Startup Competition: Are Today's Venture Funded Rivals Savvier?

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Startup Competition: Are Today's Venture Funded Rivals Savvier?


This is a follow-up to my article earlier this week titled “Competing With Venture Funded Rivals”.  In response to that article, I received several comments.

The following are two comments I’d like to respond to in this article:

Sheamus:  “…you might consider including in candid open terms as to whether or not the dot-bomb played any significant part toward the survival and success of your firm.”

Ehcolem (from reddit):  “I worry about drawing too many conclusions from the bubble days - where a well funded company was likely encouraged to spend the money very poorly by VCs rushing to an IPO. Does the author think a current well funded company is a different competitor than the ones he encountered during the 90's bubble?

I would paraphrase both these comments as the following question:

Are venture-funded startups of today savvier than those from the bubble years and how should you compete with them now vs. then?
Overall, my answer would be:  Yes, they’re smarter, but not by as much as you’d expect.

Generally, I think startups (including those that are venture-backed) are more capital efficient today than they were during the bubble.  Gone are the days of extravagant launch parties, 7-figure marketing budgets (before a viable product) and other silliness that happened during the bubble.  As such, if you are a bootstrapped startup, it is more difficult to compete with venture-funded rivals than it was back during the bubble years.  

Having said that, there are two few things that still have not changed because they are intrinsic to the VC and startup dynamic.
  1. Venture investors have a portfolio:  As was the case back then, and is still the case now, VCs are able to diversify their risk across a portfolio of startup investments.  What makes their portfolio math work is that they expect a large percentage of their investments to go down (or sideways) and a limited number (perhaps 5-10%) actually be successful and generate meaningful returns.  The idea is to have the successes be huge successes so as to make up for the others that end up being duds.  There is a subtle point in here that is important.  In order for this math to work, every company in the portfolio must be “swinging for the fences” so that one or two of them has a chance of hitting the big time.  

  1. Startup founders have all their eggs in one basket:  Contrary to the VC, a startup founding team has all of their eggs (including eggs they’ve borrowed from friends and family) in one basket – their company.   They are not risk-diversified.   As such, their best interests lie in protecting that basket and trying to mitigate risk.  The astute readers will recognize that this is in direct conflict with the VCs desired startup behavior.  Startup founders are better off playing a “safe” game whereas VCs need their startups to be shooting for the moon.

So, why does this have any bearing at all on how you, as a bootstrapped startup deal with VC-backed rivals?  The answer is simple.  By recognizing this inherent tension between a startup and its VC investors, you have an advantage.  You can (at some level) predict how most of your VC-funded competitors will act and respond (regardless of whether or not it makes sense).  Even post-bubble, a VC-backed startup is generally driven towards scaling fast, spending quickly and taking their shot.  If a startup raises outside capital, it is expected to do something with that capital – not play a conservative game, spend their money frugally and keep their bank balance high.  This simple fact has not changed.  So, even in the post-bubble world, you can still expect your venture-funded rivals to hire aggressively, have a larger marketing budget  and give away their product and service to build market-share.  They are not looking to quickly get to cash-flow break-even like you are.  This is both good and bad news.  The bad news is the same as it was back in the bubble:  A VC-backed startup is going to create a lot of noise and visibility.  The press is going to write about them.  Customers are going to hear about them and your potential employees are going to consider them.  They have the advantage of resources.    The good news is that you have the advantage of time.  You don’t have to spend aggressively or shoot for 10X growth to deliver returns to your investors.  Instead, you can focus on the real problem and meet customer needs.

So, I posit that though startups in general are more savvy than they were before, VC-backed startups still have to deal with delivering a return to their investors.  The cash certainly gives them certain advantages, but there are certain obligations that go with it.  As a bootstrap, your job is to understand your strengths and play a different game.  You can’t outspend them.  You can’t out discount them.  You can’t out PR-them and you can’t out-market them (in traditional terms).  But, you can out “execute” them.  It’s not easy, but it’s possible. 

Posted by on Fri, Oct 13, 2006


Ahem! Right on the money. Doesn't it make you think of the early stages of a rocket taking off? Burn all the fuel and hope you make orbit, for if you don't, you crash and burn!

My experience is that VCs add so much pressure to hit the right trajectory that they cause a lot more problems rushing and trying to "do right". Of course they also believe that regardless of the kind of rocket you have, so long as you staff it with "the right team" it will hit its mark. Of course we know most don't.

posted on Friday, October 13, 2006 at 11:31 AM by Chuck Wegrzyn

I don't really understand how can you have time on your side. If you have 4 programmers and they have 40 and better paid, they can ultimately mimmic your software and afterwards they can build a better one.
If they're smart, and one must suppose they are, they will not spend all the money on marketing, but they will build also a good tech department.
I think that the only advantage that you can have is that they enter your market when you already have a good customer base, and a good knowledge of your field. That takes time to earn, with money or without it.
In other words, you have to hit first.

posted on Friday, October 13, 2006 at 11:34 AM by Narciso Cerezo

There are still savvy startups and sensible VCs around, and this is not a post-bubble occurrence. I was fortunate to meet a young man who was a co-founder of a bio-tech company.

His company started around 2000. They received VC funding, and had planned the R&D resources required to deliver their first product.

The VC firm tried to offer more money but they refused because it wasn't needed to reach their goals. Six years on the company is still around and doing well.

We tend to hear about the spectacular startup failures with the associated greed and excesses - but there are savvy VCs and startups, and they have been around for many years.


posted on Friday, October 13, 2006 at 11:34 AM by Scott Carpenter

Good post Dharmesh!

First, a question: Your onstartups blog provides useful insights for software startups. Is it your intention to also serve the needs of entrepreneurs in the Web 2.0 world e.g., HubSpot?

Second, an observation (please don't be offended): In my view your blog posts are useful, yet often, tending to frame issues in a more general way. You have a ton of experience in fighting the good fight to compete and build a successful company... This includes tough battles, moments of sheer terror and moments of joy. I think to ought to write about some of these gritty experiences, telling your truths as it was, your lessons learned and you don't have to be smooth... Rather, be real and people will learn a lot from your experiences.

posted on Friday, October 13, 2006 at 12:23 PM by Sheamus

Awesome post! For those of us with no VC experience, it's an excellent explanation and perspective.

It is clear there are different agendas between us small bootstraps, and the VC funded startup. Thanks for making this so clear.

posted on Friday, October 13, 2006 at 1:29 PM by Greg Harris

Sheamus: I actually think of Web 2.0 companies and Software As A Service companies (like HubSpot) as software companies -- so yes, I do hope to provide useful discussion for them as well.

On the topic of writing more about real-world experiences, this is a good point. Though I personally find some of experiences very interesting, I have a biased opinion and others may not think so. In any case, I'll try this out with a couple of articles over the next couple of weeks and see how the readership responds. Thanks for the tip.

posted on Friday, October 13, 2006 at 2:00 PM by

"...even in the post-bubble world, you can still expect your venture-funded rivals to hire aggressively, have a larger marketing budget and give away their product and service to build market-share. They are not looking to quickly get to cash-flow break-even..."

I've been watching in the retail financial services space...describes them to a "T" get some very interesting business models with vc funded companies...Zecco is offering "free trades" for which they actually have certain costs...trying to make it up on advertising revs and the interest spread on margin loans...

posted on Friday, October 13, 2006 at 2:55 PM by Cate Long

Hey Dharmesh,
One of topics is you really miss in startup section is bad times in startup world which would mean Layoff's in the company. What happens is the How relationships /politics play in this stupid game. What should founders do to minimise politics ..

posted on Saturday, October 14, 2006 at 1:15 PM by gudikal

Dharmesh - good information which makes me wonder about how heathy this is.

I think your post implies that among the VC-funded "failures" are some companies that would have been successful had they gone the slow-burning road. So, some ideas or technology, funded on the home-run basis, are never getting to market. The result is a marketplace of fewer bigger ideas (companies). This contradicts the "long tail" argument about selling less of more. Is there really something structurally wrong in the current funding picture that prevents more ideas from making it through? Is VC funding really happening in some "old" home-run style when steady small hits may be better? Which outcome is really better for the American economy?

posted on Saturday, October 14, 2006 at 11:52 PM by Andrew Lavers

Great !
Fantastic exchange of views, that's really instructive on various minds attittudes around the table .
One can also understand that having had such or such experience (i.e boostrapped without VC, or Cash burn by to much pressure and bad alignment of strategy and tactics over time /under the pressure of VCs who wants to boost their investment too fast) does not lead to the conclusion that it is all black or all white.

One key is the ability to exchange on a sincere and detailed basis with the VC on board, never stop convincing him about how "tactical" moves are aligned with the strategy, accept to spend time trying to understand deeply why the VC has these different views your business and its market...
Remenber VC tries to view things with other eyes than the founders eyes...(Is it called 360° & lateral viewing ?).

Well, also one solution is to find another VC not mentionned hereupper, when to find new ways in front of a competior newly fueled by a VC, is to arrange soem deal with another VC at better condition than the one which was offered by your competitor, explain why your project , with the help of the new VC , will be superior in returns than your competitor...
--> Answer to a competitorfueled by VC by signing a deal with a competitor VC with better connections !
By the way I have observed recently as an investor the opening of a new web site located in europe for startup funding (seed money, up to a few Million euros ?) though pixel ads mean, and I am positively looking forward to see which are the projects who will be seeking VC and investors through that possibly efficient way (link ) .
Did any entrepreneurs blogging here have seen this or tried to obtain funds from European VCs or bi national investors trying to bridge markets over already ?
This could be another way to find a VC to face a competitor fueled by a local VC ?

posted on Wednesday, October 18, 2006 at 1:29 PM by Jessica LANOTE

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