Forget VC Money, Fund Yourself

Almost all sufficiently large startups eventually require Venture Capitalists. So there is no hard and fast rule on this; just take the money when it makes sense.

Whats the best way to know if your startup is ready? build a prototype, get some traction, look at the numbers, measure, experiment then measure again. If you truly are going to scale (and you are growing at 1% a day) and you've experimented enough that you've found a suitable path you'll end up needing money of the VC scale.

It doesn't cost much to sit around and build something. Go and test it - figure out what people want first - change your assumptions and above all PROVE that if you scaled your site it'd be worth it for investors. You don't need VC yet to start something and test it out - If it comes to that point well thats something to think about.

I'm reminded of the story Michael Birch of Bebo tells - they built something, put it out there off the traffic of birthday alarm and experimented with features. Every time a feature added to the growth of the site and got a noticeable increase in users they kept it and tried something else which also contributed to the growth. By experimenting, measuring and then iterating for things which correlated for growth they ended up on the right path. When they had 5 million users and were growing month on month they had the numbers to prove themselves. They took $15m from Benchmark capital. The bottom line - you'll know when you are ready: just go prove the numbers.

Even if you are 100% passionate in your product and believe in it every step of the way, it doesn't mean that you can just put up your house to pursue it.

The fact that entrepreneurs seek backing is because it is exactly that -- more than just a check. You'll know that there are others in to share in your risk AND reward.

What we're discussing here is that getting turned down by investors should not discourage you altogether. If you believe you have something, you should see it through with your available means. But the fact that one cannot afford to bankroll the venture does indicate a lack of faith.

Not just because you might lose your investment, but because by using your own money you are creating a situation of immense pressure. The risk of losing your home might lead one to make some bad decisions regarding the business. You have o be very careful here.

My second self funded company eventually did take about $100,000 in angel money. But we started with only $50,000 of the two founders own money and we operated the business for four years with no other investment. We eventually sold it to a public software company for $2 million dollars. This might seem like a pretty decent investment, but at the time (mid 90s) it failed to attract the buzz that seems to feed VC investments.

It also depends on how much capital you really need. Typically entrepreneurs underestimate this, but of course it is also possible to fool yourself the other way. You have to be very realistic about this to make the right decisions. My current venture requires us to installhardware in our customers' facilities, so it is somewhat capital intensive. Only someone who was very wealthy could self fund such an enterprise.

In the end VC money spends the same as any other money, so deciding where you get your funds should be a business decision similar to deciding who to hire or what product to develop. You should interview your investors as they interview you. But few entrepreneurs do this. They act desperate, and this often becomes a self fulfilling prophecy.

On another note, in my experience, entrepreneurs shouldn't expect most VCs to deliver anything more than money. Of course they all tell you about the benefits of their strategic connections and so on, but in my experience it is very rare that these bear fruit. One exception would be a venture fund targeting the specific industry you are developing your product for. These funds often do have real valuable connections to bring to bear and can help in ways that vanilla VCs can't.

Not just because you might lose your investment, but because by using your own money you are creating a situation of immense pressure. The risk of losing your home might lead one to make some bad decisions regarding the business. You have o be very careful here.

My second self funded company eventually did take about $100,000 in angel money. But we started with only $50,000 of the two founders own money and we operated the business for four years with no other investment. We eventually sold it to a public software company for $2 million dollars. This might seem like a pretty decent investment, but at the time (mid 90s) it failed to attract the buzz that seems to feed VC investments.

It also depends on how much capital you really need. Typically entrepreneurs underestimate this, but of course it is also possible to fool yourself the other way. You have to be very realistic about this to make the right decisions. My current venture requires us to installhardware in our customers' facilities, so it is somewhat capital intensive. Only someone who was very wealthy could self fund such an enterprise.

In the end VC money spends the same as any other money, so deciding where you get your funds should be a business decision similar to deciding who to hire or what product to develop. You should interview your investors as they interview you. But few entrepreneurs do this. They act desperate, and this often becomes a self fulfilling prophecy.

On another note, in my experience, entrepreneurs shouldn't expect most VCs to deliver anything more than money. Of course they all tell you about the benefits of their strategic connections and so on, but in my experience it is very rare that these bear fruit. One exception would be a venture fund targeting the specific industry you are developing your product for. These funds often do have real valuable connections to bring to bear and can help in ways that vanilla VCs can't.