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Why venture capital isn’t the only way to build a ‘successful’ business

TechCrunch TechCrunch 21/04/2016 Nicola Corzine

In Silicon Valley’s Unchecked Arrogance, Ross Baird (Executive Director of Village Capital) and Lenny Mendonca (Director Emeritus at McKinsey) boldly ask an important question that’s becoming a white elephant in the Silicon Valley pitch room: How can we enable great people, regardless of zip code, to solve messy societal problems?

To get to an answer, as investigative journalists would say, we need to follow the money. Baird and Mendonca ask, “How do we change ownership structures to prevent Snapchat, Instagram, and WhatsApp from distributing billion-dollar windfalls among only a couple dozen people?”

Perhaps we need to go further back — before the big valuations — to the inception phase of a startup, and ask the question: Why are startups seeking venture capital rather than other types of funding?

Let’s start by saying that venture capital is, of course, an essential component of a flourishing entrepreneurial ecosystem, giving companies the means to grow exponentially over a short period of time. But here in Silicon Valley, we’ve propagated the myth that value (i.e. market cap) and success (i.e. exit) can only be tied to venture-backed startups. We espouse that more venture money needs to flow to more businesses — full stop.

But this philosophy is inherently flawed. If we want our brightest minds to tackle society’s biggest problems, we need to move away from the notion that being venture-backed is the only way to build a successful company.

This is partially because venture capital has its limits. It’s almost exclusively available in cities like San Francisco, New York and Boston. As Baird and Mendonca note, “78% of investment in startups goes to three states (New York, Massachusetts, California). While in the past 20 years startup investing has increased 300% in those states, it has actually declined in the other 47 across the country.” As a result, entrepreneurs inherently become geographically siloed from problems that need solving in the rest of the country.

And perhaps more importantly, being venture-backed often encourages entrepreneurs to chase disconnected valuations and single paths of growth strategy that may not be in the best interests of the founders, their businesses or the industry overall.

Redefining startup success

It doesn’t have to be this way. What if entrepreneurs were told that success is actually determined by how you define it? Being venture-backable implies certain characteristics: a $1 billion-plus market, exponential growth, spending excess capital and having a strategy for a major liquidity event within a predefined time frame.

But what if success means retaining ownership because you want the opportunity to learn and grow as a CEO or executive? What if it’s a win to design a lifestyle cash-flowing company, rather than one set by a fund’s lifecycle? And what if you’re excited to build an important feature or set of features — that many, many customers will buy — but you may not have a platform and you’re probably not working on the industry flavor of the day?

Let’s flip this around and imagine, instead, the opportunity that NOT being venture-backed actually offers entrepreneurs. Couldn’t we make the argument that founders gain greater credibility than their counterparts pitching all day and night, because they were able to bootstrap and gain greater freedom?

How do we encourage entrepreneurs to tackle some of society’s biggest problems?

What if those who “opted out,” and somehow still made it, shone above the hopeful waiting to be named a potential $1 billion-plus fledgling? The sad thing is, in the weeks and months following the next downturn, we’ll tout the old “remember when” articles that showcase their favorite examples of companies that succeeded in spite of the downturn and venture drought. Somehow it seems history must repeat itself each cycle, because we forget that raising venture isn’t a badge of honor in and of itself.

We always used to say that the magic of raising capital lies in getting to a quick yes or no. The reason? Fundraising is a full-time job… so is building a business. So what if understanding that opting out of the VC-hopeful race could save you six months of painstakingly being told “no” and hundreds of false-starts chasing a path absent of conviction? That would be:

  • Six months of burn you can’t get back.
  • Six months of competitive lead-time over other startups or major companies.
  • Six months of focusing on your customers rather than a pitch about a customer you’ve been hoping to call back soon.

As a seasoned early-stage investor, I know this isn’t the way things work. It’s not typical. It’s not the preferred fairy tale we’ve come to love. But I can’t help but wonder what would happen if success was measured by more than what a venture tale alone can ever tell.

Thinking outside the VC box

What I can do, however, is help fledgling companies think outside the VC box and ask what kind of funding is fundamentally right for them, as founders, for their businesses to thrive. Not being venture-backed doesn’t mean your company is doomed to fail. On the contrary, some of today’s greatest business successes were established using some of these alternative funding methods:

  • SBA loans: The U.S. Small Business Administration offers loans with affordable rates and terms. Use their matchmaking tool to connect with approved lenders.
  • Crowdfunding for businesses:Fundable is a great example of this, and it’s also a way of testing your idea in a type of marketplace to gauge excitement and demand.
  • Credit card financing: From Google to Guitar Hero III to Clerky, more companies and ideas are jump started this way than any other method out there.
  • Creative customer financing: This means using consulting fees or upfront customer financing to get your business off the ground. (Yep, that’s how Airbnb did it!)
  • Keep your day job: Avoid debt and stash the cash to finance your dream job or company from your day job savings.

(In case you’re curious about comparing APRs/costs of all these methods, Fit Small Business has a simple but comprehensive chart). 

How do we encourage entrepreneurs, regardless of their zip code, to tackle some of society’s biggest problems? By changing our one-size-fits all approach to fundraising and success.

In Silicon Valley, it’s easy to lose sight of the fact that not all startups are or should be rapid-growth tech companies destined for unicorn status. They’re also creative businesses, lifestyle businesses and social businesses that are daring to solve the kinds of complicated problems that lend themselves to slower growth. They’re the businesses that are critical to the long-term success of our nation, communities and families.

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