Successfully raising capital is pretty much always seen as a win - a group of professionals have examined you, your team, and your idea and decided that it's worthwhile risking a sum of money backing you. That gives you a runway to build a userbase without needing to worry about being profitable. In some cases it means you can actually build something that you couldn't build without the money. Capital certainly gives you time to focus and build faster.
The problem though, is that capital is also a shield against the reality of building a _business_. It saves you from talking to potential customers for a while. You can kid yourself that you're "working on the product", doing the fun stuff like writing code instead of the hard stuff like selling. Many, many tech entrepreneurs conflate "building a product" and "building a business". Making the most amazing product in the world is pointless if you can't market it. If you bootstrap or borrow then you have no choice but to get out there and find real, paying customers because otherwise you're screwed so much earlier. That changes your focus in a very good way.
It surprises me that investors put money into teams of hugely technical people who can't sell the amazing tech they can build and yet don't insist that they expand the team to bring in people who _can_ sell right at the start. It's often almost an afterthought, something that can happen later once the product is "finished". Raising capital _never_ means you won't need to do sales and marketing. Every successful business has to. The earlier the sales team is in place and having input into the business the better.
There's a flip side to this: if you bootstrap an actually working business in a new industry and are "only" doubling each year, you run the risk of that industry getting noticed by VC who may lavish hundreds of millions on creating new competitors to pursue market share in that new industry. Your environment will get very tough very fast if you can't ride that out.
The result is race-to-the-bottom pricing as the "sales" teams "right at the start" that you're talking about are forced to sell unproven or worse non-existant technologies, promising 3 - 6 month take on times that turn out to be 18 months.
In the meantime, an established bootstrapped business trying to charge a working price for real delivery has trouble educating new early adopters in the industry why the promises of these well funded sales teams are unrealistic and why the pricing from these well funded startups is unsustainable. It's even harder once the industry matures a little and the well funded newcos actually can deliver at least some of what the customer needs. At that point it's frankly in customers' interests to be subsidized by the seller's VC money as long as the customer can handle the transition costs when their providers implode or are acquired out from under them.
Put another way, even if your goal is to build a solid working business, if your industry is new enough and big enough, you too need to pursue funding as a defensive strategy so you too can subsidize new client market share just to keep up when new money piles into your vertical. Ideally you need to get that funding before you have enough merely organic growth track record under your belt that VC won't believe you'd know how to execute a hockey stick growth curve with their money.
That said, taking VC money doesn't mean you have to climb on the "go big till you exit or die" train. You can operate a profitable business based on fundamentals, as long as you keep brutally honest track of what your business would look like if you have to turn off the pursuit of market share spigot. Make sure the resources you're using for growth are flexible commitments you can unwind if you have to shift back to self-funded operations, and make sure you have a base of solid loyal customers sufficiently profitable to cover any financing carry costs while still growing organically.
Successfully raising capital is pretty much always seen as a win
This is the wrong mindset, people often think that raising capital from investors is win, it's not; raising capital does not mean a company will be successful. Raising Capital is one of the steps a company can use to help them win - by using that capital to build a profitable business and/or a successful exit & only then can it be considered a win.
> It surprises me is that investors put money into teams of hugely technical people who can't sell the amazing tech they can build and yet don't insist that they expand the team to bring in people who _can_ sell right at the start. It's often almost an afterthought, something that can happen later once the product is "finished".
I disagree.
- Selling from start is difficult (even for good sales people). There isn't any thing to sale at the beginning.
- Building from start is essential.
- Resources are finite for a startup. Good people (Sales, tech both) costs decent amount (equity or $$$)
VC expect founder(s)/CEO to take care of early stage of sales/marketing/advertising etc. till the time scaling on these operations is required. To me it makes sense to avoid (expensive) hiring unless absolutely required, especially in the early days of a startup.
From reading the article I don't imagine that the author has started or has the desire to start a company.
> If you have a guarantee that you will become a home run...
That right there sums it up.
On a side note, I think there's a huge gap between a VC company and a bootstrapped company. I believe most entrepreneurs, including those who get VC money, aren't looking to hit eBay sized home runs. I think many just want to build a successful business.
Their options? Bootstrap or raise VC. Raising VC sounds like an easier road and has all the glitz and glamour. As a result, many entrepreneurs go that route, few get it and most abandon their idea altogether.
Now the entrepreneur is stuck in an odd position of having to pitch and behave as if they're "changing the world".
There's no solution to the problem as far as I know but it's really a lose lose situation. It's too bad because there's a lot of value that disappears in the process because no financing model exists/works for the moderately successful startup.
> It's too bad because there's a lot of value that
> disappears in the process because no financing model
> exists/works for the moderately successful startup.
I disagree: I think Angel funding, coupled with a "bootstrap-hustle-your-arse-off" plan can mean that moderate success makes everyone involved a decent chunk of change.
While some people use "Lifestyle business" derogatorily, personally it's exactly what I'm aiming for with my new business. A few mil in revenue each year, costs and personnel low, and I'll be a happy camper, working on what I want to work on :)
Right then. I'll just go and build a business without any capital. Maybe my fairy godmother will just handle salaries and expenses.
What's the alternative? Funding solves the problem of "entrepreneur needs money to build business". You can't just dump on VC without offering some alternative way to solve that problem.
It's possible that bootstrapping is best, but he doesn't even bother to make that argument.
After seed capital and before 1st round of VC you will already make some sales. Maybe there is a way to increase sales and cover the salaries and expenses from the sales... If you can do this, this may be better than taking the VC...
There is an interesting dynamic going on with YC/Angelpad/other incubators or startups 'in the know' that makes some of these things not apply. The kind of founders that are building tech companies are technically capable and they do not need to hire anyone nor need much capital other than initial living expenses. So there isn't as much pressure to raise money as others might expect -- there aren't salaries to pay, and your mindset is different with regard to expenses and things you're willing to try to do to get users.
When we'd started Sensor Tower, we moved to the San Mateo and worked day and night to build out the product, living for cheap on Barilla spaghetti. My co-founder promised to do 20 pushups per each paying customer, our first trial sign up was followed by a hectic phone call "omg!" and literal hopping in the air in excitement. A couple of months later, our attitude slowly changed, and after raising we didn't even bask at Safeway delivery or buying a couch. We still sleep on mattresses without frames, though.
Another thing about raising money is in most cases, when you do it right, you're not giving away your company to the VCs -- you're giving something like 10% away. That, at least, is the advantage of going through YC/Angelpad/etc, you aren't a typical startup when raising, you have the option to draw on the alumni and connections, etc.
Yes, this is what bothered me most about the article. I see ideas just like jokes that a comedian or writer comes up with. Writers will all tell you they keep a notebook of ideas, meaning they're constantly capturing every moment they think they can fit in a standup routine or movie or whatever. I do the same as a computer programmer. Every time I think of an idea for an app or business, I note it, and in doing so I've developed essentially a background process in my brain that's always seeing if my sensory inputs have any good business ideas. I have a long list now and when I want to make something I literally just sort the list. And much like a comedian, I have no problem telling people my ideas, because I have so many of them I'm at the point it's depressing to think that I'll never live long enough to build them all.
I agree it's a skill, and hopefully over time you have a better understanding of what ideas are more likely to succeed. However, I don't think anyone out there can guarantee a great idea. How many times has Google failed again and again? Zynga is worth billions, and yet they're going to struggle to create another Farmville and they'll have difficulties staying relevant in the coming years. You can put the smartest minds on earth in a room for years with an unlimited budget, and they can't promise to deliver the next Facebook.
So, when you have that great idea, and you see it starting to grow, you better take good care of it. They don't come easy for anyone. That's part of the skill though, recognizing the good from the bad, and knowing when to jump ship, and most importantly, when to try again.
TLDR: Lots of businesses don't succeed in venture and if you are of the 1-2% of businesses that receives funding and doesn't succeed than you should have postponed/avoided VC.
[+] [-] onion2k|12 years ago|reply
The problem though, is that capital is also a shield against the reality of building a _business_. It saves you from talking to potential customers for a while. You can kid yourself that you're "working on the product", doing the fun stuff like writing code instead of the hard stuff like selling. Many, many tech entrepreneurs conflate "building a product" and "building a business". Making the most amazing product in the world is pointless if you can't market it. If you bootstrap or borrow then you have no choice but to get out there and find real, paying customers because otherwise you're screwed so much earlier. That changes your focus in a very good way.
It surprises me that investors put money into teams of hugely technical people who can't sell the amazing tech they can build and yet don't insist that they expand the team to bring in people who _can_ sell right at the start. It's often almost an afterthought, something that can happen later once the product is "finished". Raising capital _never_ means you won't need to do sales and marketing. Every successful business has to. The earlier the sales team is in place and having input into the business the better.
[+] [-] Terretta|12 years ago|reply
The result is race-to-the-bottom pricing as the "sales" teams "right at the start" that you're talking about are forced to sell unproven or worse non-existant technologies, promising 3 - 6 month take on times that turn out to be 18 months.
In the meantime, an established bootstrapped business trying to charge a working price for real delivery has trouble educating new early adopters in the industry why the promises of these well funded sales teams are unrealistic and why the pricing from these well funded startups is unsustainable. It's even harder once the industry matures a little and the well funded newcos actually can deliver at least some of what the customer needs. At that point it's frankly in customers' interests to be subsidized by the seller's VC money as long as the customer can handle the transition costs when their providers implode or are acquired out from under them.
Put another way, even if your goal is to build a solid working business, if your industry is new enough and big enough, you too need to pursue funding as a defensive strategy so you too can subsidize new client market share just to keep up when new money piles into your vertical. Ideally you need to get that funding before you have enough merely organic growth track record under your belt that VC won't believe you'd know how to execute a hockey stick growth curve with their money.
That said, taking VC money doesn't mean you have to climb on the "go big till you exit or die" train. You can operate a profitable business based on fundamentals, as long as you keep brutally honest track of what your business would look like if you have to turn off the pursuit of market share spigot. Make sure the resources you're using for growth are flexible commitments you can unwind if you have to shift back to self-funded operations, and make sure you have a base of solid loyal customers sufficiently profitable to cover any financing carry costs while still growing organically.
[+] [-] itsprofitbaron|12 years ago|reply
This is the wrong mindset, people often think that raising capital from investors is win, it's not; raising capital does not mean a company will be successful. Raising Capital is one of the steps a company can use to help them win - by using that capital to build a profitable business and/or a successful exit & only then can it be considered a win.
[+] [-] random42|12 years ago|reply
I disagree.
- Selling from start is difficult (even for good sales people). There isn't any thing to sale at the beginning.
- Building from start is essential.
- Resources are finite for a startup. Good people (Sales, tech both) costs decent amount (equity or $$$)
VC expect founder(s)/CEO to take care of early stage of sales/marketing/advertising etc. till the time scaling on these operations is required. To me it makes sense to avoid (expensive) hiring unless absolutely required, especially in the early days of a startup.
[+] [-] bradshaw1965|12 years ago|reply
You could make a similar case for mortgage approvals before the financial crisis.
[+] [-] jmathai|12 years ago|reply
> If you have a guarantee that you will become a home run...
That right there sums it up.
On a side note, I think there's a huge gap between a VC company and a bootstrapped company. I believe most entrepreneurs, including those who get VC money, aren't looking to hit eBay sized home runs. I think many just want to build a successful business.
Their options? Bootstrap or raise VC. Raising VC sounds like an easier road and has all the glitz and glamour. As a result, many entrepreneurs go that route, few get it and most abandon their idea altogether.
Now the entrepreneur is stuck in an odd position of having to pitch and behave as if they're "changing the world".
There's no solution to the problem as far as I know but it's really a lose lose situation. It's too bad because there's a lot of value that disappears in the process because no financing model exists/works for the moderately successful startup.
[+] [-] girvo|12 years ago|reply
I disagree: I think Angel funding, coupled with a "bootstrap-hustle-your-arse-off" plan can mean that moderate success makes everyone involved a decent chunk of change.
While some people use "Lifestyle business" derogatorily, personally it's exactly what I'm aiming for with my new business. A few mil in revenue each year, costs and personnel low, and I'll be a happy camper, working on what I want to work on :)
[+] [-] kevinpet|12 years ago|reply
What's the alternative? Funding solves the problem of "entrepreneur needs money to build business". You can't just dump on VC without offering some alternative way to solve that problem.
It's possible that bootstrapping is best, but he doesn't even bother to make that argument.
[+] [-] markokrajnc|12 years ago|reply
[+] [-] diziet|12 years ago|reply
When we'd started Sensor Tower, we moved to the San Mateo and worked day and night to build out the product, living for cheap on Barilla spaghetti. My co-founder promised to do 20 pushups per each paying customer, our first trial sign up was followed by a hectic phone call "omg!" and literal hopping in the air in excitement. A couple of months later, our attitude slowly changed, and after raising we didn't even bask at Safeway delivery or buying a couch. We still sleep on mattresses without frames, though.
Another thing about raising money is in most cases, when you do it right, you're not giving away your company to the VCs -- you're giving something like 10% away. That, at least, is the advantage of going through YC/Angelpad/etc, you aren't a typical startup when raising, you have the option to draw on the alumni and connections, etc.
[+] [-] unknown|12 years ago|reply
[deleted]
[+] [-] ktd|12 years ago|reply
[+] [-] logn|12 years ago|reply
[+] [-] Anonymous238|12 years ago|reply
So, when you have that great idea, and you see it starting to grow, you better take good care of it. They don't come easy for anyone. That's part of the skill though, recognizing the good from the bad, and knowing when to jump ship, and most importantly, when to try again.
[+] [-] unknown|12 years ago|reply
[deleted]
[+] [-] drinkzima|12 years ago|reply
Bad logic and even worse advice.
[+] [-] kemiller|12 years ago|reply
[+] [-] Qantourisc|12 years ago|reply