Building a product that people love is a challenge in itself. Now add the need to earn enough money from day one to cover all development costs, all experimentation, and have a reliable income that will allow you to convince the engineers and designers who will build it to join you. Knowledgeable people always have better deals on hand and need to know that you’ll be able to afford them.
Venture capital removes many of these difficult questions or at least moves them a few years into the future period. You can use investors’ capital to build something and test if it is attractive and can make money. But in the tech ecosystem, people rarely end up with just one investment. Most startups instead fall into a spinning wheel where they raise new rounds every 12-18 months and focus on growth, not pure revenue and certainly not profit. And I see very specific issues with that approach and I think a significant portion of founders would be better off on a different path, a path that we don’t really have a good name for, but a lot of companies have chosen.
First of all, raising venture capital takes a lot of time and effort. Spending valuable resources to adapt to the parameters of investors does not always contribute to the growth and development of the company. Early-stage founders are the people who do whatever is necessary. And then they have to get up and go for months as they try to throw a new life-saving ball. As they receive responses from investors, their business trail crumbles a little every day, making the fundraising process even more urgent and chaotic. Some super hot companies are able to close their fundraiser within a week, but that’s only a few percent of companies. And then, in just 12 or maybe 18 months, you’ll have to start all over again until you sell your business or take it public. When everyone is focused on growth, no one is trying to build a sustainable business.
There’s one term that investors tend to overwhelmingly ignore – a lifestyle business. It’s a type of business you can work on for decades, earning you reasonable profits, but unlikely to grow 10x or more. Venture capitalists need a few startups in their portfolio to grow beyond that to make ends meet. They would rather you die trying without stopping.
But there is clearly a whole category between lifestyle companies and venture-backed companies that use outside capital as life support. The category of companies that use venture capital when they need it, but focus on building cash flow positive businesses. This freedom allows them to survive difficult times and wait for the best time to sign a strategic investor they really want. Webflow raised nothing between 2014 and 2019, when they landed a Series A of $72 million. in company. All of these companies have found the time that suits them and have risen in the best possible conditions.
When you only have a few months of track, your options are limited. Like it or not, at some point you’ll have to take the best term sheet you have on the table, and it might not be the right one. Now do it five times. The National Venture Capital Association estimates that 25-30% of venture capital-backed companies fail, but if by failure we mean stopping at a particular level without growing further, I’m sure the real number is much higher. .
Our company would never have seen the light of day without venture capital. We needed it to restart our operations and build the first product. But since this funding round in 2015, we have not raised any capital. Instead, we’ve built a profitable business that continues to grow and even accelerate that growth. We realized that we could clearly continue to build this business with the subscription revenue we had and would have in the near future. And this approach suited us, especially because we are creating a new market from scratch and we need to educate our users. If you’re building the next Uber or just a 15-minute grocery delivery, you need all that capital to grow as fast as you can and try to solve unit economics and other challenges later. Many companies have tried this. WeWork now trades at a market capitalization of $5 billion. It’s a solid company, a ton of big companies prefer it for their offices and I have high hopes for them. But the situation they got themselves into several years ago was not viable at all with a $47 billion valuation inflated by Softbank. Brandless was a direct-to-consumer “brand” selling all kinds of products for your home. They also raised from Softbank, burned all that capital and lost, while some of their competitors who raised reasonable rounds understood the pattern and endured – and even analyzed the mistakes made by Brandless.
If you raised funds earlier but are thinking about moving to self-funded growth, you have a tough discussion to have. Your early investors might be disappointed if they don’t understand what you’re trying to do. They want to track their winnings, at least on paper, and they can only do that reliably if you reroll a new spin. Explain your vision, show your current growth projections, and make sure they understand how they can grow out of your business in this model. Buffer actually had to buy out its early investors when they transitioned to bootstrapping. This could be a way forward. Fortunately, we realized that we were still aligned with our investors and they are continuing this journey with us.
This article was submitted by an external contributor and may not represent the views and opinions of Benzinga.