Why Venture?

I spoke with Rich Millington this morning about some ideas I was working with. Rich helps businesses develop and build their online companies, and has an interesting approach to concept evaluation.

He questioned the need for venture capital money in the start-up I am working on. In my current stage, the plan is to apply for an early-stage incubator program such as Y Combinator or TechStars, and then subsequently do a round for venture capital.

Rich’s recommendation was that instead of taking an early valuation and giving up equity, that my team should build a basic platform, find our first customers, and build out our cost structure depending on the revenue generation.

The benefit of this is that it would be a whole lot cheaper than giving up a 5% – 10% ownership in the venture, and you we will not need to report to investors (which is good and bad; see more below). Also, I’m constantly reminding myself that there is only 100% of a company, and it goes quick. It seems like an obvious thing to keep in mind, but when costs start building up, the go-to answer is to pay someone in equity. If you don’t have cash, this is often the road you end up taking. You only have 100%, and need to be careful where it goes.

In taking venture capital money, we’ll be giving up ownership. We’ll also report to investors, and not have complete control of the direction of the business. With that being said, the direction of the business will be guided by experts and entrepreneurs in the field (the VCs), which is the value-add in taking venture capital money.

The first course of action is one I never really considered. Is self-sufficiency possible? That would be ideal, but I don’t know if it’s realistic. Building out an online platform, grassroots style, with online and viral marketing– of course it’s possible. On paper, it seems a whole lot easier to take a few hundred thousand dollars and outsource computer engineering and an implement a third-party marketing plan. The best plan is probably to nibble at the grassroots approach while we are still in our early stage.

How do we start? Rich recommended that we get our platform to stability, but not necessary to full potential. Build it to functionality. Find our first 10 customers, sign them up and ask them what else they would want with this type of service. After signing up our first few customers, ask them for referrals for others who would find our service helpful.

Of course it’s easier said than done, but it’s worth a try.

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Comments ( View Comments )

Rich has some good advice. But then I think you embellish it a bit with some possibly incorrect thinking.

I’m not exactly sure about YC’s terms, but at TechStars, the 5% equity we take is in common stock, with no control provisions. That is, we literally look like a founder. No board seats, no first rights to invest, etc. Literally – just like the founders. So there is no “loss of control” by going to TechStars, and no “investors to report to.” If you can bootstrap, we highly encourage it. That’s what J-Squared Media and App-X did – both successfully to profitability without raising a dime. It’s also how I built my first company. We’re huge fans of bootstrapping – for the right sorts of companies.

The good advice is to build something out before seeking venture capital. It’s the only way, of course, unless you’re got a long track record. That’s where TechStars can help – we help show potential investors a 3 month track record in a very hands on way.

Further, I think the focus on the 100% of the pie and how much you’re giving up by seeking help can be thought of another way. It’s not how much of the worthless pie you “give away”, it’s how much bigger you can make the pie by participating in something like like TechStars or YC.

I’d encourage you to speak to any of the founders who have been through TechStars. You can reach them by checking out techstars.org/companies. They’ll all tell you that the pie got orders of magnitude bigger when they attended TechStars.

Take care, and good luck!

David Cohen added these pithy words on Dec 06 08 at 1:11 pm

Thanks David. I’m going to follow-up via email.

alexjmann added these pithy words on Dec 06 08 at 1:30 pm

Nice advice on funding. Is this regarding your Gen Y mutual fund idea?

A friend of mine is near the “launch” phase for his internet startup, and he also decided to take Rich’s advice and not pursue early-stage VC for now. He found it incredibly difficult to get the attention of such VC’s, as I’ve heard competition is unbelievably high.

Matt added these pithy words on Dec 07 08 at 5:00 pm

No, the Gen Y mutual fund has been thrown to the side for now. Way too capital intensive to launch, at least for now.

I’m working on a much cheaper, feasible, bootstrapped idea. I’ll make it public, probably in a few weeks, when the alpha build of the online platform is completed.

alexjmann added these pithy words on Dec 07 08 at 5:03 pm

alex j. mann (.com)

Why Venture?

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