com about this...

Thanks for the heads up.


> Sorry about that, should have only popped up if you left the page

That's still unnecessary aggressive and irritating. Like most "Are you sure you want to leave this web site?" dialogs that pop up when I close a tab.

Not the best way to give users a good last impression of your site.


FWIW I opened it in a background tab.

Still completely unacceptable.

(EDIT: as in, your site is giving a value proposition and I don't accept it if it includes a massive popup)


Sorry your hacker news experience was ruined today, perhaps you can ask for a partial refund for your troubles.


I'm not going to copy and paste my answer to girvo, but that. I didn't have to take the trouble to give feedback.


Hey, I agree that it's a PITA - I didn't get it when I loaded the page - and I hate pages that do that,

Writing "Still completely unacceptable." makes you come across as though you were ripped off in some way..


Are we really at a point where we get deeply offended at some sort of UI change when we visit a page? Inspector it, remove it, read the article, and move the fuck on.


First, tell us where you're getting "deeply offended" from any of this. Is it that it became a subject of criticism at all?


Oh hey, lets twist someones words and mock them while they were trying to give legitimate feedback. Well done sir.

Why even bother if the argument you're making isn't even remotely associated with reality?


That was the funniest HN comment I've seen in months. Nice job.


Well that's entitled. It's his site, he can do what he wants. Even if that does mean that I'll put it through Instapaper to avoid that stuff and not sign up to his mailing list.


It's not. I'm just giving a data point, as is jc4p, as is codegeek. So are the up-voters.

What part of what I said gave you the impression of entitlement? I didn't say "I deserve to read this without ads". I said "I stopped reading because you put a massive pop-up that filled the entire screen and prevented me from reading it, I don't find that acceptable, and so closed the tab".

Would it be better to have no feedback about why people are bouncing?


The issue for me is derailment.

Your complaint - which is unrelated to the content of this article - is now the top comment.

I agree with you, but there are probably a lot of things we agree about, which are also not related to the content of this article.

And regarding whether your complaint is doing the author a favor? You know, it's probably not. You're just going to discourage him from writing, because then he doesn't have to deal with HN's abuse.


Technically it is related to the content and usability of the page as a whole. It falls under the umbrella of feedback on the user's experience with the site.

I think it's myopic to dictate what is and isn't up for discussion, to say "well that's not the point, just ignore it." If the ad is so distracting and off-putting that the user doesn't even get to the content, that is pretty important.

And if that post rises to the top, the message is that a substantial amount of people are having a similar experience.


Before your edit, you had one sentence saying you had an issue, then one other sentence saying it's completely unacceptable.

It's not about your feedbacks content (I agree with you!) it's how you worded it.


On the other hand, you got me to sign up :) But that's because I've seen your previous posts and they've been really influential for our whole startup! Keep 'em coming.


Thanks for mentioning the name of the service so I can block it on Ghostery.


Hope you didn't copy-paste it from his comment because he mistyped the domain :)


Love it or hate it, I bet it drives a lot of subscriptions. This is the service they use, btw

http://bounceexchange.com/


Holy wow, that is one of the most obnoxious sites I've ever seen (and like others, I felt the same about the ad on the blog).

Leveraging our exclusive "Exit-Intent" technology, Bounce Exchange™ is leading the paradigm shift in automated customer acquisition.

I think they actually used one of those parody startup-speak generators.


Holy crap. That is obnoxious.

Frankly, can't believe they managed to patent detecting and responding when the pointer drifts to the top of a web page.

Well, joke's on them. My tabs are off to the side, and I use keyboard to close the window anyway ;)


Next thing you know, they'll start intercepting Command-W's.


Makes sense, it drives the bounce rate up.


ahahah, good one! I too hate popups, but I didn't see anything on the website, because adblock.


I agree. I didn't even click on the main link because I saw a mention of this popup with the silly wording used for the button to close it. I would definitely not proceed after that.


Agreed, what if I want to grow my business without their tool?


I really like reading groovehq's blog. The writings are very specific with lot of actual details. This one is no exception and great piece of writing. The actual customer email screenshots are a gem. Just one suggestion: To get rid of the pop up that comes up first time when you visit the page, you have to click the cutesy "No Thanks I don't want to grow my business". This even though is trying to be different does not look professional enough to me. I would just re-word it to "No Thanks, take me back to the page where I was".

EDIT: Found one typo in the blog where it says "4) How Much are You Willing to Get Dilluted?". Should be Diluted right ?

EDIT 2: Typo has been fixed.


Good catch :) Fixed...


np. So are you thinking about re-wording the "No thanks I don't want to grow my business" thing OR you believe strongly in it :)


to think about :)


Ultimately, this is a decision every founder must make for themselves. Without knowing the specifics of the offer, it's also hard to really know what went behind it.

Having said that, the rule of thumb is that you want at least 12 months of runway, and that's at the rate you want to go at. It takes typically around 6 months (if things go well) to raise VC money (unless they come to you - which is pretty rare).

From what I understood, Groove had 8 months at the current runway - before hiring the additional people they want to bring on board. That's typically when you start raising before you go into the danger zone with your runway. Also, considering the current perceived drought of Series-A funding, a $5M offer for a business generating $16k monthly is an outlier.

Of course, I hope Groove does well and never needs this money. Also, it's possible the deal terms were not favorable, though it's not mentioned specifically in the post. If that was not the case, in my opinion they had a chance to significantly derisk their business and they choose not to take it. Time would tell if their gamble pays off or not.


> Importantly, with eight months of runway, Groove didn’t need the money.

Geeze, stop right there.

If you need the money, IT IS TOO LATE.

You get money because you can use it, not because you need it.

Sorry if this comes off as a rant. I was at a dysfunctional start-up once and I guess it comes out at odd times.


Also: If you need the money, you're going to get fucked in the negotiation. You should be able to walk away from an investor who talks to you, otherwise they'll use your desperation against you and dilute the hell out of you.


There's a distinction between "need the money" as in "cannot achieve the business plan without investment" as compared to "running out of runway can't meet payroll"

For example, if you need $$$ to build a nationwide network of warehouses, or to get your new electric car through safety testing, or as a bond for your new bitcoin bank's banking license, or to order the first batch of widgets from your manufacturer, you "need the money" because you can't achieve your business goals without it, but you aren't in a desperate hurry and you can shop around.

If you need the $$$ to meet payroll and keep the lights on and the rent paid, but your business plan basically calls for you to keep doing what you're doing, you probably don't have a lot of time to shop around for investors.

If you're not in either of those categories raising more capital now is optional, and you've got to consider whether it's worth what you'll have to pay for it.


It's a case of need to grow vs. need to survive


During the dot com boom it was a always an issue if your company took too much VC money. Having a fat bank account balance can make you lazy, you can spend on things you don't need (Aeron Chairs for Everyone!) and you don't "sweat the details." but a lot of the things startup teams need to learn how to do are the exact opposite, spend only when necessary, sweat all the details, understand where every dollar of your monthly burn is going and ask yourself every month "Did that dollar work as hard for me as it should have?" With too much money it is easy to lose the discipline to keep the business at the forefront of your thoughts.


I really dislike the specific way in which Aeron chairs have come to symbolize all that was bad about the dot-com era. The nature of that chosen symbol speaks volumes about the values our culture holds.

Spending a thousand dollars on every employee to keep them comfortable while they sit at their desk and work for your company all day?! The epitome of profligate spending! A shining example of decadence! For shame, for shame!


Perhaps Aeron chairs filling the mostly unused conference room would be a better symbol?


I'm sitting on one and i'll never buy one again. Overpriced crap.


I got one about a year ago, and am actually pretty happy with it. It's ended the continual parade of mid-range uncomfortable Office Depot chairs through my workspace, at any rate.


It is not just a discipline issue, it also alters your desired growth trajectory as your sole aim is no longer being a healthy profitable company; you also have to account for the endgame the investor is playing, which, more often than not, is a big exit.

As much as it is celebrated and desired in the valley, a large number of businesses don't have the mystical hockey stick as a viable option for growth. Throw enough money at it and any business can hit the hockey stick, but it won't last for too long. For every big exit that we read about, there are probably ten companies out there that attempted it and failed.


I loved the post and was not done reading your concluding statements before I got a giant pop-up that asked me to give you my e-mail to read the exact same post I was reading. I understand pop-ups like that work for making mailing lists but can you at least make it come at the bottom of the page not in the middle of the last paragraph? That combined with clicking the "No thanks, I don't want to grow my business" button being the only way to get out of it made me leave the page without even finishing your article.


Sorry about that, should have only popped up if you were about to leave the page...

Fixing now. Thx.


Between this and the recently reading about the Expensify team taking a month trip every year, I have this question: how do people get jobs at these well-meaning, intelligently planned companies? Seems like every startup I've worked at is more of the "OMG GRAB ALL THE CASH ASAP" kind, not the "Lets build happy users for a quality product".


The new job board from 37Signals would be a good start: https://weworkremotely.com/ They've been beating this drum for a long time now.


> Are you taking funding for the sake of taking funding, or do you actually need the money?

"Needing the money" probably needs to be defined here. If you're going to the VCs because you "need the money" as in the lights will go out pretty soon, unbutton your slacks and bend over because you are in no position to negotiate.

On the other hand if you "need the money" because, in spite of the fact that your runway looks very very healthy, you can foresee a point well down the line where you will actually need the money then that's a much better scenario to be going to a VC.


Great post, love the series on groove.

Question on convertible notes: doesnt a 1M seed round on a note suggest that a second round needs to happen? How do the investors feel about not having a second round to set the price and convert to equity?


So here's a question... with the new rules around fund-raising, why wouldn't he just throw up a box to this side of this article that says something like:

"By the way... now that you've seen our numbers, if you're interested in a buying a small piece of equity in our company, leave your email address and we'll let you know terms."

Is there any downside to an approach like this? Setting your own terms and then selling equity if you find people interested?


Publicly advertising an investment opportunity is simply not allowed.


I thought the recent rule changes allowed this now... isn't this what Angel List is essentially doing?


The downside is, you still have to deal with investors and all that comes with them. Dealing with a lot of small investors is often a much bigger headache than dealing with one or two large investors.

Taking on ... 300 small investors is a nightmare. They require far more work on average per dollar invested than larger investors do.


Many countries have rules against publicly recommending a stock without a proper certification


In this particular case, they probably still don't need the money.


> Importantly, with eight months of runway, Groove didn’t need the money. There were great arguments to be made about how we could use the money, but weren’t running out of cash.

No other reason is needed. If you don't need the money, and if you believe in the business, you don't need to justify turning down external investment. In fact, I'd argue that turning down money is harder than accepting it


Probably off-topic, but something I've never understood reading these things:

How does this funding actually work? From what little I know (the stock market) you'd sell an equity stake in your company for a certain amount and you have money in your personal bank account.

But it sounds to me like all these funds somehow go back into the company?? how?? what am I missing?


Okay, so yes, you are mechanically correct in that if you sold 10% of your shares for $1m, you would get the cash not the company.

However, the way funding events work in real life is that new shares are created by the company and then sold to the investors.

As a very math-simple example, I have 1m shares in my company, and I own 100% of them. Some VCs want to take a ~33% share of the company for $5m. My "board" (me) creates 500k new shares, and sells/gives them to the investors for $5m. Now there are a total of 1.5m shares, of which I own 1m, and the VCs own 500k.

EDIT: sometimes, though, a founder will sell part of their shares to the VCs during a funding event. That's usually to help give the founder a little liquidity and cash.


I think it's more typical to issue, for example, 10M shares, take 3M for yourself, and leave the rest for employees/VCs/whatever (rather than issue new ones, in a first round)


Yeah, you're right, that's often the case, especially when you have cofounders and early employees that you don't want to dilute during the first funding round.

However, I just wanted to keep the example simple, I thought it was easier to talk about creating shares than deal with the "who owns the unissued shares" notion.

But yeah, that's a good clarification.


This answers my question, thank you.

I had never thought of the company itself creating more shares, this is what I was missing in my thought process.


this is also how dilution happens - more shares are issued, and then everyone with existing shares owns a smaller % of the total amount.

VCs everywhere will always prefer to work with their lawyers to make sure this goes in their favor. it pays to use your own lawyer so that all of this stuff happens on your own terms.

lawyers are responsible to the party who pay their fees, so watch out if anyone seems overly generous with helping you out with legal bills.


Khan Academy has a nice 12 minute long video on this topic: https://www.khanacademy.org/economics-finance-domain/core-fi...


I'm not sure I understand the question. What do you mean by "you have money in your personal bank account?" Are you saying that some of the money put in by a VC ends up in your personal bank account? If it does, it's through a salary you withdraw from the company. VCs, or any investor, will want X seats in your board, which will also give them a say about your salary. So if you got $1M in funding, no sane board will allow you to take a $700K salary. Your win from the investment is that now your company has money to move faster, by hiring more talented people, buy equipment that is important to the business, pay vendors, etc. In short, to scale. You, the founder, keep a % of the company throughout this time, but you'd only see it translate to real money in the case of an acquisition/IPO/sell off. Your motivation, then, is to increase the value of the company so that % you have in the company will translate to more money in the cases I mentioned. After this long answer, I feel like I still haven't actually answered your question because you're probably asking about something more subtle :-)


> You, the founder, keep a % of the company throughout this time, but you'd only see it translate to real money in the case of an acquisition/IPO/sell off

If Evan Spiegel and Bobby Murphy weren't taking $10 million+ off the table during funding rounds they'd probably be far less likely to turn down a $3 billion offer. It is fairly common for founders to trade personal stock for cash during a funding round.

Perhaps you mean during initial funding? It is absolutely possible - and common - for founders to take money of the table during secondary funding rounds.


The really short version is that the company sells (probably newly created) shared in exchange for money. The owners of the company are generally not selling their own shares. That would lead to serious complexity.

If you want to know more, read Venture Deals[1]. It's very thorough and well written.

[1] http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalis...


The company issues new shares and the funds go into the company bank account. You own the same number of shares as before, but a lesser percentage.


That's sorta it, yeah. rather than the money going into your personal bank account, the company sells part of itself, and the money goes in the company's bank account.


Great writeup. I'm so sick of hearing about VC funding, growth-hacking, hock-sticks, and user-acquisition and all in the name of an exit strategy. I hope to see more and more companies take this more bootstrap-ish approach to building sustainable businesses, solving a real problem for real people.


One element that this misses is the fact that it isn't always clear what size business (or something even what business) you have at the beginning. Meaning, you might take $5m thinking you've got a high growth business only to discover, a long way in, that you've really got a slower growth business. I've seen this happen multiple times where the founders say things like "I love this business - if I was just running it myself, I'd really love it, but the funding makes it a constant fight." Truth is, high growth, highly scalable businesses are probably a bit rarer than we'd all like to admit.


TLDR;

I turned down 5 million so that I could practically name the investor, get attention for my startup, and still make page 1 of HN.

----

I wonder how investors feel about posts like this. If you are an investor, would it change the way you feel about the CEO or the company?


Who cares? It's not like he's taking their money.

edit: I'm not losing sleep over someone hurting the feelings of venture capitalists by publicly saying he didn't take their money when offered. Just as I doubt they're losing sleep over the companies they turn down.


I'm simply curious, that's all.


I didn't think he disparaged the investor at all in the post. He simply stated that he didn't need the money. I don't think his decision had anything to do with the investor.


I'm excited by companies like this. I think you actually get the ability to do something that transcends just making a product and selling it. You get a chance to change what it means to grow and run a business. Groove might end up being very influential and meaningful beyond just customer support, like 37signals has. That's hard to do if you are shooting for an exit in 3-5 years just to be swallowed up by a big company.


The only point that didn't ring true was on scaling. I think it makes more sense to scale while you have the money, and use that same money to deal with the issues that arise as you do so. Otherwise, you are leaving customers without your product for longer than you have to. And that could be their loss, not just yours.


Worth while read. It's great to see an entrepreneur want to build a company instead of a product to sell to investors.

Go Groove!


This series is great but I wish it had the number for each part of the series somewhere in the URL. Or perhaps a sidebar (ruining a really clean site) with the series listed in order.

Of course, my best recourse is to read each one as soon as the announcement shows up in my e-mail client's inbox!


I think that VC funding principle is an upside for VC funders and downside for majority of fundraisers. What VC funders basically do is a transferring of economic fragility to fundraisers, while hunting for positive "tail events".


Great stuff. It's hard not to buy into the standard startup myth of raising money and going big. 'Lifestyle business' is not a positive term. So I for one salute your courage.


I find this so refreshing compared to all the "super todo app raises $30m" news.

And I love these blog posts. So much information and facts about how they try to grow. Please keep going.


thx! really glad you enjoyed it :)


First rule of taking VC funding - be aware that you're on someone else's schedule once you do.


I started the article: He's a mad man. I ended the article: Hmm.. I never looked at it that way.

Refreshing read.


haha, I am mad though :)


These huge rounds are crazy, a $5 million exit would be life-changing for most founders.


It wasn't an exit, it was a funding event.


I know, that's my point. These funding event amounts are big enough to be great exits for most founders.


Very rarely, if ever, will a founder take money off the table in such a small funding round that is used to accelerate the business.


Funding is overrated.




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