The Romaniticization Of Venture Capital

To raise, or not to raise—that is the question:
Whether 'tis nobler in the mind to seek
The slings and arrows of outrageous fortune,
Or to take arms against a sea of troubles
By bootstrapping, and so opposing them.

The startup world is perpetually divided on the issue of company funding—should founders bootstrap their venture or pursue venture capital? Both paths offer distinct benefits and challenges, yet the question remains: which approach is more likely to lead to a company's success? This week I sat down with Nish Jain, a reformed MT lawyer turned startup founder to discuss the romanticization of venture capital. Nish recently founded Alchømy Alternatives, a consumer packaged goods (CPG) company focused on complex, alcohol-free carbonated cocktails. Nish offers an interesting perspective on venture capital.

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Nish:

While venture capital is disproportionately portrayed as a funding option for startups in the media, for example Dragon's Den and Shark Tank, and on social media, venture capital is not the reality for the vast majority of startups. Venture Capitalists (VCs) disproportionately favour tech and SaaS startups that can more readily scale and grow with venture capital funding compared to physical product startups. VCs want large returns in short periods of time (typically 6-8 year time horizons). Therefore VC funding often eliminates the viability of running an otherwise successful $1M or even $10M business, as it won't be enough growth for the fund or its investors looking for "unicorn" growth.

Venture capital-backed startups have to have the "grow or die" mindset. There is a constant need to grow (and grow quickly) to try and justify the valuation created by the VC until one of three exit events occurs: (a) the company goes public, (b) the company is sold, or (c) the company goes bankrupt. This grow-or-die mindset makes building the business less about building your company sustainably, and entirely about building a company that will generate the highest returns on the VC's investment, and finding the next source of investment to keep going. VC-backed startups also risk running into the scenario where they've spent millions of dollars trying to grow (hiring staff, buying/leasing offices, increasing marketing and ad spend, etc.), plateau in growth, and can't obtain more funding. Without additional funding, these companies cannot sustain the "house of cards" infrastructure they've built, and it all comes crashing down.

For most startups: slow + exponential growth > fast + linear growth.

The feedback loop of "launch and learn" is critical to many startups. When growth at all costs is the measure, founders do not learn from their customers and the inevitable outcome is that the customers churn. In my short time as a founder, I have quickly learned that, especially in the CPG space, startups need to grow slowly in order to assess market uptake, reorder frequency, and cyclicality of products – before reinvesting into larger order runs, expanding geographies and sales channels, and developing further products. Venture capital funding would not have allowed my company to initially take the time to learn from our customers (and our own mistakes).

Of course, even bootstrapping has its disadvantages. Because a company does not have outside investors, it is likely to be strapped for resources and this can lead to founder burnout. Some bootstrapped founders earn a living in other ways while building their startup. Many founders build their startups as a side gig or have side gigs while they focus their 9-5 on building the company. While it may take longer to build this way, the ability to "fail fast" on a small scale without major implications to the company, then gradually increase to larger markets with better products, is by far one of the most important advantages to bootstrapping. Founders are also forced to connect and learn from customers in a personal and meaningful way, which in turn builds community and brand loyalty. This takes time and can't be bought.

In the case of CPG, bootstrapping results in working with smaller retailers that fit within the parameters of your production capacities and cash flow restraints. It gives you the ability to "feel out" suppliers and service providers before investing large sums of capital developing and launching products. Finally, and perhaps most importantly, as a bootstrapped startup you control your destiny. Right now, I know I control mine, and it's mine to lose!

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Aliya:

Given Nish's unvarnished take on venture capital, founders should always consider other sources of capital when considering venture capital. Some founders may be able to bootstrap to profitability while others will not be able to find a path to profitability at a small scale. After bootstrapping, friends and family, or angel investment can be viable options for taking on the right amount of additional funding to take the startup to the next level. However, in many cases, venture capital might be the only path to growth and profitability. As you think about your funding options, discuss the possibilities, risks and optionality of venture capital with your legal and accounting teams. They will be able to support you in modeling out the economic impact of bootstrapping, venture capital, and debt among other forms of startup funding.