Why I don't want funding(breasy.com)
breasy.com
Why I don't want funding
http://breasy.com/blog/2007/05/26/why-i-dont-want-funding/
3 comments
If a term sheet isn't horrible, then the lawyer you're using is the one the VC firm hooked you up with!
Sounds like you believe you need to spend it all before you make anything.. I think you've got it backwards. If someone wants to charge you $10k a month, find their competition and get the same service from them at a higher unit rate but paid for out of actual usage. Negotiate.
"Not to mention the market might be radically different by the time you even launch."
you're making an erronous assumption-- the VC treadmill has you betting the farm on the state of the market at some point in the future.
Building a viable business means that you are less dependant on the state of the market, not more.
One company I worked for was profitably doing consulting when we took VC funding. They insisted that we close that business to "focus" on the product... the result was, when all was said and done th company ended up selling for less than the consultancy was worth and the founders got a fraction of it -- because the VC business took most of the money due to their preferences. Venture Capital killed that business. Now a decade later, the market that company was in is a huge multi-billion dollar market... if they'd kept the consulting business and kept at it for another three years-- they would have been in it when it finally did take off.
Bottom line-- you can't be frugal when taking venture capital. Keeping a viable consultancy was percieved as a threat to the business-- even though it would have allowed us to hire more engineers on the commercial side. ITs almost as if VCs want you completely dependant on further funding from them. (Or they are just totaly incompetant at business.)
Sounds like you believe you need to spend it all before you make anything.. I think you've got it backwards. If someone wants to charge you $10k a month, find their competition and get the same service from them at a higher unit rate but paid for out of actual usage. Negotiate.
"Not to mention the market might be radically different by the time you even launch."
you're making an erronous assumption-- the VC treadmill has you betting the farm on the state of the market at some point in the future.
Building a viable business means that you are less dependant on the state of the market, not more.
One company I worked for was profitably doing consulting when we took VC funding. They insisted that we close that business to "focus" on the product... the result was, when all was said and done th company ended up selling for less than the consultancy was worth and the founders got a fraction of it -- because the VC business took most of the money due to their preferences. Venture Capital killed that business. Now a decade later, the market that company was in is a huge multi-billion dollar market... if they'd kept the consulting business and kept at it for another three years-- they would have been in it when it finally did take off.
Bottom line-- you can't be frugal when taking venture capital. Keeping a viable consultancy was percieved as a threat to the business-- even though it would have allowed us to hire more engineers on the commercial side. ITs almost as if VCs want you completely dependant on further funding from them. (Or they are just totaly incompetant at business.)
Above and beyond you have to have advanced common sense. If a VC wants X, but you're not a moron, and you want to do Y, don't go with the firm that is selling you bad advice. If it's too late then you didn't do enough due diligence before it was too late. That's not anyones fault but those who signed the papers.
Time to market is deeply important. Not to find a herring to point at but go create another Youtube or Twitter today and tell me how the post market absorbs it. If a market grabs enough momentum to get to a kool-aid point getting the weight of the market is going to be difficult.
While I don't believe our product is so important, I believe some of the deals and ideas we have are. If delivered properly placement has concrete potential which locks a company in for a good term, not to mention a good vector for growth. They don't say strike the iron when it's cold.
Like you've said in your other funding YC talk, cases may be different. There are thousands of variants that can effect ones viability, needs, realities, and needs.
As well I'm not making any assumptions on VC's talking points. They are our own from our own market research, trends, and skull sessions. We're seeking more angels than VC's anyhow since VC's play a game we're not really interested in. Not that good VC firm's don't exist. The funded is showing us that the cloth isn't always equal.
Good contemplative stuff though, none the less!
Time to market is deeply important. Not to find a herring to point at but go create another Youtube or Twitter today and tell me how the post market absorbs it. If a market grabs enough momentum to get to a kool-aid point getting the weight of the market is going to be difficult.
While I don't believe our product is so important, I believe some of the deals and ideas we have are. If delivered properly placement has concrete potential which locks a company in for a good term, not to mention a good vector for growth. They don't say strike the iron when it's cold.
Like you've said in your other funding YC talk, cases may be different. There are thousands of variants that can effect ones viability, needs, realities, and needs.
As well I'm not making any assumptions on VC's talking points. They are our own from our own market research, trends, and skull sessions. We're seeking more angels than VC's anyhow since VC's play a game we're not really interested in. Not that good VC firm's don't exist. The funded is showing us that the cloth isn't always equal.
Good contemplative stuff though, none the less!
To be fair, in the middle of the post Udi does mention that there are capital-intensive businesses that do require funding. His main point is in regards to building web applications and web businesses.
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 youll probably need some money because of bandwidth and storage concerns. If youre doing something like this, then funding is a necessary evil.
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 youll probably need some money because of bandwidth and storage concerns. If youre doing something like this, then funding is a necessary evil.
I think you make a lot of very valid points and credit to you for dealing with them candidly.
IMHO I dont think there is a right/wrong answer to taking VC money/raising funding in general. I think the absolute wrong answer is raising VC for the sake of it and not having your eyes open as to the consequences.
Otherwise it really comes down to your own circumstances - if you want to go for a massive hit then VC is a great option. If you want to build something slowly then self-fund. If that's not financially possible or you want to scale faster than you expected, raise angel. Either way, make sure it's your decision - that's what really counts.
IMHO I dont think there is a right/wrong answer to taking VC money/raising funding in general. I think the absolute wrong answer is raising VC for the sake of it and not having your eyes open as to the consequences.
Otherwise it really comes down to your own circumstances - if you want to go for a massive hit then VC is a great option. If you want to build something slowly then self-fund. If that's not financially possible or you want to scale faster than you expected, raise angel. Either way, make sure it's your decision - that's what really counts.
Really, its backwards. Speed to market is a factor of team size-- the more engineers you hire the slower you are to get to market. So, VC funding slows down the rate of feature development.
A small tightly focused and really motivated team will out compete a group of employees funded by VC everytime.
And, if you look at it from the perspective of the opportunity value-- you will get more massive going it alone than going with VCs. Both because of the massive dilution of venture capital, and because of the significantly decreased chances of success.
Scaling should never be a problem-- you should outsource everyting but engineering and scalability should be the problem of your hosting provider. (or manufacturer, etc.) At the time that you really need to scale you will have plenty of money to pay for it. And because you outsourced this (something that is often harder to do in a VC backed business) you have people who are more capable working on it.
Course, I'm presuming we're talking about businesses that make something people want to pay for.
If you're building a youtube like business, then VC is the onyl way to go-- you're just gambling on some mebulous chance of profitability or getting acquired for having massive pageviews... and when gambling its always better to do so with someone elses money.
A small tightly focused and really motivated team will out compete a group of employees funded by VC everytime.
And, if you look at it from the perspective of the opportunity value-- you will get more massive going it alone than going with VCs. Both because of the massive dilution of venture capital, and because of the significantly decreased chances of success.
Scaling should never be a problem-- you should outsource everyting but engineering and scalability should be the problem of your hosting provider. (or manufacturer, etc.) At the time that you really need to scale you will have plenty of money to pay for it. And because you outsourced this (something that is often harder to do in a VC backed business) you have people who are more capable working on it.
Course, I'm presuming we're talking about businesses that make something people want to pay for.
If you're building a youtube like business, then VC is the onyl way to go-- you're just gambling on some mebulous chance of profitability or getting acquired for having massive pageviews... and when gambling its always better to do so with someone elses money.
Unless your product requires you to build a factory (and even if you're in the manufacturing business its highly unlikely that you can't profitably outsource even manufacturing) -- then you absolutely shouldn't take VC funding.
YC, Angel, Friends and Family, maybe even a couple million (to last several years)... but not VC funding.
VC funding is for people who would like to spend four years working like a dog for a %1 chance to get $10M in payoff...than the alternative of four years working like a dog for a %400 chance of getting a $1 million payoff.
The value of these two opprotunities are $100k for the VC route and $4M for the independant route.
But, like contestants on "Deal or no Deal" they don't do math and they go for the big score instead of the sure thing. You only hear about the people who get the big score- they go to conferences and they start investment funds. but for each of them there are 100 or mor equally talented people who went the VC route and are now employees somewhere because the VC killed their company.
The big difference is when you get on the VC treadmill, as pointed out, the only options viable to the VC is IPO and acquisition... and you'll be diluted all to hell. Worse, you'll hire too many people spend too much money and lower your chances of success.... because you're spending that money before you know it works. And you pay in equity for the priviledge of lowering your chances.
On the other hand, if you angel fund, you can quickly determine whether the business is viable, and if it isn't, you only spend a few months on it before trying another idea. In four years you should be able to try 16 businesses .... but likely you'll make $1M per year doing it. And at the end of it, if you've failed and you've got a business that's throwing off $400,000 in cash for you for profit (your share) you could stop working and live on that $400k. The 99 out of 100 times that your VC backed venture fails, you've got nothing to show for it. So, even if you "Fail" and have a business worth $4-$8M, you still win.
One of the commentators had an excellent and underrated point: "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."
Never met anyone associated with a VC (including Seqoia) who wasn't dumb money but thought they were smart money. (except Guy Kawasaki, who is smart enough to realize he's dumb. If you think you're smart, you aren't, if you think you're dumb, you're smart.)
YC, Angel, Friends and Family, maybe even a couple million (to last several years)... but not VC funding.
VC funding is for people who would like to spend four years working like a dog for a %1 chance to get $10M in payoff...than the alternative of four years working like a dog for a %400 chance of getting a $1 million payoff.
The value of these two opprotunities are $100k for the VC route and $4M for the independant route.
But, like contestants on "Deal or no Deal" they don't do math and they go for the big score instead of the sure thing. You only hear about the people who get the big score- they go to conferences and they start investment funds. but for each of them there are 100 or mor equally talented people who went the VC route and are now employees somewhere because the VC killed their company.
The big difference is when you get on the VC treadmill, as pointed out, the only options viable to the VC is IPO and acquisition... and you'll be diluted all to hell. Worse, you'll hire too many people spend too much money and lower your chances of success.... because you're spending that money before you know it works. And you pay in equity for the priviledge of lowering your chances.
On the other hand, if you angel fund, you can quickly determine whether the business is viable, and if it isn't, you only spend a few months on it before trying another idea. In four years you should be able to try 16 businesses .... but likely you'll make $1M per year doing it. And at the end of it, if you've failed and you've got a business that's throwing off $400,000 in cash for you for profit (your share) you could stop working and live on that $400k. The 99 out of 100 times that your VC backed venture fails, you've got nothing to show for it. So, even if you "Fail" and have a business worth $4-$8M, you still win.
One of the commentators had an excellent and underrated point: "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."
Never met anyone associated with a VC (including Seqoia) who wasn't dumb money but thought they were smart money. (except Guy Kawasaki, who is smart enough to realize he's dumb. If you think you're smart, you aren't, if you think you're dumb, you're smart.)
"YC, Angel, Friends and Family, maybe even a couple million (to last several years)... but not VC funding.
VC funding is for people who would like to spend four years working like a dog for a %1 chance to get $10M in payoff...than the alternative of four years working like a dog for a %400 chance of getting a $1 million payoff."
Ahh! I understand you better. This type of VC deal is something I would probably be pretty scared of.
VC funding is for people who would like to spend four years working like a dog for a %1 chance to get $10M in payoff...than the alternative of four years working like a dog for a %400 chance of getting a $1 million payoff."
Ahh! I understand you better. This type of VC deal is something I would probably be pretty scared of.
What is a "400% chance"?
"Work hard for a year, save enough, be diligent, and you too can fund your own startup.", was the basic summation of the article in the end.
The tools I'm working on require partnerships with different service carriers which can run as much as 10k a month, then you have contractors, lawyers, designers to pay. You'd have to have one helluva job to pay for all that. My partner and I have been using our salaries, equity lines, savings, for a year and it's not enough.
Playing the slow-goer, almost like a casual gamer, won't always work. In a years time maybe you'll get married. Maybe you'll have a kid. Maybe you'll get fired. Maybe you'll want to go live on an island and harvest coconuts. Not to mention the market might be radically different by the time you even launch.
If you have an idea, and you want to see it birthed, and you know what it will take, and you can write a plan that shows it--because you did the hard work to see it through--then birth that bad boy.
Term sheets aren't all horrible. Don't ask for the moon, be realistic, get what you need and make sure you don't have to go get more. Don't get an office, be frugal, hire the best, negotiate well, partner with those who are assets and share the love.
This isn't rocket science but it does take careful thought and solid reasons. Do your homework and make the right decision for you and your product.
-a