Almost everyone I talk to about my new startup asks me if I plan on trying to raise money. The answer is, not if I can avoid it. Allow me to try and explain why.
A couple of months ago I went to a Y-Combinator sponsored “Startup School” at Stanford. It was a full day of speeches by interesting characters like G-Mail’s Paul Buchheit, Facebook’s Mark Zuckerberg, Paypal’s Max Levchin and Lotus founder Mitch Kapor. Also speaking were Sequoia Capital’s Greg McAdoo and Rahoul Seth, CFO of Adteractive.
McAdoo was an amazing speaker and you could tell that he is incredibly sharp. I listened closely. He gave some great advice about building a successful company. A company that Sequoia might want to fund in a later round of financing. I was impressed. Mr. Seth spoke more directly to the issue of getting a fledgling company off the ground.
He first brought up the point that it’s absolutely necessary to get funding because it brings a lot of experience and structure to your new organization. I’ve heard this before and it’s always stated as fact. It sounds roughly like this: “If you don’t get some funding, you will fail because you’re just a kid and you don’t really know what you’re doing.” If you ever start a company, you’ll hear the term “smart money” thrown around to describe this added value of the VC process. However, if you really pay attention, you’ll realize that you only hear this from the VC’s and their cronies. I think what they’re really trying to say is, “if you don’t get funding, then you won’t do things our way, and we don’t like that.”
The most enlightening thing came later in Mr. Seth’s talk. He taught us about the process of starting a company and raising capital. He had nice flow charts. He walked us all through “the way it works”. I dozed off a bit in the middle, but I’m fairly sure that he made no room for flexibility in this process. From angel investors to a liquidity event, he told us the way things would happen. First round, second round, common stock, preferred stock, dilution etc. etc. He said that the goal for a founder is to retain between 2% and 10% of the company (f*** that). But the really fascinating part was the end of his talk when he discussed the possible exit strategies for a successful company. There were two options. First was an acquisition. Second was an IPO. That’s it. Two options. Nothing else.
Conspicuously missing from this list was the idea that you might, *gasp*, form a profitable, self-sustaining business. It seems that once you take funding, this is no longer an option and that’s what really bothers me about VC’s. They are only interested in the big pay day.
You could build a company that brings in millions a year in profit. Enough money to allow for amazing lifestyles for all of the founders and employees. They still wouldn’t be satisfied. They’re not interested in dividends. Deals just aren’t structured that way. They’d want you to grow, grow, grow. To take wild risks. To spend tons of money on hype. They want you to relinquish control of your baby. To sell that company you built from the ground up. Why? So they can cash out and let the new owners deal with it after that. If trying to go huge causes you to fail, that’s ok, because one of their other long-shots will work out.
None of the startup founders that shared the stage with these VC guys felt a need to recommend getting funded. They didn’t outright say that VC’s are bad (well, Mitch Kapor basically did, thanks for keeping it real Mitch), but they kept their advice to practical matters. Zuckerberg arrogantly told the audience that the key to success is to be “young and technical”. Buchheit told us to quit our jobs asap and just redefine success to be any good learning experience. Max Levchin told us that the key to success is to play to the seven deadly sins. Awesome advice from the founders. All day long. But not one of them said, “definitely get millions in funding, it helps a lot!”
The mis-aligned goals that we’ve just discussed are one possible reason for this, but another potential reason is that most of these guys built websites and building a website today is simply not very cash intensive.
For many new companies funding is essential. If you want to build a new type of electric car, then you need a ton of money for manufacturing and R&D. If you want to open a restaurant, then you need money for rent, food, waiters and a chef. If you want to build a video sharing website then you’ll probably need some money because of bandwidth and storage concerns. If you’re doing something like this, then funding is a necessary evil.
But, if you’re just building a regular old dynamic web site with no wild engineering issues, then you can, and in my opinion should, go it alone. You can rent a sweet production quality box for a few hundred bucks a month. That’s all you need. Eat into your savings. Borrow from friends and family. Eat Ramen. Scrape by. But don’t raise a ton of money, get office space and hire 30 employees. All you’re going to do with all that money is buy yourself all of the disadvantages that come with working for a larger organization. Politics, lack of accountability, and a new-found sluggishness to name a few.
Earlier this week I had lunch with an old colleague who’s now working for a startup. This startup raised a few million from VC’s and hired more than 20 people before even launching their website. They had a good idea, they had a good plan, and they had a lot of money. Now it’s a few months later and they’ve signed up a bunch of users, but not a ton of users. They’re about to run out of cash and they need to go and raise more or the company will go under. Once you get big like that you need a huge amount of cash to pay everyone and keep the company alive. Your site must be a huge hit or you’ll go under fast.
However, if you keep keep it small and pop out a comparable site with just a few talented, hungry engineers then you have a much greater chance at long term success. The reason is that you are much more flexible. You don’t have as many stakeholders. You have time to let it evolve and grow. Push, watch, tweak, change, push, repeat. Then when you’ve molded it into the thing that’s just right and it catches on, you can raise a little bit of cash to buy some more smoking servers. But at that point you can raise the money on your own terms. They’ll be throwing it at you.
The blogosphere showers attention on every little startup that raises huge amounts of VC money. They make it seem like it’s some sort of accomplishment. It’s not. All it means is that they spent the last few months in board rooms making pitches instead of in living rooms building something.
Anyone that’s capable of starting a successful company is also capable of working at a big company for a year, making a great salary and saving enough dough to give it a go. It just takes a little self discipline.
Stop pitching and start building.
- Someone’s notes from that startup school.
- The Friendster founder on how the VC’s ruined things. – “At the board meetings they would say, ‘We should do a deal with AOL,’ And I’d be like, ‘Guys, the site is not working.'”
- Fixing Venture Capital – Joel on Software. – “The difference in goals means that VCs are always going to want their companies to do risky things. “