Most VCs are very sharp and can add value beyond investment, but I'm amazed at how much focus is placed on securing funding - rather than building a cash-flow generating business. Building with VC is only one way to build a company.
A team can build product as a side-gig, test the market and run until enough cash is generated to start paying salaries and working on it full-time. You won't have a fancy office in SoMa and catered meals, but you also don't need to live in the bay area. And you won't need to worry about fundraising, dilution, down-rounds, and liquidity preferences.
Why are entrepreneurs so wired to think about starting companies that require VC?
Unpopular opinion: if your company is going to fail, you need VC money. This, to me, is one of the biggest problems facing our entire industry. The 1/20 that succeed have to carry the 19/20 that want to be cool and have bean bags in their office.
The (smaller) VC's have to, ideally, find that little narrow gap between a self-funded startup starting to "go" and the time when the founders decide they can live on a quarter million a year and be just fine. To be frank, it sounds really hard and I don't envy them the task. But they do get to charge 2% for doing nothing and I could do with some of that :)
How can we create a VC industry that's focussed on more, smaller wins? Perhaps a focus on recurring dividends? Or does the math work out that there is simply no point because the big wins are so, so big?
> If your company is going to succeed, why do you need VC?
It's not just the VC but also the definition of success. Nowadays I see this mostly defined as being able to scale up quickly to - preferably - millions of users, and raking in loads of revenue in short time.
But why not have modest goals in mind to define success? Get decent, normal salaries for the initial team of employees, instead of striving to become rich. Then grow slowly and steadily.. you won't need VC at all that way, if you plan things right.
Scrap the word 'disruption' from your business plan. It originally had a negative connotation anyway. Go for sustainability in the holistic meaning of the word..
(PS. I like the use the term 'anti-disruption-layer' in these modern times.. trying to create one)
I wonder how much of getting VC money is just wanted to be in SF where all the customers are (if you are selling to startups anyway/tech b2b anyway) and pissing it all away on rent?
I think the biggest thing the Government can do in Australia anyway to help these smaller wins is promote VCs to invest in companies outside Sydney and Melbourne. You could do this by providing fibre, airports, easier local gov tender process...
Only rub is, until you hit 1 million, you're making essentially $0. And that'll take lots of time, people, and servers that all need to be paid for.
Welcome to the social network.
Go look up people like Basecamp/37 signals/DHH and Amy Hoy/Stacking the bricks. Loads of articles about bootstrapping. Another one who wrote about this a lot was Buffer, but they changed their tune and took funding.
There's just less entrepreneur stories these days on HN so you don't see much about it, to me HN has shifted its focus these last few years from starting businesses in tech to tech company news and programming.
"Ex-google 20 year old founder raises $73 million Series A to build Uber for Cats" would raise eyebrows and gain clicks.
Then you've got the current funding climate that absolutely loves companies that look like lifestyle businesses. The temptation to take money is going to be huge.
Also - a failed VC-backed startup looks better resume-wise.
Can you elaborate on this? I do keep some track of the startup world (since I consult to them) but was not aware of this point.
>Also - a failed VC-backed startup looks better resume-wise.
Why? Genuine question. Why would a failed small business not look as good?
VC funding is a form of social proof. Also in case of a total failure, as in 0 traction, perhaps even no product - it establishes "realness" of sorts.
There is a very good distinction here. Small business implies that your business is one that HAS to make money. Sure, it's not a lot. It may be a side job. But it is a business that has an actual plan from day one to make money.
Small businesses are still the backbone of the U.S. and make up for the majority of all employment. Most of them don't raise "VC" money, many of them start with a loan, or the wonderful "friends and family" money. When they fail, it is bad. Friends and family may stop talking, property may be repossessed by the bank, etc. The founders who take VC money are usually young and in tech. The risk they take is nothing compared to the people I stated above. It's actually hilarious how out of touch the SV "start up" world is with how most businesses are created. I'd even say that this is a large reason why the failure rate of companies with VC money is so high, it's mostly tech, mostly young people who can fail and be standing on their feet regardless, and these kids have never had to make ends meet in respect to running a business.
Of course, there is a place for VC money and the type of companies that are created from taking that money. Many businesses would be far too risky to put your house/family/entire life on the line if it fails. However, I see so many companies that took VC money, moved to SF, hired a bunch of extremely high paid employees, thus have to provide crazy benefits, and their burn rate is now under a year... and they haven't made a single dollar yet!! Insane.
With the same amount of money they raised, I can start up in Texas, Atlanta, Chicago, Denver, etc, hire as I need, have an office with a much lower cost, and increase my run to several years, if not more. The advantages you get from being in SF are easily wiped out when you give a company 2-3+ years to succeed, rather than 6 months - 1 year in SF.
Another thing I've seen is that these small businesses are usually started with the people that actually have expertise in the field they are in or are more likely trying to solve a problem they themselves have. I think that is important for a founder/s. Many founders in the SV world have no clue about what they are doing. They simply have tools (tech), and are looking to put it into whatever they brainstorm. Much of the time, they do not understand the problems they are trying to solve, or are solving problems they aren't important. Another reason for the high rate of failure with companies that take VC money.
I haven't found that to be true in NYC, Boston, Atlanta or Kansas City, where startups are called startups. That being said, with the exception of maybe Kansas City, I consider all of these places east coast tech centers heavily influenced by the largest American tech center, Silicon Valley.
One thing to not underestimate is that owners of lifestyle businesses, unlike their VC-funded counterparts, often really aren't that interested in getting press features - in fact, many will actively want to avoid it, as press features just increase the likelihood of someone wanting to emulate / imitate your success by competing with you.
The thing is that funding-seeker founders are very concentraded in a some bubbles in big cities, due to the nature of VC ecosystem and bootstrappers are more dispersed, each one close to their respective market (or or not even so, as in low touch digital business).
I assume you are in one of those bubbles.
Good places to sneak out of it: https://www.microconf.com and https://www.indiehackers.com
If you want to have lots of money and retire early, you might as well just join a big software company. If you can't join them, then you'd do well making a lifestyle business.
If you want power, you'll want to grow as big as possible as fast as possible.
If you want to have a positive impact on the world, you'll also want to scale your solution bigger and faster.
The op’s question is something I have always wondered and am glad (s)he asked it here. I have always thought - generally speaking- if your business can’t make money it’s not a business. I feel There are some exceptions to this rule and require large amounts of capital upfront, but they are exactly that - exceptions and not the norm.
Businesses that are innovative and will deliver higher ROI are on average more likely to require capital, which becomes a barrier to entry.
The market is much more efficient for ideas that don't require capital injection, and you're therefore playing a much harder game. It's also harder (though not impossible) to make such a business return time-adjusted compensation in excess of what you would make in a job.
There's also the risk. In order to jump ship to work on a bootstrapped company, you would almost certainly need a combination of savings and revenue streams that will sustain you long enough to make the business viable, which could take years. The combined costs of food, housing, medical, and potentially a family are often prohibitive. Taking a VC-backed salary may be the only way to safely attempt working on your business.
Alternatively, you would need to find enough time to make a side hustle viable. Not impossible but, speaking from experience, extremely difficult to manage properly.
The VC capital flows in when there are hard and expensive problems to solve in emerging tech spaces that need a lot of innovation or heavy lifting and, hence, financial runway to survive.
When the tech in the space gets cheaper, the cow paths have been paved and the tech becomes more accessible, it becomes more viable to bootstrap your way into the market. The get rich quick gold rush starts and then everyone floods in to find niches in the market they can fill on their own.
Eventually the bootstrapped businesses fill all the niches they can, the market becomes saturated and it's no longer lucrative or easy to bootstrap in that space. And the cycle begins again
Who would buy something promising that you too could be "Joe Business Owner" that no one has heard of before.
The world is huge and bazillions of lifestyle businesses make money every single day. In a way, a tangible lifestyle business can deliver steady income, whereas a startup is 99.9% an unicorn likely to burn through all of its cash and implode.
A fundamental question: keep chasing unicorns or run a profitable business that pays the bills? Some of both?
https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-...
tldr:
Most people, when they're sure they have this amazing one in a million idea want to make it happen and grow a company really big really fast. And for that, you need VCs to supply truckloads of cash to burn through. This comes with a non-obvious price though.
Check out the essay if you haven't read it, it's really good.
