More founders reject VC money

http://www.crainsnewyork.com/article/20130227/TECHNOLOGY/130229888

by dpapathanasiou • 13 years ago

90 19 13 years ago

pg2• 13 years ago

This is sort of true, but what it misses is that money and power are only loosely coupled. The real story is that VCs have decreasing power over the companies they fund, regardless of the deal size. For example, it is now the norm among YC startups for the founders to retain board control even past the series A round (which itself is increasingly a de facto series B).

Curiously, one reason this is happening is that VCs are realizing that they didn't need as much power over founders as they had. All the returns come from the big winners, and the big winners don't need to be told what to do.

VCs may well make higher returns with less power.

AdamFernandez2• 13 years ago

Do you sense this is a philosophy that is taking hold with most VCs currently?

pg2• 13 years ago

Like most trends among VCs it has started at the top. The top west coast firms are the most willing to concede power to founders. Lower-tier firms, and firms in other places, are less willing to, largely because in this as in other respects they're always a few years behind.

I say largely because lower-tier firms have a different and less trusting relationship with companies they fund. They assume that if a company had to resort to raising money from them, it won't be one of the big successes. They are the hotel where the TV is bolted down so the guests don't steal it.

speeder• 13 years ago

My cofounder refused the idea of seeking accelerators (even YC, at least for now) for more or less that reason. He (and the seed investors) agreed that the company will do what we wish only.

We are now happily seeking investments that are bigger than an angel, but smaller than VC, specially from private individuals, in a way to not be pressured into the classic VC model (ie: not having to exit, or return the VC investment in 5 years and so on)

pclark• 13 years ago

What power do investors have if they don't have board control? All the percentage equity stuff seems irrelevant.

eksith• 13 years ago

The amount of hand-holding a VC has to do is often inversely proportional to a startup's profitability.

Startups that do make it big, usually stay big when the folks at the helm know what to do or can at least quickly figure out what to do by the seat of their pants. That's quite a bit harder when there's an additional layer of bureaucracy involved, so investors can choose to stay back and let the founders do their thing or founders decide to get fewer investors involved in the fist place to ensure their freedom to operate with some modicum of independence.

To be fair, percentage equity (or "Power") can be expressed in ways other than direct control of a company's heading.

spodek• 13 years ago

There are many ways to have influence. A few, for example

- They can limit the company's ability to raise future funds

- They can convert equity to debt if it's convertible. If the company can't pay back the debt they can gain more control

- They can have rights to control hiring and firing

- They may have voting rights with the equity

- They have a voice with the public, press, customers, hiring candidates

- They have rights as minority shareholders

- Various clawback and other provisions may raise or lower their equity stakes, giving them more or less control

- They have access to information they wouldn't have otherwise

Besides contractual and legal rights, they have relationships with management. Presumably they can just talk to management and influence them that way.

Also, power can also be used to act in concert with the company, which is augmented by their inside information and made more credible by their shared interest. They can

- Recommend candidates for hiring

- Recommend clients

- Inform about competition

- Advise

- Reinvest

- Recommend other investors

Etc etc

snydeq• 13 years ago

How do folks see crowd-funding platforms like Kickstarter having a longer-term impact here?

The promise of sustainable incubation without ceding control seems real using this model, but it might add overhead in areas where fledgling "companies" or projects might not have the time or bandwidth to steer.

Plus, I suppose, there's the question of the VC's rolodex vs. the "networking effect" of the crowd.

Arts organizations seem to rely on this model fairly regularly, but as much as one might want to be idealistic in suggesting that it is about "maintaining aesthetic independence" from monetary influences (big donors, government grants, "selling out" to the market), the drying up of funding in traditional areas is a prime motivator here as well.

alexqgb• 13 years ago

One advantage of platforms like KS is that they allow originators to validate their concepts far earlier in the process, giving them more leverage in negotiating with financiers who can no longer demand exorbitant returns from highly speculative investments.

Generally, the more risk you can remove before accepting outside capital, the less you'll have to pay for it.

r00fus• 13 years ago

KS makes a huge amount of sense in that it's both a publicity channel as well as a funding mechanism. If you can successfully handle a KS initiative to create a meaningful investment "round" and then deliver on some product (with adequate margins) or MVC design that the funders receive well, you will both have some working capital and social proof in one go.

That said, it seems like a daunting challenge for technical-oriented folks - this is exactly where a paired business/technical co-founders model should be very useful.

jaxytee• 13 years ago

The biggest weakness I find of the VC funded route, is it's accidental "Let's get more money so we can build more product" effect. It can delay the all important moment of asking someone give you money for your product's created value. I once worked at a 1 year old company with ~$2 Million in the bank and a fledging product in production. Our board wanted to raise more money to hire more engineers. We didn't need more engineers. We needed a product people wanted to use.

kayhi• 13 years ago

"Everyone says it's cheaper to build and launch things, but it still costs the same to market it worldwide and get customers," said Bob Greene, managing partner of Contour Venture Partners and chairman of the New York Venture Capital Association.

I would say that the cost of reaching customers is rapidly decreasing. The popularity of various distribution platforms (Facebook, Search, Adwords, App Store, LinkedIn, Email, etc..) are allowing customers to be reached more efficiently.

yesimahuman2• 13 years ago

Yea, that quote read like a blatant "we are still important!" cry.

My startup bootstrapped to over 100k users all from Twitter and inbound marketing. We spend $0 on marketing. That's real.

NonEUCitizen• 13 years ago

Have you written this up (bootstrapped to 100k users) in more detail on your blog or elsewhere? Please provide a url (and if you have not, please write it up and share on HN).

tmflannery• 13 years ago

Fundraising 101 is don't fundraise. Any investor worth his salt says don't raise money unless you have to. You need some damned good reasons to give up your equity/control. I don't get why this is a big deal. This article should have focused more on the changing VC model then illustrate the basics of bootstrapping.

dougabug• 13 years ago

Welcome to the post-VC era.

kaa2102• 13 years ago

I think that entrepreneurs should build to ship to customers rather than to court VCs.

More founders reject VC money

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