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.