Posted by Tom Foremski - July 21, 2005
Raising venture capital for early stage start-ups seems to be the prevailing path for most entrepreneurs; however, most would-be founders should reconsider.
Here are some reasons why:
-If you start by selling your concept to potential prospects (rather than stock to VCs), you will either end up with initial customers or a conviction that your idea won't work. Why raise money and then find out which one it will be?
-Raising money takes time away from understanding your market and potential customers. Often more time than it would take to just go sell something to a customer. Let your customers fund your business through product orders.
-Adding VCs to the mix early gives you an additional set of masters you must serve in addition to your customers. It is always hard to serve two masters, especially in a startup.
-With no money you can't make a fatal mistake. This is a blessing. Without VC money, you are forced to figure out how to extract funds from your customers for value you deliver. Ultimately that is the only thing that really matters.
-Money removes spending discipline. If you have the money you will spend it - whether you have figured out your business model and
market or not.
-Raising VC money determines your exit strategy. You will either sell the business or take it public. What if you end up with a very profitable, modest sized business that you want to just run? That is no longer an option once you raise VC money.
-You sell your precious equity very dearly before you have a proven business model. This is the worst time to raise money from a valuation perspective.
I know this is a contrarian view. And some of you are saying that might be fine for a small company. Don't forget Dell, HP, Microsoft all originally started without VC funding; you can build a big business with bootstrapping and without VC money. At RightNow, we doubled our revenue and employees every 90 days for two years before we took any outside money, and even then the employees retained more than 75% ownership after raising $32m.
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Greg Gianforte has a soon-to-be-published book called: "Bootstrapping Your Business: Start and Grow a Successful Company With Almost No Money."
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And he welcomes questions from SiliconValleyWatcher readers.