7 Great Reasons Not To Take VC Money
By Tom Foremski - May 27, 2009
[Guest column by Greg Gianforte, CEO of RightNow Technologies and a serial entrepreneur.]
By Greg Gianforte
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.
- - -
[I see a lot of companies that are seeking VC money, or have VC money but need more, as if that would make their business viable. VC money isn't always smart money and it isn't always the smartest thing to do. I republish Greg's column at least once a year because it contains lots of common sense.]
Greg Gianforte is the author of: Eight to Great: Eight Steps to Delivering an Exceptional Customer Experience
His previous book is: "Bootstrapping Your Business: Start and Grow a Successful Company With Almost No Money."
If you would like to contribute a quest column please let me know: Tom(at)Foremski.com.
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Comments (6)
I remember attending this conference for startup entrepreneurs in the Bay Area. A VC from August Capital spoke at the conference. He said that there was only two stories you could tell that they would be willing to invest in. That would be "we don't need your money" and "our servers are melting."
Posted: May 28, 2009 9:15 AM
Taking funding raises the bar of "success" for your project. I'd rather have a product that makes 20k a month, overhead is 1k and I own 100% vs a VC funded 200k revenue, 100k in overhead and I own 30% and have to listen to a board of directors.
Posted: May 28, 2009 10:49 AM
Who paid your staff on day one?
Posted: May 28, 2009 11:51 AM
Tom,
I really don't understand why you like this so much. Nobody wants to take money from VCs and I'm sure we can all come up with even more cutesy clever reasons not to deal with VCs, but if you need a couple of million to get your idea/company operational what alternative do you really have? "With no money you can't make a fatal mistake" ?? You can't possibly be serious.
Posted: May 29, 2009 10:54 AM
Tedd: I like this column because it represents an alternate view. But, I agree with you, if you do need a lot of capital then VC or angel money will be needed. These days less capital is required for most startups because they are software based services. And that is very fortunate because fewer VC firms are making seed investments.
Posted: May 29, 2009 12:50 PM
Quiet agree with this and a good confidence booster for early startups. I have noticed that some of the Indian startups (particularly internet based) who were well fed by VCs are completely clueless about what they offer and how to offer. None of them seem to have made any progress.
Posted: June 4, 2009 5:28 AM