Trust customers over VCs

http://www.37signals.com/svn/posts/1201-trust-customers-over-vcs

by toffer • 18 years ago

51 28 18 years ago

Didn't they take money from Bezos' fund?

azharcs2• 18 years ago

But they had enough leverage, which most of the early start-ups wont have. So they will pretty much get in a situation where it will be a win-win situation for VC's.

fallentimes4• 18 years ago

We're dealing with this right now.

maxklein5• 18 years ago

Your particular product is something that SERIOUSLY needs paying users. Paying users will remould your path into one that can become seriously profitable.

fallentimes4• 18 years ago

You know we're already profitable right?

mattmaroon3• 18 years ago

Though I at least partially agree with the overall sentiment, he seems to be forgetting two things.

1) Much greater than 1 in 10 VC-backed companies succeed (from the founders' perspective). 1 in 10 return the fund, as Fred Wilson would say. Many others score a multiple that is lower for the VC, but in general if a company returns a VC 2-3x, the founders made millions.

2) Many startups change ideas midstream. This is largely why VCs invest in people. Whatever that silly game that eventually became flickr was called, it had users. But it wasn't going to make anyone rich.

Of course past performance doesn't indicate future results, so you can't simply say "50% of the startups this firm funds get rich, so my chances are 50% if they fund me." But I'd guess that the average funded startup still has a much higher EV, from the founders' perspective, than ones that aren't.

maxklein5• 18 years ago

Dude, what YC business were you involved in? I never did find that out...

mattmaroon3• 18 years ago

draftmix.com

dshah2• 18 years ago

If a startup returns 2X-3X, the founders won't necessarily make a lot of money.

A lot depends on the liquidation preference in the financing terms. Although not common these days, there was a time when VC deals were structured such that a large percentage of an exit went straight to the investors before the founders saw any money.

mattmaroon3• 18 years ago

That's why I said in general. It definitely depends on your valuation and terms (participating preferred can rape a 2x exit) but if you take a few mil in VC money on a few mil premoney, then sell for 3x, you probably got rich.

ajkirwin• 18 years ago

That'd be Game Neverending.

And a truly wonderful game it was. Me and many others still miss it terribly!

babul• 18 years ago

Basically reiterates Adams points.

But at least Adam and Heroku get more exposure via the 37Signals blog.

Perhaps all startups should do this - disagree with 37Signals/DHH, post on YC, await blog attention.

azharcs2• 18 years ago

I think that is what most people in comments try to do too, but they hardly get any attention. Attention is given to the people who deserve it. Someone can hardly get any attention if he is disagreeing with someone for no reason(Zed Shaw is funny though).

fallentimes4• 18 years ago

Yeah to really get attention you need to come up with a Top X list of whatever and submit to Digg.

davidw• 18 years ago

Maybe Adam got more attention because he got some venture funding:-)

subwindow• 18 years ago

You should only fully trust the opinion of a VC if they are the target audience of what you are building.

Otherwise, they're just some person with a lot of money. The fact that they have a lot of money actually makes them a worse source of advice, compared with your average Joe.

marketer• 18 years ago

I tend to agree with DHH on this one. Raising VC money shouldn't be use to justify your idea. That's a dangerous game to play. Validation by the market is much more realistic than by an investor.

webwright2• 18 years ago

The validation a VC provides isn't around whether people want the product. It's about whether (theoretically) smart folks think it's a big opportunity with likely liquidity... Which is helpful and encouraging validation if liquidity is your goal.

rokhayakebe• 18 years ago

A startup that is able to generate enough revenue to cover its operation and living costs before outside funding, is more likely to succeed than one that received a 2M dollars check without generating one dime from customer and want to focus on growth.

Growing what?

Most startups focus on consumer products knowing that it is super hard to extract money from these. If you glance at most VCs portfolio you will see that their enterprise focused companies do better than the consumer focused startups.

Most entrepreneurs want to create cool products for consumers. If you are doing your first startup I would advise creating something you can sell and make money. On your second startup, do something cool and fun as you are not worried about deciding between peanut butter/jelly sandwich and ramen for diner.

maxklein5• 18 years ago

Now, I don't believe in capital either, but David sometimes speaks as if his situation is typical. It's not, it's very atypical, and not because of some clever strategy, but because he kind of drifted into it. And now he just seems to be preaching all the time without giving real information.

ericb• 18 years ago

David may have drifted into it, but much of what he says is espoused by the 37 Signals founder, Jason Fried. Jason has some interesting podcasts out there, which you may also find preachy. If your criticism is that David drifting into 37 Signals detracts from his credibility, you can hear the same ideas from Jason, who founded rather than drifted into 37 Signals.

webwright2• 18 years ago

Any way you slice it, you need to have money for a product business.

You can use VC money if you can bootstrap yourself to a little bit of traction without giving up control of your company. VC gives you valuable validation and connections if your business is a big opportunity.

Or you can consult, which saddles you with distraction (less of a big deal if your v1 product is simple enough). This gives you a bit more control and all of the equity.

Each path is great for different businesses, depending on factors like the size of the opportunity, the cost of getting to a v1, whether there's an opportunity for early/scaling revenue, and (OF COURSE!) the goals of the founder(s) etc.

There are stupid VC paths (getting vast piles of money too early, giving up board control, etc) and there are stupid bootstrapping paths (letting the project drag along, letting consulting take over, not giving enough love to the idea).

I think the best entrepreneurs don't sit down and say, "Gosh, should I go with lifestyle biz or a shoot-for-the-moon biz?" They have something they want to build and (if they are smart) ask the question: "Does this idea NEED financing to pull off effectively?"

jules• 18 years ago

A software startup doesn't need money. Maybe a few bucks for a server.

dshah2• 18 years ago

Raising venture capital proves exactly one thing: that you can raise venture capital.

Market validation in terms of paying customers or masses of addicted users is more valuable than the vote of confidence of a limited set of investors (even really smart ones).

Disclaimer: I've done startups both ways, and my most recent venture has raised $17 million in VC.

gscott• 18 years ago

I define the person who gives you your income as the customer, the VC is your customer if without there funding you would be out of business.

Trust customers over VCs

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