Our business culture is so attuned to seeing a funding round, “traction” such as user growth and number of employees as “success.” 3 out of 4 venture-backed companies fail according to a Harvard Study. Not lose a few customers because they got a feature set wrong. Just gone.
I get it, a huge valuation gives a company the financial resources to grow quickly and “change the world.” But let’s call it what it is, a way to keep score and a good ego stroke.
It get’s a company’s leaders away from the fundamental reason businesses exist: to solve a problem for its customers.
Any investor, save for impact-focused slow money like OS Fund, wants to see a return as quickly as possibly. Not only that, but their business model is predicated on generating a home run return out of you. That means big revenue, lot’s of customers and probably a big head count. Is that what you want? Is that what is best for the company?
Not every company needs to go from 10–200 employees with 1000x revenue growth every year. It’s a stressful, highly uncertain ride and the math bares out, doesn’t result in success.
There is no shame in running a profitable, steadily growing firm. VC and angel investing is rocket fuel. When deployed well it has the power to propel a company to heights it wouldn’t reach otherwise. However, the margin for error becomes a lot smaller and time compresses. Expectations of results rise exponentially. And if you don’t have your shit together (specifically how you acquire a customer cost-effectively) you can crash and burn quickly. See Fab.com, EcoMom and Zirtual (who laid off 400 employees with an email).
While the reasons these companies failed are complex, it came down to relying on investor money to keep the business going (instead of customer revenue) and then running out said cash. There are alternatives that I don’t see companies take advantage often enough:
1. Self-Funding — it’s okay to work a day job until the business has enough cash flow to support you and employees. It’s something I should have done.
2. Vendor Financing (sort of) — if you’re building something for a customer you can ask them for a higher retainer up-front to cover expenses of the build. I don’t know why this isn’t done more often.
3. Low-interest loans — In Canada the Business Development Bank of Canada (BDC), offers awesome loan interest loans and has staff that is actually helpful. In the US the Small Business Administration’s 7(a) loan program is worth a look too.
4. Just sell more — call 5 prospects as soon as you get into the office, upsell a current customer, ask them for a referral.
For high-growth businesses the last point is especially important, nothing starts without a sale. Even if its vapourware, someone is parting with their hard earned dollars means you solving a problem for them and eliminating some pain. That’s the ultimate indication you’re on the right path and even if you’ve taken investor money, it means you won’t have to ask for more.
Disagree? Other alternatives to venture financing? Let me know!