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Never Say “VC”

Technology investment bubbles have given many entrepreneurs the impression that success in tech is all about coming up with a “cool idea,” pitching it to a VC, getting funding, building up the business, and then exiting in high style.

First, this is a fairy tale, second, this will not happen to you, and third, what you’re observing is the product of a highly evolved network of peers, of which you are likely not a part.

What Happens in Palo Alto Stays in Palo Alto

What you see taking place in Silicon Valley is the result not of people betting on “cool ideas,” but of people betting on teams and connections. Before every VC deal, there is an exit strategy in mind. Every VC-backed valley startup is an outsourced R&D play.

Ever notice that many large tech firms grow primarily by acquisition? Most have comparatively lean R&D operations; this keeps experimenting off of their balance sheet, thus improving profits and lifting stock prices. Those stock prices are what give them the fuel to make good sized acquisitions, which in turn is the incentive for startups to grow and for VC’s to fund them.

This is the capitalist cycle in its most fully evolved form. Sometimes those acquisitions work out, sometimes they don’t, but the process feeds the machine and it becomes self-perpetuating. This process is literally the grist for the innovation mill that is Silicon Valley.

Why You Should Forget About VC’s — For Now

If you’re not already plugged into this world (meaning you have a lot of contacts there and have a specific idea of a strategy to get funding and an exit before you start), you probably have no place talking about VC’s at all. So ban it from your vocabulary. They’re not interested in you and won’t be. Yet.

Instead, think about how you’re going to build value outside of that network. It is totally possible, but don’t get distracted thinking about VC’s when you should be thinking about bootstrapping and investment from friends, family, and angels.

The good news? Most software startups can be launched for $50K or less these days. Build the minimum viable product, ship it, and then follow lean startup methodologies to iterate towards something that is valuable to the market. Once you have done that, established a revenue stream and can demonstrate some reason why venture capital investment will help you grow fast and capture a market position that you couldn’t capture otherwise, you may be ready to talk to a venture capitalist.

But more likely, investors will come to talk to you! If your startup shows real promise, VC’s will likely seek you out. If you work with some angel investors, they will likely have networks that can help you secure a next round of investment. It will happen naturally. Stop thinking about VC’s. They will find you. Worry instead about building value.

Think Investors, Not VC’s

Yesterday I wrote a post that suggested that entrepreneurs should always think like investors, and always consider what an investor would think of the company. I stand by this, but I am absolutely not talking about VC’s in the early stage. You are not ready for VC’s in the early stage, especially if you are not “plugged in” to the valley culture.

So, think like an investor. Your investors are: you, your family, angels, and possibly local government business development funds. Forget about VC’s for now. If you build value for your yourself, your customers, and your first round of investors, VC’s will come knocking if they think they can help.

  • http://jtnt.net Nicholas Tolson

    Great post, Dave. If you build it (well), they (investors) will come. :)

  • http://venturehacks.com nivi

    We usually tell very early stage companies with no product, traction, or track record to look for:

    1. Family and Relationship Investors: People who already know you and are willing to bet on you, based on your history together.

    2. Idea Investors: People who believe there’s a big opportunity to serve the customer because they understand the customer as well as you do.

    3. Once Removed Investors: These investors trust or regularly co-invest with the investors above.

    Once you get some traction, start talking to dedicated seed stage funds, multi-stage investors who do a lot of seed stage investments, angels, angel groups, etc. You can also jump straight to this set of investors if you have a significant track record or a mind-blowing product (you probably don't).

    More details here: http://venturehacks.com/articles/idea-investors

  • http://www.twitter.com/ladyleet ladyleet

    awesome post. good wakeup call for new startups who think ideas=money. build, get customers, generate revenue, and if you still need $, it will come.

  • mytweetmark

    Thank you for this article. It was timely for me. I am currently building all of mytweetmark on my own time, hence no cost at all other than hosting and advertising. The progress has been awesome. Most of my time is spent in metrics, identifying log jam where traffic is stuck, because the business just got off the knees. Then I get to do quick iterations and watch the metrics again and again. My focus is to get traction. Again, thanks.

  • http://probablefuture.com/cmd.php?af=711646 Jose G. Gonzalez

    Great Reading !!
    Please connect, tag & stalk me !
    Thank you very much !
    Jg

  • http://www.mobtownlabs.com BmoreWire

    I couldn't agree with this more. Especially in Baltimore. You need to focus on creating value. What gets funding in NYC and Silicon Valley does not get funding in Baltimore. You need a game plan to proceed without VC and then if a VC shows it face somewhere down the road, lucky you…. But you don't need them to be successful, what you need is a product that creates value in a marketplace and a operating, sales, marketing, and financing plan that will build a long term business. If you have that and you do that and you build your business properly and patiently, exits and opportunities to quickly scale will appear. That said, it's always to have a handful of relationships to get some good buzz and PR in the angel community.

  • http://www.mobtownlabs.com BmoreWire

    I couldn't agree with this more. Especially in Baltimore. You need to focus on creating value. What gets funding in NYC and Silicon Valley does not get funding in Baltimore. You need a game plan to proceed without VC and then if a VC shows it face somewhere down the road, lucky you…. But you don't need them to be successful, what you need is a product that creates value in a marketplace and a operating, sales, marketing, and financing plan that will build a long term business. If you have that and you do that and you build your business properly and patiently, exits and opportunities to quickly scale will appear. That said, it's always to have a handful of relationships to get some good buzz and PR in the angel community.