For the past 18 months I have been working hard to build a company. In this time we have kept one aspect of our core idea. The "Major change" is in my eyes doing what is required to make money now as the investors (You know who you are) have not given me help of any kind.
Investors in general wasted time and energy that could have far better results in your core business. Even when presented with a "proven business model" and a "team with experience" they are not likely to invest.
Lately they have come out. Why? because now development is nearing the end, and traction is starting and we have a lot of interest. We now need money to expand our core competencies and increase our sales force.
The most interesting thing to note about these investors is that they are the same sort we have discussed things with for the past 18 months. Secondly is that the offers they want now we would have gladly taken 6-9 months ago but today are next to insulting.
One must keep in mind that the Business Angel is not all that different then the VC in general. They want to invest as little as possible for as much as possible. Many VC's are far more honest then business angels as well.
My advice to anyone seeking investment (as we are still doing) is to look for the "right people" and don't even discuss the money needed. If they like your idea, ask them what they think it is worth. NEVER tell them what you want. After 18 months I have heard every excuse possible and in the end we are gaining traction. We could still use money, but we are now looking at what the angels and VC's have to offer us outside the money. Money is important, but value added is worth far more.
As an entrepreneur I see my ability and idiocy to keep dreaming and changing course as the largest asset in the company. Finding way to make a profit, keep my core competencies (People with skills) and please our customers. We are seeking to make our customers our financial partners. In the end, it is them that will make the company succeed more then any investor and the rewards for our efforts will benefit both of our groups.
Thanks for another good article guys. for 18 months you have helped me in ways I can not even begin to explain. Keep it up please.
When I started MediPurpose ten years ago, I assumed that the VC firms I approached would understand the risks associated with a new startup and had business models that could analyze and evaluate the risks in an objective manner. I was sadly disappointed to learn otherwise.
When I had finished developing my medical device prototype at my own cost, I approached my first VC. I was told to get it manufactured so I had a product to sell. After getting my medical product ready, I was told I needed a customer. After getting my first customers, I was told that I needed to get real sales traction. After doing that, I was told that I needed to start making profits ...
The truth was revealed when I asked a friend in one of these VCs why they invested in untested dotcom startups without any paying customers, sales or profits (this was the dotcom boom days). He replied that the market wanted to invest in dotcom companies and all they were doing was to get the startup into the market so that they could flip their "investment" to the unsuspecting public for a quick return.
I'm sure there are VCs who really look at new innovations and try to evaluate the risks versus the return but many of them just follow the "herd".
Hi Wayne your story sounds familiar. I was looking for funding and got the same message!
But then I realised that I didn't actually require them. So I made some little business and got the ball rolling.
Dharmesh, great article once again. Good job!
If VC money is used to boost growth after
product market-fit, they really don't help innovation in-itself. They do, however, help sustain a proven innovation through the rough patch of the first few years.
Was this always the case? The amount of capital required to start a startup is shrinking. This allows idea-evolution to work even before the VCs put the money in, so they can afford not taking the risk and still having their pick.
I don't buy this argument at all. Let's look at: Apple, Google, Cisco, Digital, Akamai, and Amazon. Each of these companies is WILDLY innovative and NONE of them would have ever been possible without strong and committed VCs behind them since the start.
What I think you are pointing out is that there are a lot of lemmings in VC who don't have the balls to have an original thought or bet on their own thesis. This is just not true about all VCs.
Honestly, I think that Silicon Valley is one of the greatest treasures in the US and there is zero way that it would have been possible without a vibrant and bold VC community that was going aggressively after innovation.
Right on target. The VC is really waiting on the business to make it - they are become late investor rather than early.
That might have a good side to it - forces new companies to be lean and aggressive and runs off those people who thing a VC investment is income. (I was part of a deal where some of those on the board thought we succeeded the more VC we got.)
The only really sad side is I see people who waste their entire business time trying to raise $ as opposed to selling a product. This kills a lot of good ideas because people EXPECT VCs to act like - well - VCs.
Your thesis reinforces a deep-set belief of mine that VC interests and Entrepreneur interests are fundamentally misaligned, at least at the earliest, most innovative stages of a company. In fact, I wrote a blog post about why VC money isn't right for my early-stage SaaS business
. At a later stage (e.g. "growth," "Expansion," or a similar term), investment capital may make more sense.
First line, the link is correct but not the name.
I think my boss put it best when he said:
"Venture Capitalists are neither"
They manage money and their investors expect a return. Innovation, as several people have mentioned, is risky and it takes forever.
The truly innovative companies find other ways besides venture capital to get their ideas to market. It's a painful process.
You are always behind, always understaffed and always running out of money but in the end, you some how figure out how to make it happen. Then, venture will step in and fund your expansion.
The open source code you mentioned in relation to SpringSource is not un-owned, far from it. SpringSource holds the copyright for all the source code and it employs greater than 95% of the people who work on that code. Also, any contributions to a project in the Spring family requires the author to sign over ownership to SpringSource.
You've taken a good point and pushed it into straw-man land to get readers, ruining it.
In a global economy as fast moving, dynamic and with accelerating complexity it's probably a mistake:
- To look to any idea or set of ideas to represent much anymore. Contradictions are likely better than having "the answer."
- To see business models as anything other than increasingly perishable. Likely opportunities increase as well.
"Bad actor" arguments are easy for our brains to process but largely a myth and symptom of deeper complexity. Those are NOT easy for our brains to process!
In the entertainment business, the saying goes: "You will never get an agent until you no longer need one." Same applies for a lot of startups.
I think the model you are arguing for would multiple the failures and desroy the economy. Innovation is by definition an improvement. Innovation occurs only after a new product idea is accepted by the market. Other wise its a product idea that is believed to be an innovation and may actually be backwards in practical application. Developing a new product or service in of itself is not an innovation its a part of the process of innovation. A VCs job is to remove risk of all the failures and considering all the possible ideas to try one should believe that most ideas are not in practical application innovative and so a filter needs to be applied. VCs of course are not a market and so will make a great deal of mistakes so no arguing against this filter of ideas. I think your article is really around the frustration around getting capital to fund the business. I'm not a VC but I'm in business school getting my MBA and really the number of ideas that go flat is astounding of 200 ideas from engineers/developers of products with a history of a proven track record only 2 will be successful. (don't quote me it probably is even greater in discrepency I'm just writing it from memory so it could be off by a factro of 10 or more).
You have excellant insights. I just wished you would post more often or at least on a regular schedule.( Once a day,week or month)
It'd be nice if they look at innovation, but that aint gunna happen soon. it seems like.
Interesting post. However, I disagree with a lot of your conclusions. I think you are mistaking innovation with risk. VCs look for ways to mitigate risks of all sorts, including fundamental technical risk. It takes true innovation (beyond technology) to come up with a plan that sufficiently mitigates risk yet provides enough upside to justify an investment.
More of my response here: http://www.thefeinline.com/blog1/2010/02/technology_risk_innovation.html
How meaningful is an Innovation that cannot be monetized - even to an entrepreneur?
If a dozen entrepreneurs work on ideas in the same domain (social n/w, mobile advertising, affiliate n/w to name a few) with relatively minor differences, do we get really get any innovation?
Not to side with the VCs, but they do seem to moderate or tune this outcome.
We got approached by some VCs. They were not interested in investing in our business unless we were making X. But at X we'd be so profitable we wouldn't need them anyway. Seemed to me they wanted a 100% bet and zero risk. Nothing VC about that at all.
Dharmesh there are 3 spam posts in this thread:
o One is advertising a educational establishment in India.
o Two are advertising a gambling site - an activity that will ruin the lives of 7% (on average) of all males that take part in it.
Can you please expand on the "established formulas of the VC business"?
This post really surfaces the core problem in venture capital - that the current financial service business model that is venture capital is now out of step with the need of innovation and entrepreneurs. This is the primary reason why venture badly lags other types of investment class - particularly on a risk adjusted basis. Frankly, this isn't good for anyone as it also points to an underlying mis-allocation of capital for start-up companies.
The reason for this can be traced to the changes in entrepreneurship toward much more capital efficient models during the "discovery" or "pre-proof of concept" stage.
This shift has created a systemic change in the competitive dynamic for start-up ideas - one not in favor of current VC business models.
In the past, when table-stakes for getting through proof of concept were $2-5MM the VCs basically held a monopoly on what and what didn't get funded - capital was the barrier to entry that made ideas secondary to execution. That advantage is gone - never to return.
So its not surprising that VCs are sliding toward later lower risk investments - they have to.
You also point to new models emerging around micro-funding - the fundamental challenge that all of these ideas face is a.) how do you reconcile the non-scalable aspect of investment evaluation with a business model that can generate returns for investors commensurate with risk and still have money left for the professionals making investment decisions.
Its a tough challenge but doable - and innovation and technology are the key.
I see a lot of interesting posts here. Bookmarked for future referrence.
You have excellant insights.
Thank you admin