The point of funding should really be to enable faster growth than they might otherwise have been able to achieve, but if a business can't at least survive without huge influxes of investments then is it really a business that they should be investing in in the first place?
If you're a startup and you don't take VC funding, then you have the luxury of simply enjoying organic growth and funding expansion by re-investing profits into the company. Well, as long as you can do that in the face of competitive pressure. Strictly speaking, unless it's a "network effect" situation like a social network, you probably don't need to grow fast.
Unless you take VC money. Then, the simple act of taking their money now means there is pressure to grow fast, but it comes from the investors and not from the market per-se. And this is because VC funds are time-boxed and, by definition, have to generate whatever return they're going to generate by a fixed point in time. And the older a fund is (eg, the nearer it is to the end of it's life) the greater the pressure.
This is something I think more entrepreneurs should think long and hard about. Don't raise VC money just for the sake of doing it. Even if you can. Do it IF and only if it's the only (or at least surest) way to reach your goals. And always remember that the VC's interests do not necessarily align with the founders (at least not 100% so).
Uber seems like a weird example of this. It was said (and remains said) that they're operating in a winner-take-all space, and they expanded as if they were a social network.
Despite the aggressive expansion and marketing, a majority of people I know in the Bay Area now use Lyft exculsively. The last few times I've said "I'll get an Uber," somebody's actually paused and said "Wait, why don't we take Lyft?" I'm not even sure why. When asked, they just reply that they don't like Uber for some non-specific reason.
They're expanding around the world and into new products and concepts, but haven't even seemed to nail down a loyal customer base on their home turf. Anecdotally speaking.
"My greatest regret is taking other people's money."
"Don't take money unless you are losing your window of opportunity and there's nothing else you can do about it."
If you have an easy to copy idea (look at what happened to Sidecar after Uber swooped in), if you don't grow fast, someone else with more money is going to take your idea and run with it. If they grow faster than you, then you'll be squeezed out.
So VCs are like corporations or central banks or other superpowers of financing -- they grant an unfair advantage to whoever they back, to defeat the other guys. Either by offering lower prices (eg free service) until the competitor runs out of money, or R&D to get to the next level of efficiency, patent portfolio, engineering talent, brand etc.
So financing is often necessary to compete in global markets. If you don't take it, you are betting that the market is either not global or not efficient.
If you don't need an SUV you don't get one. However it is convenient to have at times and the downside is may be worth it. Also, they provide you with better protection...from all the other people who buy SUVs and this increase average tonnage on the road.
Networks are inherent in every business and the world is global.
I am not saying don't think about VC money, but there is no reason to suspect you can't get decent alignment. It is mapped pretty well to the success/need of the company. Smart helpful investors will be there (along with dumb money) for revenue positive companies.
I don't even think the pressure comes from the investors per-se, it comes from the capital investments you make which necessitated the funding. Excess staff, buildings, tools, etc, all have ongoing costs and also depreciate in value. You are by definition building out excess capacity based on a growths model. If sales don't keep up, you become insolvent.
If you're sustainably harvesting profits from your niche then eventually that's going to attract other firms, some of whom are going to be big fish that can dump a lot of marketing and sales spend, take your customers and acquire the sustainable profits you've been harvesting.
There are exceptions for when people have really strong "moats", but defensible moats are a lot harder to come by than people realize.
That's a GROSS over generalization. It definitely is not rosy, not when your competitors are VC funded and releasing products for free. You can't compete with free and VCs are realizing that maybe there's no money in free products.
One, part of the VC model is relatively frequent fundraising. You take some seed money, prove the model a bit, take an A round, prove it some more, etc. It's in nobody's interest to give all the money necessary to get to break-even at once; investors would rather make smaller bets, and founders want to sell as little equity as possible when uncertainty is high.
Two, if your goal is to never actually need another round of funding, then you'll be very conservative in how you spend your money. Bolder competitors will spend money with the expectation of getting more soon, allowing them to outpace you. So there's a strong incentive to spend as fast as possible, trusting that you'll get good enough results to earn the next round of investment.
Three, there are many interesting businesses that are only possible with huge investments. In the Internet world, Twitter and Facebook are good examples. Most ad-supported businesses really only work at scale; ditto network-effect businesses. For physical goods, Tesla's a good example: you have to sell a lot of cars to justify building a factory. Pharma, too; your second pill might cost $1 to produce, but that first pill can cost $2 billion.
I agree there's a lot of entitlement in the industry, but I think some of it's reasonable here, in that when you talk to a VC firm, they'll sing you a great song about how they are there to support you, that they'll back you all the way, etc, etc. People who haven't experience a downturn can be genuinely shocked at how fast supposedly bold, independent investors suddenly all stampede in the same direction.
Many entrepreneurs have been trained to pursue growth over short-term sustainability. In a market defined by network effects, this makes sense. It also works where one has a shot at winning a significant majority of a research-driven industry's profits (e.g. Apple or SpaceX), thereby starving one's competition of R&D oxygen.
Not all markets look like that. Furthermore, the cost of (and risk of losing) financing have not been properly worked into teams' growth-versus-profitability calculi. The time and resources it takes to adapt will kill some and slow others. After all is said and done, we'll have a healthier Valley culture.
Almost all VCs aren't interested in "non-profit" and "welfare of general community."
They want hockey-stick ROI and unicorns.
I know this may be the wrong forum to say this, but let's get real...VC are in it for the money, not to make a social impact, and the last thing most of them are interested in is playing welfare daddy to a bunch of tech nerds.
The point of funding is to generate a return.
Hopefully more than you can get from CDs.
Good investments are often a very long term proposition.
A lot of businesses would never be able to survive their early years without outside funding.
Now, do a lot of flimsy startups feel entitled to funding? Yes. That is a problem.
A publication can get a lot of clicks and buzz from folks for who it is new, and so they report it as new.
But the articles are all part of the system which trains and educates entrepreneurs. It provides examples and stories of people who bring to market real solutions, those who bring "fad" solutions, and those essentially bring "me too" type solutions. This system also trains investors, where each cycle has a few winners which spawns some additional limited partners (or general partners) in various VC firms who also look at how their money is spent and where its going.
As much as it would be great, there isn't really a course of study you can take that will teach you this stuff, you kind of have to live through a cycle or two, absorbing all the experience you can. If you want to be able to really internalize and understand the stuff that someone like Danielle Morrill is talking about you need context, and the context comes from experience both in the good times and the bad times.
So to answer your question about the point of these articles, it is the same reason they teach freshman Calculus or Composition. Everyone needs to know this stuff and every year there are new people trying to learn it. The message that value is always appreciated over hype is pretty timeless but sometimes it takes a couple of cycles to really understand and distinguish between the two.
Earlier today I gave a friend a 5min primer on venture funding. After we'd parted ways and I walked back to my office I had that phrase "you can't teach some of this stuff" rolling around in my head for a while. You can't teach all of it but you have to get people started with something.
It's evolution.
How else will the people who have been here less than 6 years get jaded?
More usefully, it may be obvious that these things go in cycles, but knowing exactly where we are in the cycle is very valuable to anybody who is thinking about raising money, or who is working at a company that isn't yet self-sufficient.
Investors can't just sit on money. They have to get returns, and that means that they have to put capital to work.
Also, don't forget the money's all locked up for multiple years.
"SVB counts among its customers 65 percent of U.S. VC firms and half of all VC-backed companies."
That's the only complimentary sentence about any of the firms mentioned in the article. It's also a bit out of place - the article reads just fine without it, and that information isn't needed to make the article's point.
Plus, the tags at the bottom are "Silicon Valley Bank" and "Money".
FTFY
For every "next Uber or Airbnb," there's hundreds of Shutdownifys.
Startup culture is weird sometimes.
Hah... What makes you think YC funds significantly higher quality of startups overall compared to the general VC industry?In practice, I'm guessing if the LPs get cold feet, then VCs will be forced to triage their funding decisions accordingly. How much this matters given the sheer size of some funds, I'm not sure.
“Right now, we don’t really know what things are worth...When you don’t know what something’s worth, you don’t know whether you are getting a good deal or a bad deal, so the obvious thing to do is, not much.”
When you invest in startups (with the exception of late-stage, pre-IPO investing) you never really know what things are worth. The business model of VCs is to make a bunch of high-risk bets, most of which will fail, in order to get a couple of big winners. What's really happening is that VCs aren't willing to invest at valuations that companies expect based on recent history. This is similar to housing bust, when home owners refused to sell because they continued to believe that their homes were worth what they were before the financial crisis.
I mean, even a touch screen toaster that costs $1,500 got invested in. Who is going to pay $1500 for a touch screen toaster? http://www.juneoven.com
Heat. Fire. Cash burn. Bears.
VC. Lower valuation. More Power. Liquidation preference, contentment.
Entrepreneur. Panic. Sellout. Fantasy. Donkey, bulls, credit card.
VC. Rich. Beach. Downturn, Upturn, Cycle. Ratchet, racehorse.
Ramen, caviar, yacht, walk, laugh, cry.
Well, isn't that just a nicer way to put this?