Startup tech companies need money. Money is a commodity. Like any commodity, it has a price. The price of money from a venture capital firm is the highest possible price, with many lurking problems.
VC money often results in the total dilution of employees, early investors and founders so they get little, often nothing when the company has a “liquidity event” – gets sold.
First time startup founders think the only way to get money, after mortgaging their homes and the other spouse’s savings is from a venture capital firm. It is a way, not the only way and often not the optimal way.
Venture capital is not a dollar for dollar exchange. The venture capital market is a leveraged market where the VC invests in 10 firms, knowing 5 will fail or break even. Several will be profitable, but not very. The hope is that one is a Facebook or Google.
Hit a couple of those and one gets a $40 million home and the adulation of those who invested in the wrong deals. The overwhelming number of VC firms are bottom feeders—never hitting the Google or Facebook.
Second or third time founders know the hidden traps of the venture funding game. They know about the “preferences.” One great one is the double dip—when the startup gets sold, the VC gets its money out first. Then it double dips with the employees and founders in the rest of the money dividing.
There are innumerable preferences and the only certain trait is they favor the VC and separate the founder, the employees, the debt holders from making any money.
Those who have done it all before, and there is a growing number, understand there is an alternative to venture funding. They understand they may be able to fund their growth without ever needing a venture capital funding round. They want to keep their equity, and that of their employees. After all, they built the company.
One alternative is to sell your way to early success. Find early customers, get early partnerships which will generate revenue without equity dilution.
When this succeeds several things happen. First, there is no need for venture capital. Second, if a need should arise later in the growth of the firm, the venture capital company is dealing with a profitable, growing entity and has zero leverage. Out go many of the more onerous preferences.
There is nothing quite so much fun as having that meeting with the Managing Director of the VC and they offer you money, millions, on the spot to be first in line for your “opening round.” And you tell them you just do not need the dough, you have several $45 billion corporations who are out selling your product through their channels, and you are just fine—thanks.
You do, however, promise to call them if you need them. Truly a fun, existentially fun, experience.
But saying it is easy. Doing it is quite hard, emotionally, intellectually and often physically.
But not impossible. Several Austin, Texas firms have shown the way.
In one case, their Internet of Things (IoT) technology is so disruptive, it enables a company to take an application that has tens of thousands lines of code, often in COBOL or other obsolete language—costing millions of dollars a year in support–to be rewritten in 72 hours, deployed on a $100 device, and run over one million times faster than the original app.
This is truly disruptive. They perform proofs of concepts—and they charge $500,000 for each one. Companies are lined up to get them. The savings for one telco is $300 million a year.
They have chosen to go to market and sell their way to success. All early deals used a sales team who got paid if, and only if, they sold something. Hard slog for a year but once the first and second deal came in, the rest was possible
Another Austin startup solved one quite major security problem—someone stealing all a company’s data. Their product does not stop an intrusion, it simply makes it impossible for the intruder to get more than one user record. Intrusions may happen, so what? No CEO gets fired. And a $45 billion telco is now taking this product to its tens of thousands of customers.
Selling your way to success is not for everyone. It is NEVER for someone who has taken any VC money. VC money takes a company down an entirely different path and that is a one way walk. Once you start, there is no way out. The VC is in charge. Period.
The interested party is the second or third time founder. Sometimes it is a first time founder who has done the math.
Remember, venture capital is not for everyone. It may not be for you.
There is a better way.
ContingencySales.com is a web site dedicated to the proposition that truly disruptive companies can find a way to market by selling their way to success.