This is Why I’ll Probably Never Pursue VC Funding

From Rand Fishkin’s post about his long, expensive, and ultimately unsuccessful journey trying to raise VC money for his company SEOmoz (emphasis is mine):

I tell this story about our VC experience to a lot of people – it seems to be a subject that attracts great curiosity and I, of course, love to share. Most of the time, folks follow up by asking “are you disappointed?” and my answer has been the same since October. I’m not disappointed we didn’t get funded. In fact, the more time passes and the more I think about the pitfalls that could have come with another round of investment, additional board members and pressure to reach $75-$100 million in annual revenue, the more I’m glad we didn’t. However, I do regret the decision to seek funding – it cost our team countless days and weeks of productivity, took our eyes off our primary goal of delighting our members and customers and, in the end, was a learning experience with a shockingly high cost.

4 comments on This is Why I’ll Probably Never Pursue VC Funding

  1. Tim says:

    As you very well know I feel the same way, I have a fundamental problem with using VC for a number of reasons, two of which are mentioned in your quote of the article. Additionally no matter how you slice it, you have a very different view on your business and the direction it should be going if it is YOUR money, you learn to become scrappy and more efficient when you are funding a project yourself. Having witnessed a few VC driven project, all of which have failed, including one VC fund, I see enormous waste and mismanagement taking place, waste that would not be taking place if it were your money. You simply lack the respect for the money when it’s obtained through a VC, $100k if personal wealth invested in the company will be respected greater then $15m obtained via a VC. It just seems every fund wants to be the next Kleiner Perkins, truth be told there will probably NEVER be another fund like that, I think even they are starting to realize they were extremely lucky.

    A start-up I worked with for 6 months spent 4:1 of it’s time on raising capital compared to focusing on core functions and 10:1 of the capital it did have on raising more cash rather then focusing on the business they could have been working on. The killer was the whole time they kept talking about how they were bootstapping, when in reality they were doing the exact opposite. Not shocking to see this company floundering today, never capable of getting out of the “death valley” what’s most painful about this company is they put themselves in the death valley, they could have easily self funded or gone with more conventional loans, but were so blinded by the awe of VC it took them over, even at the expense of the core business.

    I’d liken VC firms to Gold prospectors, those who got there early and were lucky cashed in, now everyone is trying to capitalize on the fortune experienced by others. As I heard it said once, “as a gold prospector there was no guarantee you will make money, but you could make a fortune selling the prospectors shovels.” The key is finding the next trend and being there early and being ready for anything that comes your way, not banking on the past success of others. In other words, innovate.

    • Adam McFarland says:

      Well said as always.

      What you said about it being “your money” is so true Tim. We scrutinize every non-essential business expense. There’s no way we’d be doing that if we were playing with VC money. And the VCs don’t have any real attachment to that money either…they’re really just looking for a home run here and there to justify their portfolio.

      I’m not totally against taking outside investment, especially in capital intensive ventures. I am against taking it when you don’t need it, especially in the form of venture capital as it’s currently defined.

  2. Rob says:

    This is a great post Adam, and another great comment as always Tim.

    We’ve never really considered VC, but had considered other forms of funding and in the end decided to avoid them. However, thinking about funding brings me to one of my 3 favourite “what would we do” business questions (that I’ve thought up myself while in the shower / on long walks).

    The first is: What would we do if we had an unlimited amount of funds – how would we spend that money on growing our business? If cost simply wasn’t an issue, what would we do differently? I usually realise it’s not about the money and we’re doing things with the best returns per unit cost at the moment, and that all that extra money wouldn’t help us grow at a rate high enough to justify it and it certainly wouldn’t teach us to streamline and be focussed. This makes me feel better.

    My next favourite “what” question is “what would we do if we had 100 staff at our disposal?” While on the surface it seems it could be encapsulated by the preceeding one you don’t really think deeply enough about it to get to this one. By working this out it sometimes gives me a better idea of how I should be spending my time as a percentage split. For instance, the idea of having 5 people constantly trying to negotiate better deals from our suppliers and find new products is fantastic, but no way do I spend 5% of my time like that right now – I find it hard enough to break my time up into the 70/20/10 split that so many work by, so all the 1%s, 2%s etc get forgotten about.

    My third (and favourite) question is this – what could a competitor do that would terrify us so much that we seriously considered quitting? From this, hopefully we can learn how to grow stronger.

    • Adam McFarland says:

      Great questions Rob.

      On the third one – the obvious answer would be that a competitor had a ton of funding and started throwing money at everything in an effort to drive you out of business (marketing, employees, technology, etc).

      But it rarely works that way. The one thing – in my opinion – that money can’t buy is a satisfying customer experience. That’s not to say that a company with funding can’t do that, but that it’s more difficult when you’re trying to grow at warp speed. Taking time to please the customer and get real feedback often gets lost when you’re trying to grow like crazy.

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