Blog Post

My Case Against Venture Capital

Even though my company, Altos Research, isn’t actively seeking capital, I had breakfast the other day with a venture guy at Buck’s in Woodside, Calif. VCs can be very useful for strategic advice even if — or, especially when — you don’t want their money. Interestingly, we spent much of the time talking about why Altos should not take venture capital.

From day one my cofounder and I planned to bootstrap Altos, which provides real-time real estate market analytics, but it was really an intuitive decision. I left Woodside pondering how to express the logic behind our bootstrapping choice. I finally hit on the straight answer: taking venture capital actually reduces your odds of success.

I’m talking about your success as founder. This is considerably different than the ultimate success of a company. Maybe I’m romantic, but… I’ll define success for the entrepreneur as 1) creating and leading a viable enterprise and 2) generating a personal financial windfall, what Paul Graham calls, “solving the money problem.”

I am apparently less motivated by the Fame Factor than some. Guess I’d rather be rich than famous. (See: Do you want to be Rich, or be the King?)

I’d also rather be in control.

In a recent INC. article, software entrepreneur Joel Spolsky describes his disinclination to take venture capital as driven by his need to shape his company’s culture. He’s really talking about achieving success while retaining control. (The VentureHacks bloggers point out that raising venture capital is all about control.)

Take a counter example: Jobster’s Jason Goldberg. In four years, he built a smokin’ hot startup, raised tons of venture capital, and lost his job. Maybe Jason will still make money on Jobster, but the chances diminish every day, even if the investors eventually have a payday. Ironically, Jason’s excellent post on his lessons from Jobster has a surprising twist: If he did it again, he writes, he’d have raised more money. I say, he’d still have lost his company.

Here’s how VC math works against you:

We all know venture firms expect just 10% of their portfolio companies to get to “an exit”. This assumes a 90% failure rate for their startups. But the individual founder’s failure rate is even higher because among those companies that achieve an exit, as many as half, like Jobster or Technorati or Tesla recently, suffer “founder-ectomies” at the hands of the investors. When the going gets tough, those in control exert control.

Other founders see their financial stakes diluted along the way — too many hits on the venture capital crack pipe — leaving the investors entitled to most of the gains. I don’t know of any formal studies on this, but my guess is that barely 1% of venture-backed founders achieve financial success by my standard.

If it’s so risky, why raise VC?

Unless you’re building hardware, ASICs, or biotech anything, where you’ll need capital for years before you can sell product one, I say: don’t. (Covering your mortgage is not a good reason to raise venture capital. You need the cash, your company doesn’t.)

So why do founders still do it? Maybe they think it’s the best way to swing for the fences. Maybe they’re blinded by survivorship-bias. But maybe it’s because closing a round of venture capital is easier than selling to customers.

That’s the final nail in the coffin. You can focus on selling the venture capitalist or you can focus on selling to your customers. Business plans get twisted beyond the point of recognition to appease the grand vision of the venture guys. Your product loses focus, your customers lose value. But of course your customers are going to pay the bills over the long haul. It’s them and only them that matter.

One last note. Avoiding venture capital does not mean avoiding investors entirely. There are plenty of financing options, angel, and strategic investors that can provide ready and intelligent capital without the unnecessary risk from traditional venture capital investors. Capital is for paving your road, not for handing over the keys.

Michael Simonsen is the cofounder and CEO of Altos Research. Read more from Mike — and learn about the real estate market in your ‘hood — on the Altos company blog.

11 Responses to “My Case Against Venture Capital”

  1. Well this old chestnut keeps popping up, but Michael has articulated a great perspective by distinguishing between company success and founder success.

    I’ve founded four companies.

    First was bootstraped and west bust. Raising funding would not have helped. It was just a bad idea, badly executed.

    Second was also bootstrapped and has grown and prospered. I still control it and it makes money and has great capital growth.

    For the third I raised VC ($8m) in the dot com boom, bought the company back in the bust, restarted, bootstrapped, raised more VC and then left with a reasonable payoff but nothing life-changing. This was a five year journey during which I made and lost good friends, had the family home on the line, won great customers and nearly blew up my marriage. Would I do it again? Hell, yes. Would I raise VC again? Well, maybe, but very, very carefully. In that five year period the single hardest task was managing investors whilst trying (unsuccessfully) to retain a meaningful stake in the business. The company continues today and is slowly growing. It also continues to raise VC, but there is no founder equity in the equation and the management team is 100% hired in.

    The lesson… unless you are exceptionally lucky as an entrepreneur and outperform your investors’ expectations, your investors will ALWAYS get a better outcome from the business than you will. That is built into the fundamental DNA of the investor/entrepreneur relationship. You no longer have control. You have almost no flexibility or room to course correct. Your burn-rate will ratchet up and you will find it almost impossible to avoid the addictive drip of funding and dilution.

    My fourth startup…. well it’s another bootstrap with a great product in a great market. Never say never, but we don’t see the need for VC in the near future. This means that everyone’s focus is on customers and product. The way it should be.

  2. Hasan – as I mention in the article, we’re not actively seeking capital. We’re currently funding our growth through revenues, though we’re always talking with folks and if we found a capital source that made sense for us, we’d likely consider it.

    That’s why the last paragraph is there. This article is not an argument against taking investment per se, it’s a case against traditional venture capital that requires giving up control.

    Tony – those are solid points. It’s funny, between the first time I started noodling this article and the time I published it, Jason raised money for his new venture. Maybe he did so while retaining control – my guess is that he has very different terms than his first round at Jobster. Also – I’d argue that sampling “successful entrepreneurs” is the reason for survivorship-bias. If you only ask the successful ones, of course your answer is positive! ps- I’m diggin’ RescueTime. Nice work on that.

  3. very nice piece, I really enjoyed reading it.
    I am still however on the fence and would love to make a concrete choice, funding or no funding?
    I have built my start up and still have 10-15k left in cash and 150K in credit, as I have told everyone that asks me I WILL be spending every single penny (including my credit) on this start up, I believe that much in its success. as george costanza once said, “I am going down with the ship”.

    Here is my argument to why I would need funding, long story short I am very worried that people with lots of money will copy my idea and gain market share (it is a brand new idea).
    Anyway, I think i have made a solid decision to NOT look for funding, if funding looks for me I would then have to weigh its pluses and negatives.

  4. so michael – after your enlightening convo over breakfast, what’s the plan going forward for your startup: to VC or not to VC?

    While I really enjoyed your post and there is a lot of valid points for not taking the money – I think for many, (myself included) that first pop of cash be it 15K Ycom style, 250k angel, or a cool million from the VC’s – provides the ability for an entrep to say “enough with the distractions, lets freckin do this!” and there is a lot of power in that.

  5. Success, wealth, fame — all are very personal and individual. Each of us has some level of achievement we aspire to in our lives. To your point concerning VC funds (To VC or not to VC, that is the question), many (and I mean the majority) of people don’t want to actually feel the pain starting a company. There are lots of people that read a business book, or see some famous entrepreneur speak and believe it’s all fun and games. They see the “outcome” not the “journey”.

  6. I am working on saving the funds necessary to file personal bankruptcy as my first foray into bootstrapping has faltered. As I pick myself back up, I see no opportunity for another lacing in the immediate future and believe equity investment is my only option.
    My next venture will again be technology related and I have concerns about moving too slow. Yet, I read this and it does bring about confusing thoughts.
    Would the only reason for VC assuming control be because of inadequacies presented by the companies managing partners?

    “When the going gets tough, those in control exert control.” means to me that something is wrong and someone needs to step in and save the ship.

    I do not know. I understand some of the point Mr. Simonsen raises yet I feel that there is supposed to be a common goal in these relationships and that is success. One has the fire and the other is providing the fuel to burn it.

  7. Great article– and I agree with most of it. Two thoughts:

    – I’m pretty sure Jason Goldberg left voluntarily. I think he might now be the vice-chair of the board @ Jobster. I could be wrong– I worked there for a year after their acquired my last startup, but I didn’t pay too much attention to how he left. He already has funding for his new startup, by the way.

    – “taking venture capital actually reduces your odds of success.” As an exercise, find a list of every M&A last year. Here’s one: … What percentage of them took NO institutional investment? My guess is “very few”. If your goal is M&A, it seems that institutional investment strongly correlates with that. Another interesting question is, “How many of these CEOs would take VC investment if they had to do it all over again?”. From the conversations I’ve had with lots of successful founders, I’d guess that the majority of them would. A final interesting question would be, “How many of the founders on that list got screwed/fired?” as your article suggests. My guess is “almost none”.

  8. When you actually get down to the nuts and bolts of it, this whole VC argument is pretty straight forward: if you put all your effort to developing a viable, sustainable, smart product: the money will take care of itself… worked for me. Interestingly, I’ve yet to see a viable, sustainable and smart product take care of itself while you put all of your effort into securing VC. Its a farce.

    Yet I still can’t work out why so many founders chase the VC rainbow. I’m a developer – I want to write code, not investment memorandums.

    A Tech company I used to work for were VC fiends. Management would spend weeks carefully preparing their PowerPoint presentations and delivery techniques, undergoing due-diligence audits with accounting firms, and ‘pitching’ to just about any shmuck with a cheque book. The disturbing thing is they’d invest so much of their effort into this that they’d invariably neglect their projects of the leadership and vision they required to be successful in the first place (and could have been successful – without VC). CEO got his wish in the end with a $250k initial investment. He was fired within 6 months and stripped of his shareholdings when the investors got serious…. Why would you do it??? To me (in software / web anyway) bootstrapping isn’t a choice, it’s the only realistic modus-operandi.

  9. Great piece. It’s no coincidence that all the literature out there about “Rich vs. King” have VCs funding or involved in writing it. It’s in their interest for you to believe that giving up control will give you more money in the long run.