Forget VC Money, Fund Yourself(inc.com)
inc.com
Forget VC Money, Fund Yourself
http://www.inc.com/resources/finance/articles/20040801/noVC.html
24 comments
A meta-business model that doesn't get discussed enough- and practically never by VCs- is simple revenue based growth. I know business leaders who absolutely swear by it and won't touch anything else. From their perspective, if it's not making money and in the black when it's small, making it 10x that size won't necessarily make it better. It's a well tested and respected business model if you're product and team can pull it off.
Another important thing to realise venture capital is only appropriate at a certain lifestage of a company where the founders are keen to grow at extrodinary rates in a short time. Not having expectations of growing a startup to Facebook, Google or Bebo size you are going to be wasting a VC's time. This is no mean feat - you have to be mentally prepared to grow and scale a company like mad and similarly your startup must have proved its case for being able to scale.
Whats the best way to know if your startup is ready? build a prototype, get some traction, look at the numbers, measure, experiment then measure again. If you truly are going to scale (and you are growing at 1% a day) and you've experimented enough that you've found a suitable path you'll end up needing money of the VC scale.
It doesn't cost much to sit around and build something. Go and test it - figure out what people want first - change your assumptions and above all PROVE that if you scaled your site it'd be worth it for investors. You don't need VC yet to start something and test it out - If it comes to that point well thats something to think about.
I'm reminded of the story Michael Birch of Bebo tells - they built something, put it out there off the traffic of birthday alarm and experimented with features. Every time a feature added to the growth of the site and got a noticeable increase in users they kept it and tried something else which also contributed to the growth. By experimenting, measuring and then iterating for things which correlated for growth they ended up on the right path. When they had 5 million users and were growing month on month they had the numbers to prove themselves. They took $15m from Benchmark capital. The bottom line - you'll know when you are ready: just go prove the numbers.
Whats the best way to know if your startup is ready? build a prototype, get some traction, look at the numbers, measure, experiment then measure again. If you truly are going to scale (and you are growing at 1% a day) and you've experimented enough that you've found a suitable path you'll end up needing money of the VC scale.
It doesn't cost much to sit around and build something. Go and test it - figure out what people want first - change your assumptions and above all PROVE that if you scaled your site it'd be worth it for investors. You don't need VC yet to start something and test it out - If it comes to that point well thats something to think about.
I'm reminded of the story Michael Birch of Bebo tells - they built something, put it out there off the traffic of birthday alarm and experimented with features. Every time a feature added to the growth of the site and got a noticeable increase in users they kept it and tried something else which also contributed to the growth. By experimenting, measuring and then iterating for things which correlated for growth they ended up on the right path. When they had 5 million users and were growing month on month they had the numbers to prove themselves. They took $15m from Benchmark capital. The bottom line - you'll know when you are ready: just go prove the numbers.
While I agree that VC funding is not necessarily required to spark a startup, I do however believe that it can serve wonders in terms of building connections and publicity. Prominent bloggers, such as Michael Arrington and Peter Cashmore, hunt for news relating to startup fundings. Moreover, a VC firm brings high level connections from people with real experience in this game (Vinod Khosla, Ram Shriram, etc).
Almost all sufficiently large startups eventually require Venture Capitalists. So there is no hard and fast rule on this; just take the money when it makes sense.
Almost all sufficiently large startups eventually require Venture Capitalists. So there is no hard and fast rule on this; just take the money when it makes sense.
True. And to clarify my comment, it is also a _slow_ way of growing in many cases. I've just seen so many people willing to burn through other peoples' money without a thought that the idea often appeals to me.
The real principle here is the golden rule of spending money- no matter what the source is: put yourself in the investor's shoes (even if there isn't one). Pretend it's your $10,000 or $5mil and you're investing in a company that you have little control over- would you be pleased with how it is spent?
The real principle here is the golden rule of spending money- no matter what the source is: put yourself in the investor's shoes (even if there isn't one). Pretend it's your $10,000 or $5mil and you're investing in a company that you have little control over- would you be pleased with how it is spent?
If you can't get someone else excited about your product, then you might be approaching it the wrong way. But there are many reasons why VCs might not want to get their hands in. They might deem it as a me-too or as a novelty not worth exploring. But there's no way they can completely estimate the web community. If you have a firm belief that you offer something someone else does not, or you implement it better, do it. Fund it yourself. The true reason you should give up on your idea is if you cannot sell it to yourself anymore.
I don't understand why so many people think of a "me-too" a bad thing. This way we would have only one automobile brand, only one clothing brand and the list goes on...
1. Because nobody can start a car company without hard knowledge and expertise, whereas any idiot who can talk can con VCs into funding a me-too and blind them with hype.
2. Because the Net moves so fast that the me-toos are ready just as the idea is outpaced
3. Because the people who propose the 'me toos" emanate a vibe of conformity and foolishness.... so if the person is an idiot we say "me too" if the person is smart we say "oh that tech whiz."
Anyone can be a foolish bozo and try to sell a me-too with hype. But good VCs will be able to see this.
The me-toos that CAN succeed is the one that actually do it better -- they can implement an existing concept in a way that executes better or, in the case of a web service, engages users more effectively.
I just submitted an article from OnStartups.com that talks about this in a little more depth. Maybe this will spur some more good conversation:
See http://news.ycombinator.com/comments?id=754
The me-toos that CAN succeed is the one that actually do it better -- they can implement an existing concept in a way that executes better or, in the case of a web service, engages users more effectively.
I just submitted an article from OnStartups.com that talks about this in a little more depth. Maybe this will spur some more good conversation:
See http://news.ycombinator.com/comments?id=754
photo.net was 1999, flickr 2004, zooomr 2006...my point is that the pie is so big the many folks can have their piece, because nobody can have it all.
about the car industry comment...most of the folks that made a so called "me-too" car company, was in the beggining of that industry, that is 80-100 years ago. Yes, its hard to make a new brand but Pegani Zonda seems to have done it in 21st century so good that it can compete with Ferrari.
With your thinking people shouldn't be programmers because there are too many of them. <br>
I will just aggree that if you can do it better then just do it.
I will just aggree that if you can do it better then just do it.
Are you sure nobody can have the whole pie? Some domains have significant network effects, which work to prevent competitors from developing a useful service. E.g. eBay.
Ebay bought its Chinese clone for hundreds of millions of dollars, which afterwards collapsed because after moving the servers outside China the service's data were going through word filtering (e.g. during login) and there were failures...
Ebay bought its Chinese clone for hundreds of millions of dollars
Ebay itself acquired StubHub. So I guess there are some mitigating factors to networks effects.
Something just felt right when I read, "The best possible way to finance your business is from free cash flow. If you can meet your capital needs without selling equity or without taking on personal debt, do it. It's that simple." Clif Bar, Patagonia and Ben & Jerry's come to mind. Not tech, I know, but it's really cool when a young company can maintain it's mojo, it's buzz, far longer than most people could even dream of. If equity is sold, you're answerable to someone, and you lose control over keeping it's mojo. Whatever it takes to do work you love, with people you love, I'm for always.
VC money can be a good thing if you know exactly what to do with it. Google used the funds to buy servers which they couldn't afford before, but in the end it turned out to be money well spent. But if you just raise the money to live up to the convention, then you should think again. The worst thing you could do is to go on a spending spree just to look busy.
Some products require scale or critical mass before they can be profitable. This is especially true for many website based on advertising models. Also ventures based around getting big partnerships (e.g. licensing deals) may require the prestige of VC backing before you can get through the door.
Secondly you might have an option of growing organically for 3 years and hoping that no one else enters the market and that its still buoyant in that time or growing fast with VC support. I am not saying it's not possible to grow fast without VCs but I am sure it helps. I think it just comes down to what business it is.
Secondly you might have an option of growing organically for 3 years and hoping that no one else enters the market and that its still buoyant in that time or growing fast with VC support. I am not saying it's not possible to grow fast without VCs but I am sure it helps. I think it just comes down to what business it is.
I bet YCombinator must feel a bit strange having this as the highest voted story ;)
Not at all; we're not VCs. We just do seed funding. That is a very different world.
I asked few days ago if its possible for someone to get a green card if I got funded by YC. I read the reply that is not enough. From the US immigration web site they site is possible and on some other sites it sais that 500,000-1,000,000 dollars is required as investment for someone to get green card.
My question is, would you risk to accept someone for funding, and wait until he finds invenstors through you, so that he could use these money as invenstment and also get a green card?
The thread is not available so I thought asking you here...
My question is, would you risk to accept someone for funding, and wait until he finds invenstors through you, so that he could use these money as invenstment and also get a green card?
The thread is not available so I thought asking you here...
I asked few days ago if its possible for someone to get a green card if got funded by YC. I read the reply that is not enough. From the US immigration web site they site is possible and on some other sites it sais that 500,000-1,000,000 dollars is required as investment for someone to get green card.
My question is, would you risk to accept someone for funding, and wait until he finds invenstors through you, so that he could use these money as invenstment and also get a green card?
The thread is not available so I thought asking you here...
My question is, would you risk to accept someone for funding, and wait until he finds invenstors through you, so that he could use these money as invenstment and also get a green card?
The thread is not available so I thought asking you here...
Forget VC Money, Fund Yourself...well, if you don't believe in your product to put your own money or time into it, how can you expect someone else to invest in it themselves?
I think this advice is somewhat misguided. I'm currently on my seventh start up. I started two previously myself with my own money, but my current employer is VC and angel backed. (I am the chief scientist) Relying only on your own resources such as credit card debt or a second mortgage on your home can be a very risky proposition.
Not just because you might lose your investment, but because by using your own money you are creating a situation of immense pressure. The risk of losing your home might lead one to make some bad decisions regarding the business. You have o be very careful here.
My second self funded company eventually did take about $100,000 in angel money. But we started with only $50,000 of the two founders own money and we operated the business for four years with no other investment. We eventually sold it to a public software company for $2 million dollars. This might seem like a pretty decent investment, but at the time (mid 90s) it failed to attract the buzz that seems to feed VC investments.
It also depends on how much capital you really need. Typically entrepreneurs underestimate this, but of course it is also possible to fool yourself the other way. You have to be very realistic about this to make the right decisions. My current venture requires us to installhardware in our customers' facilities, so it is somewhat capital intensive. Only someone who was very wealthy could self fund such an enterprise.
In the end VC money spends the same as any other money, so deciding where you get your funds should be a business decision similar to deciding who to hire or what product to develop. You should interview your investors as they interview you. But few entrepreneurs do this. They act desperate, and this often becomes a self fulfilling prophecy.
On another note, in my experience, entrepreneurs shouldn't expect most VCs to deliver anything more than money. Of course they all tell you about the benefits of their strategic connections and so on, but in my experience it is very rare that these bear fruit. One exception would be a venture fund targeting the specific industry you are developing your product for. These funds often do have real valuable connections to bring to bear and can help in ways that vanilla VCs can't.
Not just because you might lose your investment, but because by using your own money you are creating a situation of immense pressure. The risk of losing your home might lead one to make some bad decisions regarding the business. You have o be very careful here.
My second self funded company eventually did take about $100,000 in angel money. But we started with only $50,000 of the two founders own money and we operated the business for four years with no other investment. We eventually sold it to a public software company for $2 million dollars. This might seem like a pretty decent investment, but at the time (mid 90s) it failed to attract the buzz that seems to feed VC investments.
It also depends on how much capital you really need. Typically entrepreneurs underestimate this, but of course it is also possible to fool yourself the other way. You have to be very realistic about this to make the right decisions. My current venture requires us to installhardware in our customers' facilities, so it is somewhat capital intensive. Only someone who was very wealthy could self fund such an enterprise.
In the end VC money spends the same as any other money, so deciding where you get your funds should be a business decision similar to deciding who to hire or what product to develop. You should interview your investors as they interview you. But few entrepreneurs do this. They act desperate, and this often becomes a self fulfilling prophecy.
On another note, in my experience, entrepreneurs shouldn't expect most VCs to deliver anything more than money. Of course they all tell you about the benefits of their strategic connections and so on, but in my experience it is very rare that these bear fruit. One exception would be a venture fund targeting the specific industry you are developing your product for. These funds often do have real valuable connections to bring to bear and can help in ways that vanilla VCs can't.
I can't say I agree with you there. You might have missed the point a little bit.
Even if you are 100% passionate in your product and believe in it every step of the way, it doesn't mean that you can just put up your house to pursue it.
The fact that entrepreneurs seek backing is because it is exactly that -- more than just a check. You'll know that there are others in to share in your risk AND reward.
What we're discussing here is that getting turned down by investors should not discourage you altogether. If you believe you have something, you should see it through with your available means. But the fact that one cannot afford to bankroll the venture does indicate a lack of faith.
Even if you are 100% passionate in your product and believe in it every step of the way, it doesn't mean that you can just put up your house to pursue it.
The fact that entrepreneurs seek backing is because it is exactly that -- more than just a check. You'll know that there are others in to share in your risk AND reward.
What we're discussing here is that getting turned down by investors should not discourage you altogether. If you believe you have something, you should see it through with your available means. But the fact that one cannot afford to bankroll the venture does indicate a lack of faith.
I think this advice is somewhat misguided. I'm currently on my seventh start up. I started two previously myself with my own money, but my current employer is VC and angel backed. (I am the chief scientist) Relying only on your own resources such as credit card debt or a second mortgage on your home can be a very risky proposition.
Not just because you might lose your investment, but because by using your own money you are creating a situation of immense pressure. The risk of losing your home might lead one to make some bad decisions regarding the business. You have o be very careful here.
My second self funded company eventually did take about $100,000 in angel money. But we started with only $50,000 of the two founders own money and we operated the business for four years with no other investment. We eventually sold it to a public software company for $2 million dollars. This might seem like a pretty decent investment, but at the time (mid 90s) it failed to attract the buzz that seems to feed VC investments.
It also depends on how much capital you really need. Typically entrepreneurs underestimate this, but of course it is also possible to fool yourself the other way. You have to be very realistic about this to make the right decisions. My current venture requires us to installhardware in our customers' facilities, so it is somewhat capital intensive. Only someone who was very wealthy could self fund such an enterprise.
In the end VC money spends the same as any other money, so deciding where you get your funds should be a business decision similar to deciding who to hire or what product to develop. You should interview your investors as they interview you. But few entrepreneurs do this. They act desperate, and this often becomes a self fulfilling prophecy.
On another note, in my experience, entrepreneurs shouldn't expect most VCs to deliver anything more than money. Of course they all tell you about the benefits of their strategic connections and so on, but in my experience it is very rare that these bear fruit. One exception would be a venture fund targeting the specific industry you are developing your product for. These funds often do have real valuable connections to bring to bear and can help in ways that vanilla VCs can't.
Not just because you might lose your investment, but because by using your own money you are creating a situation of immense pressure. The risk of losing your home might lead one to make some bad decisions regarding the business. You have o be very careful here.
My second self funded company eventually did take about $100,000 in angel money. But we started with only $50,000 of the two founders own money and we operated the business for four years with no other investment. We eventually sold it to a public software company for $2 million dollars. This might seem like a pretty decent investment, but at the time (mid 90s) it failed to attract the buzz that seems to feed VC investments.
It also depends on how much capital you really need. Typically entrepreneurs underestimate this, but of course it is also possible to fool yourself the other way. You have to be very realistic about this to make the right decisions. My current venture requires us to installhardware in our customers' facilities, so it is somewhat capital intensive. Only someone who was very wealthy could self fund such an enterprise.
In the end VC money spends the same as any other money, so deciding where you get your funds should be a business decision similar to deciding who to hire or what product to develop. You should interview your investors as they interview you. But few entrepreneurs do this. They act desperate, and this often becomes a self fulfilling prophecy.
On another note, in my experience, entrepreneurs shouldn't expect most VCs to deliver anything more than money. Of course they all tell you about the benefits of their strategic connections and so on, but in my experience it is very rare that these bear fruit. One exception would be a venture fund targeting the specific industry you are developing your product for. These funds often do have real valuable connections to bring to bear and can help in ways that vanilla VCs can't.