<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>
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<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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