To VC or Not to VC, That is the Question
This is my site Written by Alora on April 15, 2009 – 10:45 am

It's Raining MoneyLast night I was reading a very interesting Harvard Business Review article by Umair Haque called Five Problems Venture Capitalists Should Have Solved (But Didn’t). Admittedly, I know very little about the world of venture capital (hence the reading), but this made me think of a panel I attended at SXSWi and he raised a point that is near and dear to my heart when he said that “it’s become increasingly clear that the radical irresponsibility of industrial-era business is deeply unsustainable.”

My perspective on the VC universe is heavily colored (naturally) by my life within the world of tech startups, which is where I’ve spent my career. I have personally lived on both sides of the tech startup coin: a bootstrapping, self-funded, hold-everything-together-with-duct-tape-and-bailing-wire startup and then a well-funded, organized, structured, VC-backed startup. Both were phenomenal learning experiences — both technically and when it came to business.

Bootstrapping

In my heart of hearts, if I had to admit to a preference of one model over the other, I would probably say that I enjoyed my bootstrapping experience more — though, to be fair, that’s easy for me to say. While we did have layoffs and two rounds of paycuts (woo hoo! to those who remember where they were the day the bubble burst invaded their lives, too), I never felt the pressure of our financial situation the way my leadership team did. Whether they were taking their paychecks late or having me buy servers for clients on their personal American Express cards (could not count how many times that happened), our situation may have aged them each more than they had ever thought possible, but they did a great job of insulating most of us from how close to the line we really were at times.

But our financial tight-rope walk is precisely why I look back on this time in my career as fondly as I did, because necessity is the mother of invention. (Which is also why I firmly believe that this economic downturn will ultimately prove to be good for the tech industry.) We had no choice but to be creative, scrappy and innovative. And we hustled our asses off. I have never seen a group of people work so hard in my life. I have never seen the kind of crazy, off-the-wall, no holds barred brainstorming or experimentation than we had back then. And it was because that was simply a requirement of our own survival. Never underestimate the motivational power of self-preservation.

Of course, there were also huge downsides (even aside from the aforementioned layoffs and paycuts). We had office space that was often a shambles; many of us were (literally) doing at least two different (near full-time) jobs; I personally spent two years on call 24×7; and we were often living life so close to the financial edge that our sales team would make deals that were a delivery nightmare (and since that was my end of the business, it was a constant source of resentment and frustration).

So it certainly wasn’t sunshine and flowers. But the Grand Canyon could not hold everything I learned during that time, and no experience since then has matched the exhilaration, the learning curve or the sheer intensity of that time in my professional life.

Venture-Backed

After leaving my bootstrapping existence, I moved to an extremely well-funded tech startup and quickly discovered what Little Orphan Annie must’ve felt like to go from the orphanage to Daddy Warbuck’s mansion. Even more than that, because the goal of the company from the outset was to be acquired, much of the focus of the COO (and ultimately me, as well) was to make damn sure we had our ducks in a row when it came to operational aspects of running a tech firm — development process, product management, knowledge management, etc. These were things that, in my previous life, took YEARS for us to be comfortable enough so that we could pay attention to them in any kind of organized way.

As someone whose adult life has been spent implementing both technology and process improvement in organizations, this was extremely exciting for me. I absolutely loved the idea of getting to build something scalable from Day 1, instead of trying to retrofit a solution after years of lost opportunity. And I was very aware of the fact that this was only possible because we had funding.

Naturally, there were other obvious financial benefits to this arrangement: I made considerably more money, our offices were in the uber-trendy SoHo neighborhood of Manhattan, weekly FreshDirect deliveries kept up all in snacks and Diet Coke, and not a single one of us ever had to use a recycled, out-dated, resource-constrained computer.

The flipside, though, was that the sense of hunger that had been pervasive in my previous startup was simply not there. And while our work was extremely innovative on a technical level, the teams were much more disparate. We didn’t have the cross-organizational sense of unity that comes from being in a sink-or-swim situation with a group of other people.

Which One?

I’ve thought about these differences a lot. Ultimately I ended up in the IT Department of a non-tech company that was — in many ways — a startups, as well. And it was actually a combination of the two experiences: the company itself was extremely well-funded (had to be because of the operational investment needed), but the IT Department was definitely outside the mainstream of the organization (like much of corporate IT), which tended to give it more of that ‘digital wild west’ attitude.

But what I find more perplexing — and how this all relates to both the SXSWi panel and Haque’s article — is that, more than I have ever seen before, you don’t hear discussions about the tech startup community that are not largely dominated by VC-talk. I find this to be truly sad, because adding VC funding into the mix of your startup changes it radically. And the truth is, it is probably a sexier sounding idea than it is reality for most.

During the SXSWi panel, Penelope Trunk made a fairly unpopular point (she has made a career of making contrarian points, which is part of what I like about her), but one which completely resonates with my experience: as soon as you take on a VC, you are no longer in control of your company. While Mike Maples (a VC) was quick to bat back her statement with a, “That’s not necessarily true” the fact is that most of the examples of late stage funding I have witnessed in my career support Penelope’s assertion.

While “serial entrepreneur” is a sexy title, it rarely fits: most entrepreneurs spend their career trying to grow one business. That means that most of them do not have the chance to collect a bag of lessons from one company to the next on how to advantageously structure VC deals when the time comes. Quite often, someone who builds a company and then gets VC funding late in the game finds themselves pushed to the outter edge of their business (if not entirely out the door) within a matter of a couple of years, if for no other reason, than because they did not have the experience necessary to know how to structure a deal with their VC firm that left them with enough control to prevent that.

Now, to be fair, entrepreneurs are visionaries. That’s their strength. They are often the best evangelists, but they are rarely operationally oriented. Over time, the sustainable growth and development of a business will typically require a shift from being entrepreneurial to being operational. And this shift will almost always require different people to lead it. So I’m certainly not saying that an organization’s founder is always the best person to lead the business over the long haul; but what I also know is that most entrepreneurs do what they do because that’s their passion. And there is something hopelessly broken-hearted about an entrepreneur who no longer gets to be central to their organization’s lifeblood. Entrepreneurs who want VC funding should think about that before they go down that road.

The Current Recession

In a tight economy with an immature space that has yet to develop solid discipline around sustainable business models, I certainly understand the appeal of a big bank account. No CEO wants to have to hold a company meeting to tell his employees that they are not getting their paychecks on time, or that when they do, they are going to be short by 15%. But really, when does VC-backing really make sense?

My funded startup would be one of those times when I think it did: the cost of building the infrastructure needed was too high and was going to take too long to be able to build without external support. The entire revenue model was based on a getting strategic partnerships in place and leveraging an economy of scale model that meant, first and foremost, we had to build that scalable system. Bootstrapping this (especially in NYC) would have been unlikely because we needed to give the team time, which is the most expensive thing of all when you are starting a new company.

Could it have been done without backing? Yes, but it would have taken a long time — which was not a luxury we had in this market space — and it probably would have had to be done by a very high-profile industry insider, who had the personal relationships necessary to make some of the most essential in-roads. The combination of necessary skills would have been extremely unlikely to find in a small handful of individuals. The solution needed a bigger team to make it work properly.

But I routinely see other funded tech startups that, in my opinion, are a bit lazy. Bootstrapped startups don’t get nearly as much attention, but they are the more realistic model. I attended a Core Conversation at SXSWi with the partners from Dogster.com and they mentioned something I love to hear: their business got started with two guys programming at a kitchen table at night, after their day jobs, for a year before they tried to live off what the business was generating.

Why do I love that reminder? Because it’s real — and, frankly, it’s what small startup businesses outside of the tech space have to do; tech is one of the only industries that starts off assuming that it’s even entitled to getting VC money, which I think is limiting hubris that continues to get the industry into trouble by fostering some really bad financial habits. In an era where chasing the glossy dollar sign has blown up in our collective faces and is taking the global economy with it, what I love to hear is that someone who felt strongly about something buckled down, busted their ass, made huge personal sacrifices, and made it happen.

So while I would not presume to weigh-in on Haque’s assertion that VCs are a significant part of the problem based on my current level of understanding (though, it’s easy to paint all segments of the greater financial community with black hats these days), what I will say is this: the tech industry success stories I think are the most inspiring, and the most worth listening to are the ones that did what they did because of passion, dedication and the ass-busting efforts of committed teams trying to make meaningful products and introduce revolutionary changes to the marketplace.

And while I do not summarily dismiss the possibility that type of drive could come with VC-backing, the value of the reward is often proportionate to the value of the risk. And there is no risk like the all-in, double-or-nothing gamble of a self-supporting team trying to take on the house. Which also means there is no reward like when that team manages to pull a natural twenty-one, either.

So which do you prefer? Or do you think it matters?