Resist Venture Funding Until You Scale

Create your own startup runway to stay in the game

Silicon Valley is Ground Zero for tech startups. As a resident of this community, I hear of many new startups, but I never hear of a startup starting on its own without outside funding.

Getting your idea baked at accelerators like Y Combinator and TechStars is a popular route. It is essentially boarding school for startups, mixed with seed and angel funding.

Some skip the accelerator and jump right into the arms of VCs. This past weekend, a good friend was telling me he’s already received commitments from top VCs for his “startup.” His “startup” consists of only a prototype and his pedigree (i.e. right team from the right places). Apparently, this is still enough to get funded.

That no startup is going out on its own is surprising since it is so much easier and cheaper to start a business than ever. What makes this standard route insane is the amount of control and equity that you must give up when you enter this trade with VCs. It’s a Sisyphean bargain that few startups can survive.

It’s a much more effective model to put VC money to work after you’ve discovered product market fit and are ready to scale. After all, fuel is most effective when poured on a burning fire. The time to step on the gas is when you know where you’re going.

Getting started is easy

How much do you need to get started and build a business? Not a lot.

Werner Vogels, CTO of Amazon Web Services says that it takes just $50–100K to start a business these days. He may be biased but the spirit of his numbers is accurate.

You can get most everything you need from the cloud with the swipe of a credit card. Need to stand up another server? More app storage? More database? Easy peasy.

And the cost? It’s racing to near-zero. I’ve written about the battle waged by the cloud giants that is precipitating the low cost of cloud.

Whether you are trying to start up a computing environment for your staff or need to ramp up computing resources for development and testing, it’s never been easier. You can literally build your business on a credit card.

Life is good on the forever runway

At risk of sounding like those codgy old men who talk about how they used to walk 3 miles barefoot to school in driving cold rain as a young lad, we actually did build a business on a credit card before AWS spun out of Amazon and way before the term “Cloud” was coined.

It was 2004, when our founder started his first product?—?LeapFile. He was sole developer, marketer, and top salesperson all wrapped up in one. It was not until 12 months later that employee No. 2 was added.

By 2008, the company began to generate annual recurring revenue that exceeded $4M. Net revenue was high due to the nature of the business and also lean operations. And it all started on a credit card.

Perhaps it was a different time then, but there was no thought given to taking on outside investment. With no outside investors, we had to run our business the old fashioned way: make more money than we spend.

Effectively, we built a forever runway that supported the development of odrive beginning in 2009. We have been able to build odrive and search for product market fit without the pressure of having to raise another round?—?and without fear of running out of money.

The reward for waiting is priceless

If you are able to build a business without taking on venture funding, you stand a good chance to survive and go on to making the next big thing.

We have been able to pursue and build our best ideas. We have valuable patents in our back pocket. We have been able to methodically search for the winners and drop the losers. There has been a lot of code left strewn on the cutting room floor.

To be honest, while we don’t spend more money than we make?—?because we can’t?—?we also have put everything on the line to pursue our dream product. And it was worth every penny.

We have been able to develop our convictions and let them evolve. Markets change, we change. What did not change was our pursuit of true innovation. Our sole purpose is to make something unique, powerful and awesome. We want to make a product that is genuinely useful to a lot of people.

odrive is the living embodiment of our ideas, convictions, and risk taking.

It would not have gone this way if we had investors to answer to (or piss off). Sometimes, we wonder out loud whether we could benefit from the discipline of external demands and expectations hanging over our shoulders. But we don’t have the luxury of time for regret or introspection.

Onward and upward

In today’s capital environment, VCs are demanding more traction than ever if you want to get another round of funding. There is little room to maneuver and tweak your product or business model. There is tremendous pressure to hit your numbers or risk a down round. In today’s capital crunch, the consequence is likely a death spiral.

So what should you do when you are starting your startup? Focus on building a business first. The credit card goes a long way these days. If you can reach cash flow positive, then a forever runway is even better.

We are continuing to pursue our odrive vision, unfettered. We may very well take on venture capital when we are ready to scale. We are in this for the long game, the big game.