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The venture capitalist (VC) community is disdainful of angel investors and their puny funds, but the angels can do deals that VCs cannot because they are too small for the large funds.
Today’s entrepreneur has a choice: Angels or VCs or none of the above. It’s worth considering the “none of the above” option because startup costs are very low.
Joe Kraus, co-founder of Excite, which was the Google of its day, told me that they needed $5-million for a data centre when they first started.
Today, with the ready availability of cloud computing you don’t need to raise lots of capital to fund your capital costs.
Development costs are cheaper too, with high level languages and development platforms such as Ruby and even development platforms in the cloud from companies such as Engine Yard, development is quick and scalable.
Angels and VCs can be good in terms of getting access to an experienced hand in building a business, helping to recruit the right people, even mundane things like finding office space.
But a good network of mentors or board directors/advisors could provide similar help without the ownership and other terms that outside investors demand.
Bootstrapping is a viable option
Many startups could achieve a lot with just the founders pooling their credit cards for a year or so and then seek expansion capital, maybe with debt.
Sramana Mitra, writing in Forbes, says there is an assumption that only “mom-‘n-pop” businesses can be built with bootstrapping:
“How very wrong! Ask Frank Levinson and Jerry Rawls of Finisar whose bootstrapped venture went public at a $5 billion valuation. Or ask Christian Chabot of Tableau Software, who raised his Series A from NEA at a $20 million pre-money valuation by bootstrapping the early stages, when typical valuations for that round are in the $2- to $5-million range.”
Raising venture capital for early stage start-ups seems to be the prevailing path for most entrepreneurs; however, most would-be founders should reconsider. Greg Gianforte, CEO of RightNow Technologies and serial entrepreneur lists seven reasons not to raise venture capital:
- If you start by selling your concept to potential prospects (rather than stock to VCs), you will either end up with initial customers or a conviction that your idea won’t work. Why raise money and then find out which one it will be?
- Raising money takes time away from understanding your market and potential customers. Often more time than it would take to just go sell something to a customer. Let your customers fund your business through product orders.
- Adding VCs to the mix early gives you an additional set of masters you must serve in addition to your customers. It is always hard to serve two masters, especially in a startup.
- With no money you can’t make a fatal mistake. This is a blessing. Without VC money, you are forced to figure out how to extract funds from your customers for value you deliver. Ultimately that is the only thing that really matters.
- Money removes spending discipline. If you have the money you will spend it — whether you have figured out your business model and market or not.
- Raising VC money determines your exit strategy. You will either sell the business or take it public. What if you end up with a very profitable, modest sized business that you want to just run? That is no longer an option once you raise VC money.
- You sell your precious equity very dearly before you have a proven business model. This is the worst time to raise money from a valuation perspective. I know this is a contrarian view. And some of you are saying that might be fine for a small company.
Don’t forget Dell, HP, Microsoft all originally started without VC funding. You can build a big business with bootstrapping and without VC money.