4 Reasons Portland Startups Should Bootstrap and not VC
I love Portland and have been blessed to run a bootstrapped startup for the last year and half. I’ve learned four things about Portland startup funding over this time:
- Portland startup money is scarce
- “A teams” fail to raise money
- Fundraising has an opportunity cost
- Not all startups are 15X unicorns
Portland startup money is scarce
First time startup founders seem to have a pervasive notion that seed round money is widely available; however it is not. Portland based startup founders face two primary issues gaining seed round funding:
- Limited deal flow
Portland based startups seeking a seed round via Oregon money will be hard pressed to come away with success, because few Portland startups get to a seed round.
There are basically seven investment groups which typically fund seed rounds in Oregon. They are:
- Oregon Angel Fund (OAF)
- TiE Oregon
- Portland Seed Fund
- Oregon Entrepreneurs Network (OEN)
- Rogue Venture Partners
- Seven Peaks
- Cascade Angels
Between January 2015 and August 2016, there were approximately 25 investments in Oregon startups. That’s 25 investments in 20 months. Two groups appear to dominate seed round funding in Oregon: OAF and TiE Oregon. These two groups account for 74% of all investments in Oregon startups. If they don’t green light you, you’re highly unlikely to get it from the other groups.
Over a third of all Portland seed and Series A investments are shared between these groups. If you can’t convince one of these groups to fund your startup; you’re highly unlikely to convince the others, because deal and lead sharing is part and parcel of the Oregon investment climate.
- Oregon investors aren’t “first money” investors
Only 5 of these 25 investments were “first money” investments. Most investments are follow on investment rounds where Oregon investors have previously invested or where the company obtained out of state investment first.
The real numeric odds of finding a seed round in Portland is very low. For example, some Oregon investors do initial screens of over 200 companies a year, which means only 3% (6 out of 200) of these companies actually go on to secure a seed round.
“A teams” fail to raise money
Even “A Team” startups fail to raise money. As the numbers show above, very few startups actually make it to a seed round via Oregon based investors. If only 3% of companies who seek funding actually get it, this means even “A Teams” are failing. For example, this year’s Seattle Angel Conference had 60 companies pitch for their seed fund prize. Six companies made it to the final and there was one winner. Just by sheer numbers, if you pitched at their conference, you had a 1.6% of being the winner. And even if you were a finalist, the proverbial “A Teams” of the Seattle Angel Conference, you still had only a 16% of winning. This means 84% of the A Teams at the Conference walked away with nothing.
Angel Oregon is no different. They hold the annual Angel Oregon event where there is one winner among 40+ contestants. Again, just by sheer odds, there’s only a 2.5% chance of winning it. And granted, the winner benefits from follow up investment opportunities, but there is still only one winner. And still only one investment per year.
Fundraising has an opportunity cost
Some startup founders say they might as well try to raise money, because it hones their business skills. I submit two things about this:
- Fundraising distracts companies from building products and services their customers want. Most investors will tell you that you should seek them out as a last, not a first resort, for money. Also, most entrepreneurs will tell you that any fundraising journey was a drain on their time and commitment to making the business grow.
- Fundraising knowledge doesn’t translate to increased business success. For example, knowing what a convertible note is doesn’t help you understand your customer any better. It’s essentially back office knowledge that you may need, but won’t make your business any better.
Not all startups are 15X unicorns
Many startups aren’t good candidates for seed or VC investment, because they will never garner a 15X return for their investors. Portland entrepreneurs need to do a better job of seeing when their company fits that angel and VC 15X return profile and when it doesn’t. If the company doesn’t fit this 15X return, then it’s a waste of everyone’s time to pitch it to investors. Instead, spending more time growing the business organically would be wise. And even if it does fit, understanding that Portland investors are risk averse and generally not interested in funding your startup (see earlier point that investors aren’t “first money” investors)
I say all this not to excoriate Oregon angel or VC investors. They’re doing their job with the investment monies available to them. The issue is with misplaced entrepreneur expectations and hopes. My hope is that more facts and hard realities about fundraising in Portland will enable startups to make better and more informed decisions about whether angel and VC fundraising is a productive use of their time.
As an investor once advised a friend of mine “the best way is to bootstrap to revenue, then raising money is so much more useful for you and the investor.”