Some Thoughts on Non VC Funding

There was a ton of chatter last week about this excellent article by Erin Griffith in the NYT about startups seeking alternatives to VC. If you haven’t read it, check it out here.

I was on the road and preoccupied when this came out, so my main response was this tweet below:

Below are a couple additional thoughts on this topic. I tried not to rehash things have have already been repeated a bunch of times.

  1. Non-VC does NOT = Small. Josh Kopelman provided a great analogy about Jets vs. Motorcycles. VC’s provide Jet Fuel, but founders shouldn’t put that in a motorcycle. He also points out that jets are rare, and motorcycles are more common. But what I hope people DON’T assume from this analogy is that the VC path = BIG and the non-VC path = small. This is not necessarily true, and I don’t think was Josh’s intent. But this assumption is often made that there is a trade-off between ultimate scale and raising VC dollars. There may be a trade-off in speed to scale, but not necessarily ultimate scale. Some very big companies were bootstrapped all the way to the point of market dominance.
  2. The article seems to suggest that VC’s are the ones trying to convince founders to take early stage capital that they don’t need. I’ve actually found very few early stage investors trying to “convince” companies to raise money. I think I have 10X more conversations encouraging founders to think about a different funding path early on, vs. getting on the VC treadmill. Sometimes, this is tricky to do without insulting the founder because of the false assumption that non-VC funding suggests a non-ambitious, small goal (see point #1). But I think that it’s rarely early and seed stage VC’s that push founders to take capital that isn’t right for their business.
  3. VC’s DO push founders to take more capital than they should in two common scenarios. The first is when a company has been bootstrapped to some interesting scale. Growth stage VC’s will often try to call founders and track them for months and years, trying to convince them that raising money is a good thing. The second is when a company has already raised some capital and things are working. In that situation, new VC’s will be chasing the company to try to get in, and existing investors will want to take in more capital to mark-up their investment. This cycle can continue and be quite toxic. As I said in a subsequent tweet, the VC treadmill is not something I’d like to live on.
  4. There is more than one way to use the VC “tool”. Raising a round does not mean that you always need to keep raising. Not raising doesn’t mean that you never will. Some companies raised modest amounts of VC early on, but got to billion dollar outcomes on only one or two rounds. Ebay and Whatsapp come to mind here. Other companies bootstrap to significant scale (eg: hundreds of millions in revenue), then raise large VC rounds to secure market dominance. Wayfair and Chewy come to mind here. Some VC rounds are to fund customer acquisition behind a working growth model. Some VC rounds are used to fund product development when the alternatives are to seek grant funding or rely on services revenue that could be distracting. Other VC rounds are used to support a particular strategy to getting to scale before the need to monetize (which is not always bad, BTW). The point is that there are many different ways to use VC capital.
  5. One article I read recently about the demise of Raden struck me because it suggests that the company may have failed because they did not raise enough VC capital. One quote in particular: “Investors counseled him to raise more money, but he believed he could keep the company running from the revenue Raden was earning from sales.” I don’t bring this up because I agree one way or another. But it’s always interesting to think about a counter-example to the prevailing narrative
  6. I’d be really curious to hear how the discussions about buying out existing investors end up working out. I’m sure they are time consuming and a tough negotiations, but do both parties walk away feeling good? Cheated? Indifferent? I should probably just buy Chris Savage lunch and see if he’d share :)
  7. I’m also curious to see what pricing ends up looking like for some of these alternative early-stage funders. The risk for early stage businesses are significant, regardless of whether they raise venture money or not. The typical VC investor is building a portfolio looking for the outlier company that can deliver the 100X or more to pay for a large number of losses. My guess is that the non VC investor would be building a portfolio predicated on a less extreme range of outcome. I think that this means that for those models to work the investor will EITHER need to take less risk OR the investor will need to pay much lower prices (or both). Will founders considering different funding paths take much lower valuations in exchange for the extra flexibility? Perhaps… but it will be harder to accept that I think most folks realize.

Overall, I’m really glad that this conversation is happening, and I admire folks like and others that are trying to champion new forms of early stage funding. I’ve always hated the assumption that raising VC money was the only way to finance an early stage business. Even more, I’ve hated the idea that the “goal” of a startup was getting to the next funding round at a higher price. These beliefs sell both entrepreneurship and venture capital short.