BC Business
Careful what you wish for: Venture capital can be the poison pill for some startups.
Cool out, people: Ninety-five per cent of the time, venture capital is terrible for startup software and service firms. There's a lot of buzz in Vancouver's tech scene these days about how local companies can attract venture capital and secure the kind of big-money cash injections that fuel our counterparts in Silicon Valley. It's all very exciting, if you like that sort of thing. I don't, though.
There’s a lot of buzz in Vancouver’s tech scene these days about how local companies can attract venture capital and secure the kind of big-money cash injections that fuel our counterparts in Silicon Valley. It’s all very exciting, if you like that sort of thing.
I don’t, though.
For a long time, I’ve felt like a naysayer in the tech industry – and not because I didn’t line up for an iPad. No, it’s because I think that 95% of the time (and maybe more often than that), venture capital is a terrible idea for startup sofware and service firms.
Sure, there are some types of companies that have big startup costs, or whose growth plans require significant capital boosts at key stages. But to my eye, there are way too many tech entrepreneurs who default to the VC mindset rather than considering how they might self-fund their businesses. And I think they’re making a huge mistake.
37signals, the software-as-service firm behind Basecamp, Highrise, Campfire and Backpack (and business minds behind the bestselling Rework) have a series of interviews on their blog called “Bootstrapped, Profitable, & Proud” that is half balm, half triple-shot of inspiration for this skeptical business owner. They’ve profiled nearly a dozen self-funded tech firms with revenues ranging from just over $1 million to about $35 million (since they’re all privately held, they don’t all disclose revenues), who didn’t take venture capital, and are profitable – and the insights contained therein are pure gold, even for those who don’t know their SaaS from a hole in the ground.
What do these VC-rejecting entrepreneurs have to teach us that others can’t? For starters, they’ve got financial success stories that aren’t muddied by investment money. They didn’t necessarily get rich quick, but they were certainly forced to get profitable quickly, because bootstrapping removes the safety net.
As you make your way through your third or fourth profile, too, you’ll begin to notice some consistent lessons in sustainable growth – like how Alien Skin Software made a conscious choice to decrease their staff numbers from 20 to 11, or iTeleport setting their iPhone/iPod app’s price at $25 even though the average app’s price is well under $5.
One of the common themes that runs through these interviews is that time and again, these successful business owners decided to trust their own instincts and their customers’, rather than bend to external investors.
You’ll notice a distinct lack of workaholics here, too. Reasonable work hours and efficient, consistent processes abound; tales of smartphone addiction are conspicuously absent. “Bootstrapped, Profitable, & Proud” is a welcome rebuttal of the dismissive moniker “lifestyle business,” though – these are some of the brightest business thinkers around, and they aren’t shying away from the profit motive. (In fact, two of the firms (AnswerLab & Logik)were featured on the Inc. 500 list of fastest-growing companies.)
My only complaint is that I’d love to see some gender diversity in the profiled companies; so far I see only one whose leadership includes a woman, and her male business partner answered the interview questions. 37signals is actively seeking out prospective interview subjects, so if you know anyone who fits the description ($1M+ in revenues, no VC, and profitable – with an emphasis on software product developers), I encourage you to suggest them.
P.S. Don’t forget to read the comments – there are some great insights in the interviewees’ answers to questions from readers.