Why I don’t want funding

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.

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23 Responses to “Why I don’t want funding”

  1. wjpunsapy Says:

    Most VCs would want you to believe that securing first round dollars is an inevitable and necessary step to a start-up, cause it’s the only way they can make some cash.

    I think wants you’re doing is for the right reasons. Keep goin’ and let me in the Beta soon!

  2. Up To Something » Blog Archive » My Definition of a Startup Says:

    […] ing way to many feeds. Updated : In context to what I have written this blogpost is  very relevant. Posted in startup | No Comments

    […]

  3. eran Says:

    Nice post Udi!

    I actually had a post in mind prior to reading yours about the other side of things.

    The side in which every portrays how easy it is to build a startup and how much money you’ll get when you do that.

    Not everyone can be an entrepreneur no matter how creative and technically skillful they are and not everyone should go run and start a startup just to make money :-)

    Anyhow, I’m still cooking that thought and I’ll post it when its fully baked :-)

  4. Reasons to NOT take VC funding « Kevin Burton’s NEW FeedBlog Says:

    […] May 27, 2007 in startups, web2.0 This advice is pretty much dead on from my perspective: From angel investors to a liquidity event, he told us the […]

  5. Udi Says:

    Hi Eran,

    Agreed. I hate to give the impression that what I’m attempting to do now is easy. It’s not. Saving money is hard. Using that saved money the right way is even harder. Building an excellent website is of course the hardest part of all. Chances of success are indeed low. I have no idea if I’ll pull it off or not.

    My thoughts here aim to get across the idea that taking VC money does not substantially increase the chances of success and doing so may indeed change the end-game of a budding success story for the worse.

    I look forward to reading your thoughts.

    Peace,
    Udi

  6. duke3k Says:

    Heh, the horror of it all is that if I were a VC I wouldn’t want to fund anyone who was unresourceful enough to need funding.

    I went to a thing at Stanford while I was out there and they were on about pretty much the exact same kinds of thing. No mention of any business model other than acquisition, I even called them on it during the q&a portion. This may be sustainable for a few more years, but I think the brightest founders are building with a mind to profitability from the start.

    I’ll certainly try and keep an eye on you, it’s shockingly rare to find a tech founder who has realized these things, as obvious as you’d think they’d be.

  7. ChiliPepper Says:

    I couldn’t agree with you more! We are a late stage “start up” – we’ve raised over $4MM from just angel investors, and I don’t mean “organized” angel groups, I mean angels you meet from personal introductions from people involved with our company. We are in our last round of funding and have had several discussions with VCs and VC types, including organized angel groups whom I believe to be very similar to VCs in the exits they look for, however they are less “punitive” in their offers. The VCs we talked to basically have said to us: “you do know that your current stockholders (before this round) will get squeezed out when you do a VC round and that you, the founders, will not have control of your company when it’s all said and done, don’t you?
    Our response: see you later Mr. Volture Capitalist. We’ve managed just fine without you till now and we have ZERO plans of squeezing out those who were there for us from the beginning. It’s not easy being an entrepreneur and the price we pay is high (personal/emotional/financial), but the rewards will be great, and it will feel even better knowing we did the right thing by our stockholders and ourselves.

  8. Min Liu Says:

    _really good insight_. I’m bookmarking this site.

    Also, for more lessons from Max Levchin, check out this interview by two Stanford business school students. Max provided some interesting thoughts on Paypal alums:

    http://iinnovate.blogspot.com/2007/05/max-levchin-founder-of-slide-and-co.html

    Min, on behalf of iinnovate.

  9. Jerry Hilburn Says:

    A long time ago about 3 months before Garage.Com opened its doors, they were testing their engine and invited start-ups seeking funding to try it out. And I did. And I was rejected. I still have the letter signed by Guy Kawasaki hanging on my wall, and he wrote at the bottom…

    Prove us wrong!

    I owe Guy for that rejection. By not being funded I managed to build a company that is *GASP* profitable, self sustaining, has no funding, and turns forty million a year in retail sales, and oh did I mention, is PROFITABLE year after year.

    So much so that it allowed me to start another company which is also PROFITABLE, lacks VC funding, and is making enough money for us that we recently “launched” a third company.

    Pun intended, see: Epsori Space Systems Inc.
    http://www.epsori.com

    You see VC funding is death itself. Any idea that makes a profit that self sustains, should stay far away from funding, for as long as possible.

    Just today I was pitching our Space Seeds concept to a financial guy who was at an entreprenuer meeting. He just could not get it. No matter that you have to put your head in the place of a 3rd grader to understand it, he just kept carping on about how it made no sense to his adult way of thinking.

    And thats the rub. Every lawyer, finance, and admin guy you run into at a VC firm will think they know your idea better than you, and worse yet, better than your intended customer.

    Sure, they will give you funding, but along with that funding comes their screwed up way of thinking that no matter how much you, because they have money, or an mba, or a bar number, that qualifies them to tell you how much more they know than you.

    And at the end of the day, when the rubber meets the road, the only person that matters is your customer. If your customer gets it, you win. And since its all about profitability, if your idea is really worth a hoot, and you have enough customers, then you can completely ignore the VC Vultures.

    So I vote for no funding, good ideas, and hard work. Do that, and the money will follow.

  10. Andy C Says:

    Heck yea, if we didn’t need funding I’d love it.

    The only thing you left off is time to market. As we approached the finalization of the domain of our project we looked at it and had two paths. Keep doing it as a side affair and rock it out over a number of deliverables and years, or get funded, at rocket fuel to the sauce and get it put in the market in its correct form first time.

    Funding comes in two flavors, smart and dumb. I’m smart enough to know I don’t know it all. Smart money with the right group could be an asset. Just like anything–weights being equal–it could be a liability. Thats when you hope you’re intelligent enough to at least keep situational awareness up doing proper due diligence on those assembled for the party.

    Deep thought told us we should run like hell. I need funding for that. I don’t like needing funding, but I need it. We’ll get it too, with smart players, and let the mayhem begin! ;D

    -a

  11. Deena Varshavskaya Says:

    Brilliant post. I love it that there’s this whole process you are “supposed” to go through. Must write a business plan, raise funding, etc. My philosophy is: if you build it they will come.

  12. Aviram Says:

    Udi, you’ve stumbled on to a very well-kept secret. Most startups don’t need funding, but all VCs need startups to fund.
    Your analysis is right-on, and with all the easy money floating around there is huge pressure on smart guys like you to “do the right thing” and be like everyone else. Well, if you went on the road to entrepreneurship you already know “everyone” is often wrong!

    People around you will tell you how inexperience (some will say immature) you are and point that none of the big successes did it without funding. Don’t listen.

    Instead, let me tell you another well-kept secret: if you are looking for funding (e.g. when you are looking to expand sales, develop an expensive new product or put some money in your bank account) the best time to do so is when you’re a profitable, large company that has grown organically. It suddenly becomes so much easier to raise funds – *on your terms*.

    I can’t tell you how many dot-com founders decided to bootstrap their SECOND startup (despite the fact it was so much easier for them to get funding), myself included.

  13. Derek Powazek – links for 2007-06-04 Says:

    […] Udi’s Spot: Why I don’t want funding “Conspicuously missing from this list was the idea that you might form a profitable, self-sustaining business.” (tags: business startups vc) […]

  14. the carolynn blog » Readworthy Links: June 4 Says:

    […] Udi: Why I Don’t Want Funding […]

  15. Rob Wu Says:

    Good thoughts from everyone. Like all things in life, funding is for some people and not for others. The intent behind funding is to gain resources to transform and/or develop product and services that customers perceive to have value. Thus, in that process, some businesses are more resource intensive than others. For example, it takes a hell-of-alot more resources (time, money, materials, labor, etc) to make a car than a burger. The same concept goes for web startups.

    Personally, I am a fan of Udi’s approach rather than VC funding–as it builds character and consolidates power in the founder.

  16. Marc’s Voice » Blog Archive » Blogging on Bloomsday Says:

    […] I like this guy Udi. He says he doesn’t want VC funding. […]

  17. frank Says:

    http://www.paulgraham.com/equity.html

    Nothing entirely new, but the comments proved interesting. The varying view points reminded me of your post…

  18. Martycon Says:

    nice article. I liked the ‘CFO” comment – 2-10% hehehehehehe
    so i guess the rest will be eaten up by VC’s and Harvard clodes who graduate and think — o – btw there are 2 exits.

    I hope that u did not pay to go for this OR that the real entrepreneurs’ wisdom paid off. I still love that comment 2-10%. So typical of someone who never founded anything but lives off the alms of the founders.

  19. the carolynn blog » Blog Archive » Welcome Back! (My Summer Without Blogging) Says:

    […] Udi: “Why I Don’t Want Funding“ […]

  20. Edwin H Says:

    “Politics, lack of accountability, and a new-found sluggishness to name a few.”

    I agree that those are common problems when startups start hiring people. The thing is, those are not problems with a “larger organization” — those are problems with mismanagement. Management isn’t an issue when it is just you and two of your buddies. It is an issue when there are 20 people.

    One thing that sinks many startups when they are just starting to be successful is that the founders, despite being smart guys, don’t realize or at least don’t want to accept that they are not managers, leaders, and CEOs. They are engineers and business people. They start things and they build things. They don’t manage. It’s like putting the pit crew in a race car — the professional driver will be able to drive the exact same car faster than than any of the pit crew can. Yes, engineers can learn to manage, but often they do not take the time to do so, and neither is it their passion to manage. After all, it takes time away from building real stuff!

    The lesson is, know what it is that you are good at, and do that. Find someone else who is good at doing the things that you are not so good at, and let them do it. That works best for everyone.

    So if you do start becoming successful, with or without funding, put your ego back in your pocket and hire a real manager.

  21. Whatever-ishere Says:

    thanks for the GREAT post! Very useful…

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