Do you really need Venture Capital funding?

Money!One distinctive characteristic of software startups that really sets them apart from other new companies in different fields is the exceptionally slim amount of capital required to get started. The ability to bootstrap is what makes our industry such an incredible business opportunity. Anyone with a good idea, decent technical skills, and a dose of business sense can come up with a profitable venture, without having to give up their equity and hand over control of the company to venture capitalists. And alternatives like angel investors or lower-end funding companies a la YCombinator are legitimate options, given that in most cases the initial investment required is minimal.

In almost any other industry you need serious capital if you plan to go into production. Let’s say that you want to market protective rubber cases for remote controls (to help save them from getting damaged if they take a spill). How do you get started? Regardless of the exact process required to go from the initial idea to the final product, one thing is certain, at some stage you’ll have to pay for the materials and have somebody manufacture your product for you (generally this will be done overseas, where manufacturing is less expensive). Whether your item has been (mass) produced or not yet though, it’s obvious that before you even begin to start marketing your product, you’re going to need some serious funds for materials, manufacturing and warehousing costs.

When it comes to software, in order to create your product all you have to do is sit down and transform the design that you’ve got in head into actual code. If you are creating a web startup, you’ll have expenses like hosting bills, but in most cases such costs are minimal and tend to increase with the size of your user base. As long as you have a solid business model, dealing with the cost of an increasingly larger customer base, is a “problem” I truly hope you encounter, as it likely means your startup is heading in the right direction.

This unique software advantage is underestimated far too often. A few weeks ago I wrote the following line on Twitter:

I’m convinced that startups that are grossly over-funded are far more likely to fail than startups that are slightly underfunded.

There are exceptions to this statement, I’m sure, but think of it like this: if you pour a lot of water into a bucket with a large hole, you’ll quickly find yourself out of water. In Paul Graham’s latest article he mentioned thirteen sentences that describe startups. Unsurprisingly, two of them are dedicated to this very topic: “Spend little” and “Get ramen profitable”.

Unfortunately, I see a trend emerging in which many new startup founders appear to care more about VC money, and the lifestyle such funds can afford them, than the success of their business. The idea of spending as little as possible, and receiving a bare minimum type of salary, so as to “get ramen profitable” is often overlooked. It would seem that the industry evolved from the notion of two hackers in a garage working to change the world with their product, to a bunch of Starbucks latte sipping, four conferences a month attending kids who expect to receive millions so that they can bring their idea to the masses.

All the best things that I did at Apple came from (a) not having money and (b) not having done it before, ever. Every single thing that we came out with that was really great, I’d never once done that thing in my life. — Steve Wozniak, co-founder of Apple.

You’ll find counterexamples to everything I’ve just written, stories of software/web startups that actually needed and were able to justify VC-level funding, but they are, in my opinion exceptions, not the norm. As I come to the end of this quick piece, I wonder if I’m being too cynical. Perhaps, not living in Silicon Valley myself, I have the wrong impression of the way the startup world operates. But even from up here, in the chilly Great White North, I can feel the heat that proverbially radiates from all the VC dollars being frivolously burned.

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  1. Al Chou February 24, 2009
  2. Carlo Pecchia February 24, 2009
  3. andreacgranata February 24, 2009
  4. Daniel Cimera February 24, 2009
  5. rmk February 26, 2009
  6. Marc Dangeard March 1, 2009
  7. Cam G May 30, 2009
  8. Alex August 6, 2009

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