<a href="http://fi.co/posts/568">http://fi.co/posts/568</a> <br><br><h2><a href="http://fi.co/posts/568">'Here are #Startups that Would Do Best Without Venture Capital" by @DanShapiro</a></h2>
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<p><em>Founder Feedback gives you insights from the startup trenches.</em></p>
<p><em>In a post on his�</em><a style="font-style:italic" href="http://danshapiro.com/" target="_blank">blog</a><em>,</em><strong><em>�Dan Shapiro</em><em>, former Founder & CEO of Sparkbuy (acquired by Google) and Ontela (merged with Photobucket)</em></strong><em>, and�</em><em><span class="Apple-style-span" style="font-style:normal"><em>Founder Institute Mentor</em></span></em><em><span class="Apple-style-span" style="font-style:normal"><em>,�</em></span></em><em><span class="Apple-style-span" style="font-style:normal"><em>explains
the types of companies and entrepreneurs who should not raise venture
capital. It is a very insightful article on how venture capitalists
think that may not be obvious to many entrepreneurs.�</em></span></em></p>
<p><strong><em>Dan will be speaking at tomorrow's <a href="http://foundershowcase.com/" target="_blank">Founder Showcase</a> event in San Francisco. There are still a few tickets remaining, and over 100 investors will be in attendance, so <a href="http://foundershowcase.com/tickets" target="_blank">register today</a>.</em></strong></p>
<p>This post originally appeared <a href="http://www.danshapiro.com/blog/2012/01/companies-that-would-do-best-without-venture-capital/" target="_blank">on DanShapiro.com here</a>. Below it is republished.</p>
<p>�</p>
<p>"I just got the following email.</p>
<p>�</p>
<p style="padding-left:30px"><em>Subject: Small taxi company looking to expand</em></p>
<p style="padding-left:30px"><em>Hello,</em></p>
<p style="padding-left:30px"><em>I run a small taxi company outside of
Boston Massachusetts. My community has been targeted for casino
development and I am looking to expand my business. Could you possibly
provide some advice on how to find venture capital?</em></p>
<p style="padding-left:30px"><em><br></em></p>
<p>For someone who lives in the startup world, this looks pretty silly.
�But I�m sure I�d say a lot of silly things if I were getting in to the
taxi business, too. �So I figured I�d point him to a simple explanation
of why taxi companies (actually, services companies in general) aren�t
appropriate for VC. �I did the Google thing for a bit to find a good
article. �And no luck.</p>
<p>Well, you know what they say: when the internet fails you, make more
internet. �Here, then, are a very good set of reasons not to take
venture capital (or � why venture capital won�t take you).</p>
<p>�</p>
<p><span style="font-size:large"><strong>1. �You want to build a profitable company</strong></span></p>
<p>First day of Founder's Institute I ask how many people want to raise
venture capital. �Most of the hands go up. �I then ask who wants to
build a profitable company. �Again, most hands go up.</p>
<p>The funny thing about this is � VCs don�t actually like their
companies to be profitable. �Someday, sure, but not on their watch. �You
see, profitability means that the company <em>wont grow any faster</em>.</p>
<p>This seems odd, but think about this for a minute. At the early
stages, a company may be making money, but it�s almost certainly
investing every penny it makes back in to the business. �If it has
access to outside capital (e.g. a VCs), it�s investing <em>more</em>
than it makes. �And that�s exactly what VCs like: companies that can
grow at amazing speed, and never slow down their burn rate to amass
cash.</p>
<p>They like this for two reasons. �First, VCs want to invest in
companies that can grow explosively. �That means huge markets,
executives who can scale up a business fast, and a willingness on the
part of management to double down on a winning bet � over, and over, and
over again. �Second, because it means the company <em>keeps coming back to the VC for more money</em> on positive terms. �That means the VC keeps getting to buy more and more of the growing concern.</p>
<p>Of course, this is something of an over-broad generalization. �I�m
required to include one per post or I lose my startup blogging license.
�In fact many venture backed companies are profitable, it�s very
impressive to bootstrap your company to profitability in a few months
before raising outside investment, etc. � But if you are excited about a
profitable business that can cut you giant dividend checks (not that
most VCs can even accept divided checks �- long story), realize that VCs
will not be pleased with that approach to running the business. �They
will want you to plow those earnings back in to the business. �And when
the day comes that a VC-backed business generates cash faster than it
can effectively spend it? �They sell the company, or IPO (which is
technically also selling the company), or replace the CEO with someone
who can spend faster.</p>
<p>A taxi business should be run for profits. �That�s not VC style.</p>
<p>�</p>
<p><strong><span style="font-size:large">2. Your business has reasonable margins</span></strong></p>
<p>As a general rule, VCs don�t like reasonable margins. �They are exclusively interested in <em>outrageous</em>
margins. �Ludicrous margins. �We�re talking about sneering at 50%, and
hoping for 80%, 90%, crazy astronomy stuff. �Venture capital is all
about investing a little bit of money to create a business with massive
scale and huge multiples � investing tens of millions to build software
that then can be duplicated or served up for virtually nothing extra
per-person with a total market size of billions.</p>
<p>In particular, VCs don�t like businesses that are people-powered.
�Software businesses are awesome, but their evil twin � software
consultancies � are near-pariah to VCs. �If adding revenue means adding
bodies, they don�t like it. �In fact, enterprise software companies,
which can tread a fine line between software consulting & software
development, sometimes get <a href="http://kellblog.com/2011/06/27/why-palantir-makes-my-head-hurt/" target="_blank">really creative</a> to come down on the right side of the line.</p>
<p>So the rule of thumb is that VCs like product companies: software,
drugs, cleantech, and so on. �And they don�t like the manufacturing,
service industry, and consulting businesses that often are just a tiny
shift of business model away.</p>
<p>Every new taxi requires a� well, a new taxi. �And a new taxi driver. �Not the right business for VC.</p>
<p>�</p>
<p><span style="font-size:large"><strong>3. You are going to double your investors� money</strong></span></p>
<p>I�ve covered this before, but <a href="http://www.danshapiro.com/blog/2010/08/vc-insanity-economics/" target="_blank">VCs really don�t want to double their money</a>.
�Strange though it sounds, their economics make that look like a
failure. �They need to target a 10x return on their investment, and that
means � depending on stage and fund size � that you company has to grow
to somewhere in the hundreds-of-millions to billions range to be
interesting.</p>
<p>That means taking your taxi business from $20MM in annual revenue to
$40MM just doesn�t do it for them. �Particularly because the valuation
multiples on the aforementioned lower-margin businesses are smaller.</p>
<p>�</p>
<p><span style="font-size:large"><strong>4. VCs probably don�t want to invest in you</strong></span></p>
<p>Here are the people VCs <em>really love</em> to invest in:</p>
<ul><li>Entrepreneurs who�ve already made them lots of money</li><li>Their closest buddies</li></ul>
<div>�</div>
<p>Here are the people who VCs <em>can be convinced</em> to invest in:</p>
<ul><li>People who have been wildly successful at high-profile past jobs
that are related to their new business �(e.g. a former executive VP at a
Fortune 500 company, inventor of thingamajig that everyone knows)</li><li>New graduates from top-of-the-top tier schools who have built something amazingly cool already</li><li>Extremely charismatic type-A personalities</li>
</ul>
<div>�</div>
<p>Anyone else is possible, but our taxi driver is going to have a devil of a time.</p>
<p>�</p>
<p><span style="font-size:large"><strong>5. You have better things to do with 9 months, and you will probably fail</strong></span></p>
<p>That�s how long it took me to do my Series A for Ontela. �9 months
before the first check came in. �Average is 6-12. �That�s because a busy
VC will look at a few companies a day, and will make a few investments a
year. �The math says the hit rate is well under 1%. �That matches my
experience � I pitched over 100 times during our Series A investment.
�Not only that, but most of the companies pitching the same events and
people that I saw worked just as hard as I did, and did not get funded.
�And fundraising is a near-full time job; you won�t have much time for
actually driving your taxi.</p>
<p>�</p>
<p><span style="font-size:large"><strong>6. You will have a new boss</strong></span></p>
<p>You know the great thing about working for yourself? �Well, if you
raise VC, you probably don�t have that thing any more. �Raising VC
usually means forming a board that includes your investors, and that
board is charged with, among other things, potentially firing and
replacing you. �I�ve worked with a number of boards and have been lucky
in that they were all awesome and I would recommend those folks to
anybody. �But if you like your freedom, then bringing on VC may feel
somewhat familiar � in an �I have a boss again� way you probably won�t
enjoy.</p>
<p>�</p>
<p><span style="font-size:large"><strong>What are my alternatives?</strong></span></p>
<p>VC is really only appropriate for a tiny fraction of a fraction of
the companies in the US. �But there are numerous alternatives.</p>
<ul><li><strong>Angel investors</strong> are individual investors who can
invest larger amounts, on more flexible terms, and with less onerous
restrictions. �Many companies that take VC money actually start with
angel investments � but lots of companies never do VC, and just grow off
of angel investment.</li><li><strong>Traditional bank loans</strong> are always an option if you
have a sufficiently traditional company � while they may not be right
for many purposes, they�re definitely the best terms you will find for
bringing in capital.</li><li>A <strong>Revenue Loan</strong> from a company like <a href="http://www.lightercapital.com/" target="_blank">Lighter Capital</a> is a way for companies with revenue to bring in capital with a debt structure � without giving up control to outside investors.</li>
<li>And, of course, <strong>Bootstrapping</strong> is arguably the best
way of all � re-investing your company�s profits in your own growth, and
building a strong company based on the revenues from your business.</li></ul>
<div>�</div>
<p><span style="font-size:large"><strong>�So does this mean I shouldn�t raise VC?</strong></span></p>
<p>Look. �I�ve raised over $30mm from 7 different firms in the course of
my two startups. �I will tell you: if you are the right kind of
company, and find the right kind of investor, then VC is <em>awesome</em>.
�It�s an instant infusion of cash, connections, experience,
credibility, and confidence at the stroke of a pen. �It accelerates
everything. �It focuses the mind. �I can�t recommend it highly enough.</p>
<p>But most companies are not the right kind of companies. �And the only
thing more frustrating and time consuming than raising a VC round is
failing to raise a VC round.</p>
<p>So think hard. �Make sure it�s for you. �And if not � keep on driving!</p>
<p><em>(Update: <a href="https://twitter.com/#%21/MikeFROMRevere" target="_blank">Mike Carter</a> from <a href="http://reveretaxi.com/" target="_blank">Revere Taxi</a> has pointed out that if I�m going to use his email to write my blog post, the least I can do is give him a backlink.)"</em></p>
<p>�</p>
<p><strong style="font-style:italic">Dan Shapiro currently works at
Google following their acquisition of his most recent company, Sparkbuy,
a comparison shopping website that offered unprecedented depth and
accuracy of information. Before that, he was founder and CEO of Ontela, a
pioneering mobile imaging company that merged with Photobucket, where
he was named CEO of the Year by MobileBeat.�</strong><strong style="font-style:italic">He blogs at </strong><a style="font-style:italic" href="http://danshapiro.com/" target="_blank">DanShapiro.com</a><em><strong>, and you�</strong><strong>can also follow him on Twitter at <a href="http://twitter.com/@DanShapiro" target="_blank">@DanShapiro</a>.</strong></em></p>
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