Today’s Question
What small-business owners think.
Eric Millette Steve Blank: “The question is, ‘Better positioned for what?’”
Steve Blank retired from serial entrepreneurship after working with eight start-ups, including E.piphany, a software company that he helped found and sold in 2005 for $329 million. Today he’s an associate professor in management science and engineering at Stanford University and co-author of “The Startup Owner’s Manual.” Mr. Blank is credited with helping to create the lean start-up movement, which holds that start-ups can be successful without large amounts of cash. As we considered the example posed in our just-published article contrasting the financing experiences of two data companies that went after roughly the same market at roughly the same time, GoodData (venture-backed) and RJMetrics (mostly self-financed), we asked Mr. Blank for his views on an age-old question.
The following conversation has been edited and condensed.
What are the advantages of bootstrapping?
You own more of your company. The most expensive investment you’re going to take is your initial investment, when your valuation is the lowest.
It can’t hurt to have money to invest in the business, can it?
Taking a lot of money before you’ve figured out a repeatable business model actually is one of the greatest causes of start-up failure. I’ve never seen a start-up that’s raised $1 million that doesn’t spend $1,000,001. The more money you raise, the more burn rate you layer in. And if you haven’t figured out how to generate revenues by the time the money runs out, all the salaries and building rent will come due, and you’re going to be out of business very quickly.
Venture capitalists say you need to do a land grab or you will leave opportunity behind.
The land grab, what was called the first-mover advantage in the last bubble, well, we ran that $1 trillion experiment in the last bubble, and it’s about 99 percent scientifically proven that that’s wrong. There’s actually a first-mover disadvantage. The pioneers have arrows in their back. There’s actually a second-mover advantage.
It has to be an advantage sometimes, no?
There are small corner cases where, if the market is only six customers, maybe the first-mover advantage is true. In almost every other case, like consumer Web or mobile Internet, I don’t think so. People say, what about Amazon? They weren’t the first mover. What about Microsoft? They certainly weren’t the first mover. Apple? Not the first mover. These are all second followers.
If V.C.’s were useless, wouldn’t they have gone extinct years ago?
The advantages of venture capital money are pretty clear. It turns out that during his lifetime, a venture capitalist will see thousands of start-ups and get involved in hundreds and sit on maybe 50 boards. They’d have to be deaf, dumb and blind not to have some modicum of pattern-recognition skills far and above what you as an entrepreneur sitting in your first start-up are ever going to have. They’ve seen this movie a million times.
And they’re putting down real money, so they want their entrepreneurs to succeed.
Your interest and your V.C.’s interest in liquidity may not be the same. Those who take big V.C. money have signed up for, “We’re going to be a home run or we’re going home.” That’s the interest of the V.C.’s. They have a portfolio of 10 or 15 investments, and they’re going to swing for the fences on all of them. That’s their business strategy. But you might not have realized what you signed up for. Because if someone had sat you down and said, “Would you be happy if it got sold for $25 million?” you would say, “Yeah, I get to take home $5 million, that’s more than I’ve ever seen.” But that’s not your V.C.’s strategy.
How much do V.C.-funded entrepreneurs need to grow to make money?
They need the company to be some large multiple of the investment they got. There is typically something called a liquidation preference in any investment document with a venture capitalist. That means the V.C. gets 3X or 5X or something like that. It’s never obvious to a first-time entrepreneur. The allure is the big amount of cash and the huge valuation. It turns out that the huge valuation is detrimental to a founder making money.
Which of the two companies mentioned in the article — RJMetrics and GoodData — is better positioned?
The question is, “Better positioned for what?” GoodData is better positioned to get big or go home. The good news is, with $75 million in the bank, you can make a lot of mistakes and still be in business. The bad news is that raising all that money makes you act like all you have to do is execute and everything works. The reality is that no business plan survives first contact with customers. After raising $75 million, GoodData needs to sell (or take public) the company at several times that number for the investors/founders to make money. To grow that large they’re going to be selling software to companies that can pay $100,000 and above. RJMetrics, either by default or design, has minimized the amount of capital they raised. From an outsider’s perspective, it looks like they spent their time finding a repeatable and scalable business model before they gave away equity to a V.C. Now it appears they’ve found a business that works, and they’re using their investors’ dollars to go for scale.
What do you think?
Article source: http://boss.blogs.nytimes.com/2013/06/19/is-50-million-in-venture-capital-an-advantage/?partner=rss&emc=rss