Dear founders — don’t be the sheep. Decelerate your startup and build real value.
The popular narrative of tech startups is to raise funding, celebrate and try to grow aggressively. That is, the expectation, after all for anyone who is investing in you in return for equity — whether at seed or later stages. Venture investors want a significant return on their investment. The ones who can, spread their risk by investing in a lot of startups — perfectly OK with a large majority of them failing. For their fund, only a very small % being successful is what they typically expect in any case. The institutional money which funds the venture funds themselves is happy with that too — because it is part of diversification for them in a world of otherwise mediocre returns. The originating money, to whom it actually belongs, for example people contributing to their pension funds, do not know necessarily how their collective pool of money is being invested. They expect it to be there when their time comes, and maybe have grown a bit.
It is a wonderful world, overall, except for the founders in most cases as the below referenced data documents. There are exceptions, and the delusion of what I am doing is great and I am the exception exists everywhere, and that’s why casinos are a great business to be in (except if you are Trump).
75% of seed funded startups fizzle out
Dear founder, think hard before getting on this path, before you raise capital in exchange for equity from anyone. CB Insights did an analysis of startups which received seed funding in 2009 and tracked their journey till 2015. It found that eventually over 75% of the startups which took seed money were either dead or orphaned. That is what will most likely happen to your startup too, because that is just how percentages work. You have a higher probability of getting hit by lightning before you build the next unicorn.
This is the pecking order of who is impacted the most by a startup which fizzles out. Who is at the bottom, and the most negatively impacted:
- Your enthusiastic tech media supporters — bloggers and journalists — they will move on quickly to the next story.
- Your customers — they can find an alternate product in most cases.
- Your paid service professionals — lawyers and others — they will find other clients.
- Your VCs — they will be just fine. They are looking for a few very successful companies, not many moderately successful companies.
- Your angel investors — they will hurt a bit, but can probably survive through it and have other investments. They are accredited investors — this money is money they can presumably afford to lose.
- Your employees — they will hurt a bit more, but will find an alternate job and use the experience they gained at your startup.
- You, the founder — you lose the most when your startup fizzles. Dream shattered. Time and opportunity in life lost. Your goal here was not to gain experience, or to raise funding, or to build a network, or get likes and approval from the crowd — but to build a lasting business for yourself, so that you can pursue your dream, don’t have to work for anybody else again and can do what you enjoy. You can leverage the experience to a successful job or more ventures — but that wasn’t the reason why you got into this in the first place. But you lose in another way too — often overlooked…
Being responsible for other people’s money will give you stress and impact your health
Since you are a good person, you will care about doing what is right and what is best for the venture, even more so if anybody else has invested their money into it. Or, you might be pressured to provide regular updates, manage expectations, otherwise risk being fired from the company you founded.
This translates into stress, which is bad for your health over the long term. It manifests itself into other diseases. You are organic matter, after all, not a machine.
For you to raise any $$, the expectation would be for you to devote yourself to the venture 100% — there is no room for part-time, to pursue other things, or to pursue multiple ventures at the same time. Even though, everybody else investing in you is hedging their bets, you as a founder are tied to ONE venture until it dies or succeeds.
Fundraising will also take away a significant chunk of your time as a founder, giving you less time to focus on the business itself.
Even if you get lucky — are you really lucky when you have to address the expectations of your investors on an ongoing basis ? If you get to IPO one day, the ultimate goal/dream of almost everybody starting a tech venture, do you really want to live the life of a public company C-level executive ? Imagine the stress there — and the toll it must take, and the sacrifices in personal life it must demand. There must be a better way…
Modest goals = more happiness
What if instead of building the next blockbuster tech startup, you set yourself out to build a venture which pays you $100k/year in profit ? Instead of investing money into a franchise business, you think of this as investing your time and talent into this modest tech venture of yours.
The ability to build world-class applications is ridiculously easy now. There are a whole bunch of exciting tools and technologies — you don’t even have to be a great coder — you just have to be a hustler, and you can do it yourself or with a friend or two (a topic for another post). If that is intimidating, hire a developer in India, who can work FT for you for less than $500/mo. Heck, who says you need an app on Day 1 in any case — look at Arcade City in Austin. They started with a free Facebook group for ridesharing, grew it to over 30,000 people and now are building an app around that community.
There must be some venture backed startups, which are pioneering good ideas or are first-movers, which will run out of cash due to their shorter runways and will have stunted growth (sad, but happens for over 75% of seed-funded startups per the above data referenced). Who will bring those good ideas eventually to the Canadian market ?
Those are opportunities for entrepreneurs who are able to survive, over an extended horizon, with ridiculously low overhead, using nothing but sheer grit, hustle and patience. To not get featured anywhere — but build solid businesses, until there is an absolute need to raise. Obviously true only for mobile/web apps at this point.
Venture funding will always be there
If you still have the itch, and feel you can and want to grow your part-time venture exponentially, having a business which is proven out in one small market and has global potential puts you in a much better negotiating position to get the best terms and leverage.
But you need to have that as a last resort, because once you take even a $1 in exchange of equity, you are on a ride you can’t get off easily.
Hope you go ahead and build a boring, slow growing business which provides for you a comfortable life, while giving you the option to accelerate if you choose so one day.
