Only a fraction of business financing comes from Sand Hill Road. Yet entrepreneurs still obsess over traditional big meeting/big money Silicon Valley venture capital. This heated panel debates what types of companies actually benefit from VC and reviews concrete examples of alternatives to traditional venture capital.
Presenters
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Mitch Lasky Benchmark Capital |
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Mike Trotzke SproutBox |
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Jolie O’Dell ReadWriteWeb |
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Dave Mcclure 500 Hats |
Chris Wanstrath, founder of GitHub
Session:
To get funded at the Powerpoint stage, you probably need to have a track record with VCs. Otherwise you’ll need a functioning prototype or more, like paying customers.
There are companies that shouldn’t be raising venture capital, and there are many that aren’t going to get funded because demand far outstrips supply. When you build a business, venture capital should be a second order consideration. Build a solid business first and think about venture capital second … your business should not be about raising the money. On the other hand,there are companies that do require venture funding, because they do need to get the servers and bandwidth and employees to be able to scale.
“Don’t write business plans. It’s a f*ing waste of time” -Mcclure. For Dave, the trust filter is the most important, and he only considers startups who have references in common.
Wanstrath did not take Venture Capital for Github. It did take a lot of money to set the company up, but they found other ways, including friends and family. They made a lot of business deals for servers, maxed out credit cards and borrowed money and generally did whatever it took. They did not feel a $10 million valuation was fair when they were profitable making $1 million in revenues. They certainly did not want to take on a VC that was going to start setting their direction.
Lasky sees a lot of great companies that are not good venture investments, because the return profile does not fit the time or ratios that VCs are looking for. For example, a $500 million fund will invest in 30 to 40 companies and are looking at 3X return on capital in 10 years. So they’re looking for $250 million exit for all companies, or $750 million with a 2/3 failure rate. Smaller VCs with funds under $100 million can tolerate smaller exits. An example would be Mint, which is a company that did need venture backing.
Huge exits are not the median scenario by any means and the venture capital game has a huge corrupting effect on startups. A better approach is to build a cool business and then things will happen. For most businesses, the core product can be built by two people in eight to ten months. This means a $50k to $100k investment, which is not VC; it’s personal savings and friends and family. The crucial seed phase is $250k to $1 million, where it’s really hard to bootstrap to that size. The best thing to do is to look at VCs with funds under $100M.
The average Techstars deal is investing $15k to $30k for about a 7% to 10% stake on a $300k valuation — but they bring huge value in their mentorship model. However, this is good for students out of college, because they have no savings.
The typical scenario is taking a 20% to 40% dilution when funding through VCs, and probably more.
There are plenty of lifestyle businesses online where the founders can make $1 million to $2 million per year and live happily ever after without having a big exit plan.
When pitching venture capital, you have to sift through the good, the bad, and the criminally negligent. Weird term sheets, dishonesty, etc., are the pitfalls to watch out for. Venture capitalists fund the expansion of the business in anticipation of upcoming revenues. The idea is not to figure out new ways of spending the business; the fundamental concept is to spend the money in ways that grow the business. VCs are willing to fail, whereas banks are not.
What are the alternatives to VC funding? What do you do if your friends and family are broke?
The important thing about alternatives is that there is no industry based around bootstrapping, like there is around venture capital. First, figure out what you need and then start cutting. Do you need PR? Do you need an office? What can you do away with? After that, figure out where you can get the money from. Taking money from parents or going into debt is a big deal in case of failure.
A realistic alternative to bootstrapping is raising $100k to $2 million for up to 20% of the company, with an exit at $10 million.
Q&A:
European entrepreneurs a decade ago were pissed off about how difficult it was to raise money, because of hugh risk aversion. The American model of risk is migrating over and things seem to be getting better for European startups.
Customer financing with upfront discounts, customer receivable financing or factoring, asset-backed leasing are some other alternative strategies to help manage the cash flow and offset the need for fundraising.
Wanstrath would not bootstrap a consumer web company or a consumer app.
Wanstrath advises opening up as many different revenue streams as possible. Offer people many different plans and ways to pay you for your services.
For Lasky, the difference in being there six months early meant a $400 million advantage in valuation over the second mover in his market.
The venture capital industry has to contract. There are too many firms with very mediocre results. Part of the reason is there are more mature companies doing deals earlier.
If you have 20% equity in your startup and are looking for a $10 million payout, then your sweet spot for exit must be around $50 to $75 million.
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Also panelling is 
