Startup Question: Why Venture Capital for Web Startup?
This is probably a silly question, but this seems a good forum to get an answer: It seems to be taken as a given that any founder will sooner or later apply for VC funding. Why would a founder of a web startup ever bother with venture capital? A web startup can be built by a team of 1-4 people working on it part-time (so no need for anyone to quit their full-time jobs). The time required to build such a web system would probably be on the order of 12-18 months. Because servers, bandwidth, and/or hosting services are cheap, this can all easily be self-financed (for ~$5000-$10000?). What have I missed here in this analysis that makes venture capital desirable or necessary?
8 comments
1) You oftentimes can't afford success. Google and Facebook would've gone broke without outside funding of some kind, long before they found a way to generate significant revenue.
2) VCs are advisors, and are likely smarter than you about lots of things-- especially how to sell a company. If you want a lifestyle business (37Signals, for example), then avoid VC. If you want to sell a company, you'll have a better chance (and sell it for more money) with a motivated VC.
3) Sales, marketing, and support cost money, for most businesses. If you've got paying customers, telling them "sorry, I'm at my day job" just won't play. For a consumer play, this is less of an issue.
4) A lot of ideas (b2b, mostly) just aren't simple enough to bootstrap with 3 people and 18 months. Of course, it's easy enough to avoid those business ideas. ;-)
5) Businesses are ticking timebombs. Stretch out your development time and your stretching out the opportunity for disaster. A team member can lose interest or get a great job, a killer competitor can manifest and snatch up your customers, etc.
6) Momentum. I can say with experience that it's REALLY hard to keep momentum going with 3 people working part time (I'm doing it right now). When you put a startup on the back burner, it's rare that you all get to focus on it at the same time. When you're rarin' to go, your partner is "really slammed this week".
7) Necessity drives success. When your startup is your full-time job and you have an investor looking over your shoulder, your going to work harder and better. If you've got a job, startup failure is more of an option and delays aren't very painful.
8) Debt or VC can get you to the point where your growth curve starts quicker. When you are confident about the fact that you're on track to build a zillion dollar business, $100k of debt/equity financing get get you there a LOT faster.
All that being said, I've sold two bootstrapped companies-- it works.
I'd advocate for bootstrapping your way to the point where you know if you're on to something. If you can prove that the market desperately wants what you're building, then it USUALLY makes sense to get some cash (via debt or equity)... Assuming you want to focus on growth/exit events instead of profit/lifestyle.
2) VCs are advisors, and are likely smarter than you about lots of things-- especially how to sell a company. If you want a lifestyle business (37Signals, for example), then avoid VC. If you want to sell a company, you'll have a better chance (and sell it for more money) with a motivated VC.
3) Sales, marketing, and support cost money, for most businesses. If you've got paying customers, telling them "sorry, I'm at my day job" just won't play. For a consumer play, this is less of an issue.
4) A lot of ideas (b2b, mostly) just aren't simple enough to bootstrap with 3 people and 18 months. Of course, it's easy enough to avoid those business ideas. ;-)
5) Businesses are ticking timebombs. Stretch out your development time and your stretching out the opportunity for disaster. A team member can lose interest or get a great job, a killer competitor can manifest and snatch up your customers, etc.
6) Momentum. I can say with experience that it's REALLY hard to keep momentum going with 3 people working part time (I'm doing it right now). When you put a startup on the back burner, it's rare that you all get to focus on it at the same time. When you're rarin' to go, your partner is "really slammed this week".
7) Necessity drives success. When your startup is your full-time job and you have an investor looking over your shoulder, your going to work harder and better. If you've got a job, startup failure is more of an option and delays aren't very painful.
8) Debt or VC can get you to the point where your growth curve starts quicker. When you are confident about the fact that you're on track to build a zillion dollar business, $100k of debt/equity financing get get you there a LOT faster.
All that being said, I've sold two bootstrapped companies-- it works.
I'd advocate for bootstrapping your way to the point where you know if you're on to something. If you can prove that the market desperately wants what you're building, then it USUALLY makes sense to get some cash (via debt or equity)... Assuming you want to focus on growth/exit events instead of profit/lifestyle.
My last company progressed essentially as you described. We went from nothing to acquisition on $0 of outside investment and essentially $0 of inside investment. So I am here to say that it is possible.
However, there are a number of reasons taking VC money would be "desirable or necessary." Here are some I can think of:
1) Good VCs are often hooked into potential acquisition targets. They can get you noticed and possibly help you fetch a higher price.
2) If you need good targeted seed traffic to get you going, that might take a substantial amount of money. This can take many forms, e.g. a PR firm, adwords, traditional advertising, etc.
3) If you have a working customer acquisition channel that requires money, and more money will help you grow faster, you might want to do it just to grow faster, outpace competition, etc.
However, there are a number of reasons taking VC money would be "desirable or necessary." Here are some I can think of:
1) Good VCs are often hooked into potential acquisition targets. They can get you noticed and possibly help you fetch a higher price.
2) If you need good targeted seed traffic to get you going, that might take a substantial amount of money. This can take many forms, e.g. a PR firm, adwords, traditional advertising, etc.
3) If you have a working customer acquisition channel that requires money, and more money will help you grow faster, you might want to do it just to grow faster, outpace competition, etc.
Because when a competitor comes along that does have venture funding, they will leave you in the dust. They will be able t do more in less time and scale faster, while your hobby site remains just that.
At least in my cases, I have found this to be simply untrue unless it is related to ad spending. A good hacker or two can develop quality scalable software as fast or faster than most VC backed companies.
And quality scalable software sells itself? Sometimes, but not usually. There are plenty of examples of lower quality software burying the better product because of sales and marketing horsepower.
I never said anything about selling and neither did the comment I was replying to (at least the way I read it). In fact, see my other comment on this thread about why I think you might want to take VC funding if you need to blow out a sales channel.
Ah, the old "marketing is a myth", "build it and they WILL come" argument.
I must just not have been clear. I don't believe in that argument in the least.
I just thought that there's more to publicity and marketing than ad spending.
Thank you for pointing out that small matter of competition. That was something I certainly had not taken into consideration.
With regard to your point on calling it a 'hobby' though. Because its possible for someone to put in 30-35 hours a week (over and above one's full-time commitment at the day job) if they're willing to work hard during 'free time', could this not serve as reasonable mitigating circumstances?
With regard to your point on calling it a 'hobby' though. Because its possible for someone to put in 30-35 hours a week (over and above one's full-time commitment at the day job) if they're willing to work hard during 'free time', could this not serve as reasonable mitigating circumstances?
Working 70-75 hrs/wk is just not sustainable over the long term, you will get burned out, fired from your day job, and won't want to continue working on your project.
The problem with a day job isn't really the time it takes up, it's what it does to the remaining time. Yeah, you've in theory got 30-35 hours a week of "free" time. However, it's likely broken up into an hour before work, a couple hours after work, and 10 hrs/day on weekends. And your full attention won't be on your startup during those blocks, because you'll be worrying about having to get to work or exhausted from having come home from work.
I've found that nearly all my completed projects have required the ability to say "Fuck it" to all my other commitments and just concentrate on them. My first project for FictionAlley was done during summer vacation. The big rewrite of FictionAlley lingered for 3 years while I kept putting it off for college coursework, and only got finished because I put in a 4-month gap between graduating and getting a job. Scrutiny was done instead of studying for my physics final exam, which I ended up flunking anyways. My most successful project at work involved blowing off all my boss's requests for busywork, which made him pretty mad at me until he saw the result. Once I had to start paying attention to his busywork again, my productivity dropped way off.
I've found that nearly all my completed projects have required the ability to say "Fuck it" to all my other commitments and just concentrate on them. My first project for FictionAlley was done during summer vacation. The big rewrite of FictionAlley lingered for 3 years while I kept putting it off for college coursework, and only got finished because I put in a 4-month gap between graduating and getting a job. Scrutiny was done instead of studying for my physics final exam, which I ended up flunking anyways. My most successful project at work involved blowing off all my boss's requests for busywork, which made him pretty mad at me until he saw the result. Once I had to start paying attention to his busywork again, my productivity dropped way off.
Are you guys any good at marketing?
"If you build it, they will come" sometimes applies but not usually.
"If you build it, they will come" sometimes applies but not usually.
Even if it takes such a site 2x-4x as long to grow as it would with more expensive marketing, doesn't the fact that what it produces is over and above one's full time employment mean that growing as fast is less critical? After all, with self-financing you don't have people waiting to collect their investment money.
That's true.
I guess my point is that sites need some kind of marketing to succeed, unless they build something that "goes viral" and it takes luck and a product people truly want for that to happen.
An advantage of the VC funding is that the investors will make sure you worry about marketing. I'm just thinking of a recent post on here where a guy said "I launched my startup. I need more traffic. What do I do now?" So as long as these guys have some kind of plan for marketing, they can do it themselves.
I guess my point is that sites need some kind of marketing to succeed, unless they build something that "goes viral" and it takes luck and a product people truly want for that to happen.
An advantage of the VC funding is that the investors will make sure you worry about marketing. I'm just thinking of a recent post on here where a guy said "I launched my startup. I need more traffic. What do I do now?" So as long as these guys have some kind of plan for marketing, they can do it themselves.
Besides throwing piles of money at the problem how does a vc help (as opposed to say an angel)?
I could be wrong but I would think it would help more if you figured out good SEO and maybe targetted some heavy bloggers in your industry... and if your product is good enough - people like Arrington, Needleman, and Malik will talk about it for free.
Angel money is good enough in most cases (unless your site is cash hungry like say another Youtube).
I could be wrong but I would think it would help more if you figured out good SEO and maybe targetted some heavy bloggers in your industry... and if your product is good enough - people like Arrington, Needleman, and Malik will talk about it for free.
Angel money is good enough in most cases (unless your site is cash hungry like say another Youtube).
You are implying that said startup is nothing more than a basic website (ie. MySpace, Facebook).
What if the startup includes mobile features (twitter), or deals with video/music (Slacker, YouTube, etc).
Licensing, lawyer fees, scaling, development costs - they are all relative to what action your startup is taking.
Yes, if you are just building a blog or the next MySpace-killer (which will fail and you suck at life if that's what you are attempting) - yeah, you could pull it off by yourself with a $7 per month shared hosting package.
What if the startup includes mobile features (twitter), or deals with video/music (Slacker, YouTube, etc).
Licensing, lawyer fees, scaling, development costs - they are all relative to what action your startup is taking.
Yes, if you are just building a blog or the next MySpace-killer (which will fail and you suck at life if that's what you are attempting) - yeah, you could pull it off by yourself with a $7 per month shared hosting package.
Twitter's mobile "features" are a joke. Twitter is the who's who of easy technology. Your basic forum site has more technology then Twitter does.
I think his point was that Twitter's mobile feature costs them a lot of money per month in fees, as would a video streaming site.
http://www.paulgraham.com/vcsqueeze.html
http://www.paulgraham.com/venturecapital.html
yeah unless you're doing hardware (or some other capital hungry biz), I think angels are better
It's kind of like multi-threaded programming... don't do it if you can avoid it
Then again there are VCs with special terms nowadays like Charles Rivers and Bay Partners....
http://www.paulgraham.com/venturecapital.html
yeah unless you're doing hardware (or some other capital hungry biz), I think angels are better
It's kind of like multi-threaded programming... don't do it if you can avoid it
Then again there are VCs with special terms nowadays like Charles Rivers and Bay Partners....
VC money, gives you capitol weight, and if you wanted to negotiate partner relationships as part of your business plan, the VC $$ will help demonstrate that you can execute. If you are working on an app, that requires page views only, then you might be able to cost through on your own; but if you are building an app with a new model, you will need some time time to tweak things for your customer/ partner relationships before the dollars roll in.
IP legal fees might be another one to lead revenue.