Playing WembleyPosted: September 28, 2010
I originally asked Roy to write the posts that would help small businesses or people looking to start their own business, but being that he’s swamped with his day job, I thought I’d jump into the ring with a post, mostly about starting a web based start-up business and the seemingly prevalent mentality around funding one.
So last week, Mike Arrington, Editor at Techcrunch.com broke a story about a super secret meeting of so-called “Super-Angels” at a wine bar in San Francisco. There have been several developments since the story broke, some leaked emails and a whole bunch of hurt feelings in the Silicon Valley. The only thing really known about the whole thing is that a group of well known investors met and discussed start-ups over dinner and drinks. I don’t know if anything in the way of collusion happened, or if they were simply talking shop. Frankly, I don’t care. I think a lot of the individuals involved have done great things to help some start-ups turn into proper companies and it should not be forgotten that they do make their livings by investing. Making money is not a bad thing and the said angels do risk a lot of their own dollars to make their livings. If there were shenanigans involved, then by all means it should be dealt with. If the law was broken, then an investigation would be justified, however, I don’t think this was necessarily the case and infinitely hard to prove if it was. Check out the link if you really want to know all the details. I’m not going to rehash everything here.
Over the last several months, I have started to gather a strong feeling that large armies of companies are started with pipe dreams of acquiring angel and VC funding and that this mentality is entirely destructive for web based start-ups. Certainly some of this comes from reading start-up based coverage on many different sites, but when you add in comments on posts, questions on sites like Quora and the Twitter streams of many, I’m starting to feel like start-up founders are like Canadian kids with dreams of playing in the NHL. Very few will ever achieve that dream. But Canadian kids rarely ever start playing hockey because they want to play in the NHL. Many start-ups do start thinking they can play at the pro level within months of starting out.
When starting myTooq, I had to learn a lot as I went. I did lots of reading and lots of reading specifically about funding. I knew that I would likely need someone else’s money at some point to get things/keep things going. I spent about two months holding off our incorporation while I read up on angels and VCs and funding and structuring and exits. I wanted to make sure that Tooq was in good shape to receive investment, not only for a formal round, but simply for a friends and family round early on. I definitely wanted to make sure that I didn’t paint Tooq into a corner down the road that could kill the company off because of the costs of restructuring or prevent an investor from being interested.
I then trashed any thoughts about outside funding. Rather after several months of trying to prepare to look for funding, I found myself more interested in working on the product and acquiring customers (as it should be). I made the conscious choice to self-fund as long as possible, with the hope of bootstrapping all the way to break even and beyond. I still read some of the VC blogs (Mark Suster and Fred Wilson both write insightful tech blogs and are VCs, but worth reading even when not looking for funding for their management insights). I read Techcrunch and ReadWriteWeb and all kinds of blogs, and follow a lot of Angels and VCs on Twitter. I’m not actively pursuing relationships, but rather lurking and acquiring knowledge.
At some point in the future, taking on investor money may make sense to scale up our business. But for now, it makes more sense to me to stay heads down, bootstrap, and build a strong base so that if we do need financing, we have a strong platform to stand on, retaining as much equity in the company as we can, while reducing risk for any investors involved (including myself). Silicon Valley dreams are nice, but there are a lot of dreamers out there. The only way to get there is hard work, perseverance and some luck.
Let’s face it. Having a web start-up company is risky. Some say that nine out ten ventures will fail. For every YouTube, there are thousands of companies started that implode. YouTube, Google and Facebook are the Rolling Stones, U2 and Justin Bieber of tech. For every Beatles or Elvis, there are thousands and thousands of weekend warriors that will never play Wembley or Shea Stadiums. I don’t know if Tooq will ever see the big stage, or if we’ll languish playing the B circuit for a while before fading away. What I do know, is that I want to have some fun while doing it and be able to walk away knowing that we were above the level all the way and worked for the users of our website, not to gain an investors trust and blow through their cash while we tried to make a go of it. I’ve done most of the things in my life the hard way and done alright. Good thing I’m stubborn.
I’m seeing a trend with companies, with some that are starting pretty-light-on-the-idea kind of companies, that are built purely to go through the investment mill of Seed, Angel, Series A, Series B, and IPO or Acquisition. They often are founded on too simple an idea, rely too heavily on someone else’s platform (see Twitter clients) or have absolutely no plan on how to monetize and become a real business with paying customers. Maybe this is a necessary evil. While on paper most people would have scoffed at Twitter or Facebook, they have scaled very well and have become internet superpowers. But lots of companies hit the dead-pool well before making a penny and some of them have burned through a lot of other people’s money to get there. Maybe this is why the cult of failure is so popular in tech. If you’re wasting other people’s money, what do you care if you screw everything up or it just doesn’t pan out and you move on to another start-up?
Now, I don’t believe in ‘best practices’ as they all too often encourage people not to think or analyze their context. I also don’t like to tell people what to do. Okay, actually I kind of do, but not to the general public on a blog post. What I would highly encourage anyone that is thinking of starting a web based start up is this:
1. Create because you believe you can make something better, something easier to use, or even that you can change the world (while the last one is getting rather cliched, the world does need people to shoot for the moon). Don’t build something to become rich. It’s the wrong carrot. Focus on solving other people’s problems and yours will go away.
2. Find a way to create it without anyone else’s money and get your first dollar from a paying customer, not an investor (one exception: self-funding and friends and family funding are sometimes the only way to get to customer #1).
3. Think of some ways to monetize your idea. Adwords is always there by default so it doesn’t count. You don’t have to implement your plan right away, but if you can’t think of how to make money from it, you likely have a hobby, not a company. Keep in mind that Twitter came from guys who already had the luxury of money and a change in plans. They are the exception not the rule.
4. Take your time and grow at your speed. There is no ‘Overnight Success”. Some companies move very fast and grow quickly, and maybe yours will too, but lots of companies toil quietly for a while before their “overnight” success in the media kicks in. If you’re not featured on Techcrunch and being asked to give TED keynotes after three months, this is normal.
5. Learn about the funding process before you start and discuss possibilities with your lawyer when you incorporate. You should be prepared, but then forget all about pitch decks and dollar signs and just work hard, while knowing that, if at some point down the road, funding makes sense, you are structured for it.
6. Ignore Everybody. Hugh McLeod over a Gaping Void has a great book by this title and he’s right. Ignore the vacuum that is Silicon Valley press (or read it, but realize that it is a closed ecosystem with many positive and negative feedback loops for the most part) and just do your thing, your way. Find people locally, where ever you are, and spend some time with them, find a mentor, become a mentor (Don’t ignore them).
I’m not sure that I’ve gotten this post nailed down as much as I’d like. I’m not saying to never take or look for funding, but rather that it is better to build something solid first and worry about funding later, if funding is what will help you scale. Don’t try to scale and then figure out your product/market fit. And my intent is not to pick on those that have failed after funding before. I hope it doesn’t come across that way. Lastly, I hope this post doesn’t sound like I’m on some holier-than-thou trip. I’m not. I’ve had more than my share of mistakes, missteps and outright f**kups in my time, and it is certain there will be more in the future. I’m just puzzled at the money culture of one seemingly growing portion of the start-up crowd and how often the money comes before product, traction or usefulness for them.
That’s all I’ve got for now. I love to hear any thoughts you might have on this one. I hope to also post some less web-based business posts too, but I’ve been a little immersed for a while and it’s where my head is at.
Thanks for reading,
[EDIT: And if you are looking into VC funding, I just tripped across this excellent breakdown by Dan Shapiro here: http://www.danshapiro.com/blog/2010/08/vc-insanity-economics/ Worth a read to be sure.]