The New York Times has a very long, detailed article by Erin Griffith on the sins of venture capital entitled More Start-Ups Have an Unfamiliar Message for Venture Capitalists: Get Lost.
Neither the writer nor the many founders quoted seems to realize that venture capital is for the very, very, very few – about .1% according to a post on Quora. As I was told by a veteran vc investor in one of my companies years ago, “Venture capital is the most expensive capital you can get as a founder.” VCs are focused on two things: growth and exits. Venture capital is rocket fuel: go for it only you are prepared to ride a rocket, which will either reach escape velocity or crash back to earth – in other words go public/get acquired or go bust – don’t even consider it.
Frankly I consider most of the article to unrealistic whining. As Josh Kopelman, a venture investor at First Round Capital, an early backer of Uber, Warby Parker and Ring, said, “I sell jet fuel,” he said, “and some people don’t want to build a jet.”
Some companies that have raised vc money have realized they want to step off the jet.
Wistia, a video software company, used debt to buy out its investors last summer, declaring a desire to pursue sustainable, profitable growth. Buffer, a social media-focused software company, used its profits to do the same in August. Afterward, Joel Gascoigne, its co-founder and chief executive, received more than 100 emails from other founders who were inspired — or jealous.
“The V.C. path forces you into this binary outcome of acquisition or I.P.O., or pretty much bust,” Mr. Gascoigne said. “People are starting to question that.”
For those of you wise enough to avoid the vc grow fast or die rocket ride in the first place there is some information on new ways to fund startups or ways to undo vc funding.
In September, Tyler Tringas, a 33-year-old entrepreneur based in Rio, announced plans to offer a different kind of start-up financing, in the form of equity investments that companies can repay as a percent of their profits. Mr. Tringas said his firm, Earnest Capital, will have $6 million to invest in 10 to 12 companies per year.
Earnest Capital joins a growing list of firms, including Lighter Capital, Purpose Ventures, TinySeed, Village Capital, Sheeo, XXcelerate Fund and Indie.vc, that offer founders different ways to obtain money. Many use variations of revenue- or profit-based loans. Those loans, though, are often available only to companies that already have a product to sell and an incoming cash stream.
But the reality is that these new ways to obtain startup funding are a drop in the bucket. Founders who can’t finance their companies through customer revenue must look to friends and family, angels, angel groups, bank loans or maxing out their credit cards if they want to avoid vcs.
The reality is that vcs and other investors have realized they can make more money pouring investment into later stage unicorns like Uber than they can by investing in raw startups, which is making life more difficult for the early stage companies I mentor.
But the laws of investment are much like the laws of physics, you might be able to bend them, but they can’t be broken. Create real value and someone – customers or friends and family, angels, whomever – may pay for or invest in that value creation engine. Too many founders I see are focused on raising money, not value creation. It’s a bit like a pro football team focused on the Super Bowl before they have even won a game.
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