Should you really get funding?

I think YCombinator is attempting great things and has a great strategy. However, after StartupSchool I'm mulling over my intention to build my startup without getting any funding. Yet, what I saw yesterday was mostly based on the assumption that a startup has to go thru rounds of funding.

A bit of background: I'm not young, right out of college. I've been working for startups for about 18 years with a couple periodic stints at major tech companies. In all the startups I've worked for, the two leading causes of startup death are 1) Founder friction. 2) Stupid VC tricks.

Founder friction is a risk that I'm sure everyone understands. But the risk of taking money from a VC is one that I think is under appreciated. Generally these risks manifest themselves in the form of the VC meddling in the company to the theoretical benefit of the VC, and the companies detriment. Speaking of instances I have intimate knowledge of, in one case the investment was contingent on 1/3 of it being spent on hardware and software from two companies that the VC had ties to-- overpriced hardware when commodity PCs would have done, and very expensive software that caused us to hire consultants (from the company that sold the software of course) to try and make it work, and ultimately forced us to revert to the original plan and build it ourselves. Significantly delaying our ability to scale up the product.

In another case the VC required that we hire a new CEO, and manuvered us into hiring a friend of the Partners who was non-technical and was fond of changing company direction quarterly whether we needed it or not, to follow the latest business fad... no matter how irrelevant it was to our industry. (EG: one quarter it was "Push" and we were a company that made video game technology... nothing to do with "Push" but we had to have a "push story" and issue press releases.)

And of course, you can find lots of other examples of similar things happening at other companies.

I don't want to paint with too broad of a brush. I recognize that my experience is limited to the half dozen startups I've worked for, and the dozen or so VC partners and associates I've known over the years.

But I have a strong impression that these are not people who understand technology, or the technology business well enough to give good advice. Further, they have shown a propensity to force companies to go in a direction that helps their other investments, but may be detrimental to the company.

And, more importantly, is investment really necessary?

In this day and age, you can get servers provisioned easily-- no need to commit to hardware purchases and long term datacenter leases. The tools are high level and easy to use and there's a lot of open source to leverage so that you can focus on the added value part of your product. Leverage has increased dramatically.

Furthermore, companies are now starting to go without investment, such as MyBlogLog which was acquired only a few months after launch without doing a VC round.

Thus I reach the conclusion that the course for me to take is to not seek investment at all.

This may not be possible for someone who is recently out of college. (And thus the funding from YC is not the kind of investment I'm talking about here-- the presusre to use the money to get three months of solid focus on the product is really positive "interference" especially when backed by the rapid feedback, networking, and weekly seminars.)

But if you start to get some traction with your product, and you're not building something that inherently requires massive investment... probably small angel rounds are the way to go until you can be acquired or reach profitability.

And while being acquired may always be wise-- reaching profitability is a milestone that I think truely marks success. Nobody can ever take that away from you once you've done it-- its victory.

Startupschool was great-- was good inspiration, and much of what was said checked well with my thoughts giving me a boost in confidence that I'm on the right track.

I love lists like "5 dos and 5 don'ts" or the X things that cause startups to fail, or Pauls 16 reasons... love to check those off and go "Yep, Yep, Yep"... and there were a couple that I need to work on.

Hopefully this little rant is not offending anybody... in summary, I'd say winning means making a viable business. Getting VC funding shouldn't be the goal.

it is not only about the funding but also about the network. Todays world information is wealth and information can be collected by network. Hence for network building funding is necessary.

As amusing as Philip's story is, screwups that spectacular are rare.

I failed to make a distinction-- I am not opposed to funding, but think that VC funding is overrated.

If you are seeing your business as a 1-3 year affair- if you believe that in that time period you'll either crash or get bought or go big, and you don't have any resources... then taking VC funding to cover basics like food, housing, bandwidth, maybe makes sense. I would still say that angel funding is better. And if you're just out of college then its kind of a no-lose situation. You get funded, then you've won because you have a job until the funding runs out and even if you crash and burn, you'll still be well set up to do another startup.

But if you want to build something that lasts... you have to take into account all the costs of various types of funding. This I may not have illuminated as well.

After so many months, the VC funds turn into, effectively, a high interest rate loan with a lein against your business. If you go to sell, you may find that they get the entire proceeds. Sometimes they even put a 2-3x liquidation preference there... so even a success results in nothing to the founders.

The essense of these terms is that the clock is ticking, and you are put in a position where you have to hit a home run, or die trying. And the VC firm will guide you in this direction, and replace you if you do not make the choices that lead that way. They are only interested in home runs, not viable businesses.

This is also why acquisition is more popular now- the risk reward profile has changed, or at least people learned form the 1990s bubble.