A vote for me is a vote for dipshit businesses everywhere

Let’s get the self-aggrandizing plea for attention out of the way:

Please vote for my SxSW panel entitled “A Bootstrapped Geek Sifts Through the Bullshit.”

It answers questions like “How do I get the courage to just start when I know so little about what it’s really like at a startup?” and “How do I balance the utility of learning from others with wanting to go my own, unique way?”

Plus it’s ironic; I’m giving advice about how to take advice. You know, like finding a black fly in your Chardonnay. (White flies are harder to see and therefore not ironic, you see.)

OK, now on to the good stuff…

Champion of the dipshits

Michael Arrington wrote an interesting piece today at TechCrunch about how VCs are pissed that great entrepreneurs are taking under $500k of angel money instead of $2m their money.

The real reason they’re pissed is that VCs are increasingly unnecessary to get companies started, both because of inexpensive technology and marketing channels and because there are enough angel investors that founders don’t have to sell the entire farm for ridiculous amounts of cash they don’t really need.

And then, for the few companies that really do need VC-sized investments to take them from product/market fit to explosive growth, by the time they start touring Sand Hill Road their valuations are sky-high; they’ve already got all the trappings of a successful company, the major risks having been removed during the angel round.

All this is explained in clear detail in Paul Graham’s his piece on the future of tech investing — a must-read for anyone interested in financing. He’s is biased, of course, because he leads the 200+ company Y-Combinator incubator, but his predictions have already come true for many founders I know personally.

Of course the VCs aren’t happy about this. This excerpt from the TechCrunch article made me livid:

The VCs, for their part, fight back more quietly. They point out that very few angel funded startups end up very big or interesting. “An entire generation of entrepreneurs are building dipshit companies and hoping that they sell to Google for $25 million,” lamented a venture capitalist to me recently. He believes that angel investors are pushing entrepreneurs to think small, and avoid the home run swings. And you don’t get a home run unless you swing hard, he says. When you play it safe you nearly always lose.

Rather than provide a cogent argument for why founders ought to take VC money anyway, the response is to call the company a “dipshit” and reveal the astounding arrogance that a few founders selling their company for $25m is somehow a failure.

To understand what’s really being said here, you have to replace the word “you” with the actual antecedents.  So: “When you play it safe you nearly always lose” should read: “When founders play it safe VCs nearly always lose.”

But founders often win.

That’s what gets me about this entire attitude — it’s about returns for their fund, not success for the founders. Which is how it should be, understand, because they have a fiduciary duty to their investors, not to the founders of the companies they invest in. It’s OK for them — it’s their job — but it’s not OK for you. “You” being “you, entrepreneur, reading this, the one who matters.”

At last year’s Capital Factory Demo Day, Mike Maples Jr. gave the keynote address. He gave the statistic that only 9% of the companies they invest in succeeded. And his venture firm is considered one of the more successful ones. (By the way, Maples is now doing super-angel deals. Interesting.)

The math is simple: Only one in ten companies need to hit, but it needs to hit big, like 100x the original investment. Of course no one wants the rest to fail, but every one will be pushed into explosive growth, which means strapping a rocket to the back of each one, even if that means the vast majority will just blow apart.

Great for them, bad for the founders.

The last thing they want is for founders to wake up and realize that this isn’t necessarily a good way to build a company. They don’t want you to realize that if you shoot for reasonable, profitable growth, it’s far more likely to work, far more likely to produce a company that not only pays the bills but is a valuable asset, one that you might sell someday for millions of dollars, like I did.

For them, a little, solid company for $25m to Google is dipshit material. For you and me, it’s a life-altering home run.

Until I hear a rational argument for why super-angels, angels, or friends-and-family rounds are worse for founders than a standard A-round from a VC, I’m just going to ignore these emotional, self-serving statements.

And I suggest you do too.

Focus on building a company you’re proud of, not how big and disruptive you can be. Focus on getting to profitability as the greatest measure of success. Focus on selling customers, not selling investors.

And vote for that SxSW panel so I can spread the Good Word to others.  :-)

Is my argument healthy or too far the other way? When is it right to take VC money right off the bat? Let’s continue the discussion in the comments.

, , ,

  • Pingback: Tweets that mention Angel rounds better for new startups than VC rounds -- Topsy.com()

  • http://blog.noopinaloop.com Brandon

    “When you play it safe you nearly always lose.”

    Given the statistics you cite, “when you play it safe” is entirely redundant. How about, when you take VC and swing for the fences, you nearly always lose. Or, when you start a company, you nearly always lose.

    • http://blog.asmartbear.com Jason

      So the key point is not the overall chance of success, but that the chance with VC-style funding is lower, because the expectations and strategy is an “all-or-nothing” mentality.

      And therefore, typically not good for founders if they have another option.

  • http://austintechgeeks.com Ricardo Sanchez

    Very interesting and timely post. I agree with you about trying to get Angel, Super Angel, or friends and family money before trying to get VC money, if at all.

    I’ll just add that when possible,it is a good idea to bootstrap your startup first, at least until you get some functional product and maybe even some revenue. This will make it easier to get Angel money and help you build a better company.

  • http://www.hackingwork.com Jenny

    Sounds good! at http://www.hackingwork.com , we share the same ideas

  • http://www.debugging.com Salman

    I’ve always wondered what these companies do with the 10’s of millions they receive in funding. Maybe it takes allot of bribe money to get onto major news channels? :)

    The majority of funding the way I see it should be used for human capital.

    BTW, what is a ‘super angel deal’?

    • http://blog.asmartbear.com Jason

      Often most of it does go into human capital, at least in the form of job-creation. It’s debatable whether they are better at building great teams or whether it’s just jobs.

      “Super Angel” is a relatively new term to describe what people like Dave McClure and Mike Maples are doing — creating funds (like VCs, but much smaller, and usually mostly their own money) to do angel-sized investments ($20k-$500k, maybe $100k-$150k being normal).

      So it’s angel investments, but from a fund with deeper pockets and, unlike individual angels who often invest in just a small handful of companies, they might invest in a bunch.

      If you including YC as a super-angel, they have 200+ companies in the fold, each having around $20k investment.

      • http://500startups.com Dave McClure

        fyi, our plan with 500 Startups fund is to do both “incubator” and “seed” deals. incubator deals will be in the $25K-100K range, probably at around $1M pre-money or less (tbd, haven’t settled on this as yet). seed deals will be in the $50K-250K range, in an overall $500K-$1.5M financing (prob syndicate with other angel / seed VCs), at around $2-5M pre-money.

        the former is slightly larger but similar to YC & TechStars deals; the latter is similar to most super-angel seed deals.

        (btw, please don’t quote the numbers as exact, but they’re close enough to market to provide reasonable example use cases).

  • http://www.loopycode.com Edan Maor

    I was annoyed at the TechCrunch piece as well.

    But I do think you’re not presenting their whole case. Their point wasn’t that it was better for the entrepreneurs themselves to aim for huge successes, but that it was better for the economy as a whole. Google employs 20,000, but small companies that “sell out” don’t get anywhere near those numbers.

    Of course, I’m guessing that argument is wrong, and as an entrepreneur, of course I’m in your camp: it’s a good idea to start with minimal funding and aim to get to *any* kind of big payday.

    • http://blog.asmartbear.com Jason

      Great point, thanks for it!

      I would argue that the VCs are just using that as an excuse. Do you believe for one second that they actually care about being good contributors to the economy as opposed to making money for their investors?

      Also I would point out that in America studies routinely show the majority of net new jobs coming from small business, so that argument is pretty thin.

      • http://www.loopycode.com Edan Maor

        My thinking exactly. I think there was even a TechCrunch article on the fact that most jobs are created by small businesses a few weeks ago.

  • http://blog.sagepointsoftware.com Richard Wilner

    Jason,
    Just out of curiosity: are there any situations in which you’d suggest a founder seek VC funding?

    Or stated slightly differently: does a VC bring anything to the table besides a giant wallet and the associated exit event expectations?

    • http://blog.asmartbear.com Jason

      Certainly VCs have an important role in growth-stage — after you’ve figured out the business itself and it’s time to grow. So the real question is: When is it best to take the money right off the bat?

      Lots of good reasons, just not usually the ones people cling to. :-)

      For example, say you have a business where the market is “first one wins.” Many marketplace-style businesses are like that (e.g. eBay for auctions — what’s the #4 auction site?). Also any other businesses which require the network effect, like social media sites.

      Or businesses where R&D requires lots of money, like hardware plays. Or businesses where even simple growth requires lots of working capital, like hardware also or if the sales process takes 18 months and lots of manual work (for a million-dollar order, say).

  • http://www.ppcsoft.com/blog/ Atle Iversen

    Great article !

    Alt. 1: Bootstrap
    Alt. 2: Angels
    Alt. 3: Something, anything
    Alt. 4: VC

    Yes, my company is bootstrapped :-)

    I would have voted for you if I didn’t have to create an account – but I’m sure you’ll get plenty of votes anyway – you *know* how to give advice !

    • Anonymous

      Oh, I just remembered…

      I highly recommend the book “High stakes, no prisoners” by Charles H. Ferguson (Founder Vermeer, creator Microsoft Frontpage).

      If you want a “scary” tale of VCs, that also shows that they *can* be useful (and even required in some cases), it’s a great book !

  • http://www.giffconstable.com Giff

    I did crack up when I saw the “dipshit” line. As we all know, a huge number of VC investments are in copycat companies after one startup turns hot — and it has worked that way for years. But it would be idiotic to say “all VC investments are in dipshit lookalike companies”, because it’s just not true. And of teams raising money from angels, many are hoping to change the world. If they are good and lucky enough to have a chance to have a major impact, most of them will eventually need VC money to grow. If they just end up building a profitable business that changes their lives and provides a solid return to their investors, that’s awesome too. Anyway, it’s just Arrington stirring the pot.

  • http://unicornfree.com Amy

    Sounds like somebody (actual antecedent: VC) needs to take a vacation and reread a little Aesop’s. “Dipshit”? Sour grapes much?

    VCs have clearly helped themselves into this situation. Many have had a very good run at the expensive of founders. Somebody (real antecedent: media trainer?) should teach them to pluck the feathers from their mouths before stepping up on the soapbox to stump about what’s good for the chickens.

  • http://www.esimplestudios.com Gabriele Maidecchi

    This is the most enlightening view about VC and angels I’ve ever read so far.

  • Cris Bjelajac

    Great article. You crystalized into words what I have felt in my bones. Well done.

  • http://www.growvc.com Valto

    World is definately changing for the better.

  • http://www.invoicefox.com Janko M.

    Besides the fact that it’s now a lot cheaper to start a web startup and that costs now scale down nicely with many flexible (cloudish) services. It’s also that founders (and investors) grew up and aren’t naive any more. Smart founders try to raise just as much as they need and only when/if they really need it. Some startups will need VC level investments, but for most web startups, if they need such big money to start “breathing on their own”, they are probably doomed anyway.

  • http://www.thricearoundtheblock.com Edwin Oh

    Jason, and yet again another great post. The problem is many “traditional” VCs have mastered a single formula which assumes that everyone wants to grow really fast. You might enjoy my little story at http://www.thricearoundtheblock.com/2010/08/growth-mystique-silicon-valley-parable.html

    • http://blog.asmartbear.com Jason

      I love your parable. I’ll push it on Twitter tomorrow but I couldn’t find your Twitter handle to credit you with. Let me know if you have one.

      • Anonymous

        Thanks Jason. It’s @edwinmoh.

  • http://www.freddestin.com Fred Destin

    Jason — what conclusions can we draw, exactly, from this unattributed comment reported by Mr Arrington that only became news b/c Fred Wilson (rightly) amplified it ? Who is this mistery VC and what or who does he represent ? Certainly not me.

    I will tell you what: I got into this game because I absolutely love participating in creating great companies. And yes, creating jobs is part of it. It’s aspirational for me. It’s what I want to do until I am an old man, with passion and energy. It’s got fuck all to do with money (my dad gets upset at me b/c I don’t respect money :-)). I’ve linked to a post above on VC motivation. I believe in what I do.

    • http://blog.asmartbear.com Jason

      I completely agree that taking that one quote (not attributed, I noticed…) and applying to every VC on Earth is unfair and untrue.

      I sold Smart Bear to Insight Venture Partners, and I’ve been impressed with them.

      But although I got riled up by that quote, I’m really reacting to the general reality of VCs and founders and the relative returns they actually get. That is, looking back over the last 15 years and just asking in general whether a founder of a particular new company ought to seek angel funding before a VC A-round, I believe the tides have changed over the past few years.

      For a more considered, less emotional reaction, there’s the writings of all the folks listed in the TechCrunch article and more besides. I’m still waiting for the counter-arguments.

      I believe in what you do too. I just wonder if whether it’s best for a founder to do that first, or whether it’s better for them to wait until they can put millions of dollars to use.

      • http://www.freddestin.com Fred Destin

        I think you should wait for as long as you can before taking anyone else’s money, but not longer :-)

  • http://twitter.com/chrisyeh Chris Yeh

    I’m shocked, shocked to hear that a VC might make a self-centered comment. I always assumed they had the best interests of the entrepreneur at heart!

    The core issue is that the startup environment has changed. It used to be that the model was for companies to take VC, grow, and IPO after 4 quarters of profitable growth.

    Then the dot com boom came and ruined it for everyone.

    Today, IPOs are practically non-existent, which means that we all have to deal with the reality of smaller exits.

    To a VC, many startups are “dipshit companies” because they can never get to a scale that will generate “VC returns”–defined as a 10X return on a $5 million investment that buys you 1/3 of the company. For that to work, you have to sell for at least $150 million ($5 million X 10 X 3) and probably more.

    But for a founder with a majority stake, a $25 million exit is life changing. Hell, a $10 million exit is life changing.

    Layer in the fact that VCs go for a home-run strategy that results in no money to the founder in a super-majority of cases, and it’s no wonder that entrepreneurs are flocking to super angels like Dave.

    One super angel I know put it to me this way: “I invested because I knew that in the worst-case scenario, Google would still buy the company for a few million just to get the founders as employees, which would allow me to make my money back.”

    Finally, the other reason why entrepreneurs are flocking to super angels is simple: They provide VC-style help without most of the BS. This distinguishes them from traditional angels, who provide very little help, and even more BS than the VCs.

    In the old days, no one wanted to deal with angel investors. They were a pain in the ass, didn’t get new business models, and were likely to cause more hassle than VCs. They were funding of last resort.

    Today, super angels are the funding of first resort. They make decisions fast (in Dave McClure’s case, after one meeting), they have great connections, and they don’t tell you how to run your company. What’s not to like?

    Okay, so maybe a guy like Dave is pretty busy–a typical VC partner might have 10 active investments, Dave does that many per month–but if you follow him, you know that A) He never sleeps, and B) He’s always there for his entrepreneurs.

    Side note: Ironically enough, I ended up proposing what amounts to a Super Angel fund back in 2005: http://chrisyeh.blogspot.com/2005/10/confederacy-of-startups.html

    Yet another case of my seeing the future and saying, “But enough about that billion-dollar idea, what’s for dinner?”

  • Pingback: ExecTweets Canada » davemcclure at 08/16/10 10:20:54()

  • http://www.checkbox.com Carolyn Craven

    So nice to hear from someone who is as skeptical of VC’s as I am. We’ve got a new project in the works that we probably could have gotten VC funding for pretty easily, as evidenced by some of the initial talks we had with some prominent VC firms. But in the end, we decided it was more important to answer to ourselves and be guided by our guts, our customers, and our sense of what was right for the business. I’ll take a decent chance at a stand-up double over a tiny chance for an out-of-the-park home run any day, especially when it means running a company the way I want to run it!

  • jeteye

    Um, you got my vote, ah, dipshit?

  • jeteye

    One other thing, I can pretty much guarantee you what companies will be successful and which ones fail PRIOR to $1 dollar coming in, and it has NOTHING to do with product, people, all the VC BS, etc.. It has to do with what Warren Buffet and Peter Drucker did for mid- and large companies..profit. Oh well, I guess I just have to get some money to prove this out, but you, VCs clout is going bye bye…

  • http://www.victusspiritus.com Mark Essel

    Good stuff Jason. My first response was “I’d love to be creating one of the dipshit companies Mike refers to”. Maybe FU money causes folks to forget the transition from treading water to walking on it.

    What are your thoughts of sustainable long term companies, versus explosive growth but quickly fading businesses? And is the half life of a companies value directly related to the revenue growth/size and liquidation price tags?

    • http://blog.asmartbear.com Jason

      Any company not built for long term sustainability isn’t a company in my opinion. I’m sure VCs would agree.

      No one plans for a flash in the pan.

  • http://austintechgeeks.com Ricardo Sanchez

    Hi Jason,

    I had the need to add another comment after I read a blog post with the following title: How angel investors are destroying young gullible programming talent
    What are your thoughts about it? They have some valid arguments as well…

    • http://blog.asmartbear.com Jason

      He’s confusing angels with VCs. It’s true that some angels see themselves as just a stepping-stone to VC money, but many do not.

      I know plenty of companies whose goal is just to become a cash machine and pay dividends to investors, and plenty of angels who want that exact outcome.

      • http://austintechgeeks.com Ricardo Sanchez

        Got it, that was my first impression… when I finished reading it I thought… the title should have the word “VCs” instead of “Angel Investors”. Thanks.

  • Mark

    It seems like “stating the obvious”, but I believe that blogs such as this one have also shifted the balance of power. No longer can VC’s pull the wool over the eyes of the novice founder. Unless said founder has not done any homework!

    Not too many years ago, before the proliferation of blogs, info was harder to come by for founders planning their funding strategy. Today’s post is a perfect example. One blogger writes a “dipshit” memorandum and through the power of blogging it spreads like wildfire.

    I rest my case and thank you Jason for the heads up.

  • http://blog.claritylawgroup.com Sue

    Our startup is a law firm (yes, really, please don’t argue), so both angel and VC money are entirely off the table. Even if it were an option, we wouldn’t take it.

    For skilled knowledge workers such as attorneys or developers, the time it takes to build substantial savings coincides neatly with the time it takes to acquire fire-tested skills, business acumen, and life experience. The VC firms can have the wunderkinds–I’ll take the odds on people over 30 (preferably with some supervisory experience in their last position) building something carefully with their own hard-earned dough.

  • http://moneyandrisk.com Kim

    I agree with you Jason that focus solely on growth will blow up companies. I’ve seen much of that in my 25 years working with businesses.

    One of the assumptions that I have about VC money and why so many investment failed is because there is not enough control and common sense that is required of the founders. This benefit neither founders nor investors.

    During the net boom, I watched friends get millions of dollars in VC money for random business ideas that had no basis in reality or hopes of succeeding. I was flabbergasted. In addition, they wasted the money like crazy because there was so much of it. I was offered $250,000/year job to sit and party because I was friends with the founders. In fact, they hired everyone from their HBS class.

    One ecommerce company bought their own private yacht.

    My perspective was “so you want me to quit my career and business for 2 years of partying on a large salary and then what….” – because the VC money will run out and no second round of funding.

    My old boss just got funding last year. I didn’t ask if it was VC or angel but I can tell you that the business idea sucks and he has no ability to run or build that business. He’s nowhere near earning any revenue and they’re down to 2 months of operating expenses left.

    I believe there’s a role for VC but only at a certain point in a company’s life cycle and it’s not for all companies. The founders need to be sophisticated enough to hold their own in negotiations.

  • http://planonfire.blogspot.com/ Brad Bentz

    You highlight an important lack of alignment between VCs and founders. Namely, the fact that VCs spread their risk across an entire portfolio of opportunities, whereas the founder of a startup may be investing most of his or her available assets (and time) into a single venture. Because the fund can survive a fair number of misses, VCs push portfolio companies to swing for the fences. Singles and doubles won’t cut it.

    On the other hand, one could argue that the same lack of alignment applies to angels. Surely the opportunity cost of their capital is not dramatically lower than VCs, but the fact that they make smaller investments means that they can still generate adequate returns without knocking it out of the park.

  • http://www.refinancehomemortgageloan.net JS Refi

    The problem is that many start ups and good ideas need to compete with large companies with deep pockets. They definitely need money backing. If they can find angel investors for $500K, that is great. A successful management could make that $500K go as much as $2M would go if they were in full control and not under pressure to deliver and deliver fast.

    Unfortunately, growth comes very slowly at the beginning. Once you pass certain stage it starts rolling like a snowball. A solidly build business would last, but we have seen many companies that mushroomed suddenly and they went down the same way.

  • Pingback: Innovation: Disruptive, Sustaining or Rippling? | Market By Numbers()