Has Venture Capital Become a ‘Necessary Evil’ for Entrepreneurs?

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Has Venture Capital Become a ‘Necessary Evil’ for Entrepreneurs?

What if we’ve reached the point where founders need investors in order to build successful startups?

Has Venture Capital Become a ‘Necessary Evil’ for Entrepreneurs?
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Where I live, there’s an entrepreneur who’s locally famous for having built and exited his B2B, SaaS startup as a solo founder with no investors. He’s basically the local poster-boy for entrepreneurial success, and people in my city often reference him and his story when describing what’s possible in the startup world. In fact, considering how often people reference his success where I’m from, I was surprised when I recently found out he “only” exited for $54 million.

“That’s not a ‘big exit,’” I initially thought when I heard the number. Yes, I realize $54 million is a lot of money, but most startup success stories describe founders whose companies exited for hundreds of millions or billions of dollars. In that universe, $54 million seems tiny.

Then I thought more carefully about the context surrounding that $54 million exit. Specifically, since the entrepreneur didn’t have investors or co-founders, most of the $54 million he was paid went into his pocket. In comparison, if an entrepreneur with co-founders sells a VC-backed company for a billion dollars but only owns, say, 5% after dealing with investor dilution and what not, his 5% ownership stake produces roughly the same $50-ish million dollars.

I’m bringing all this up because that same entrepreneur — the one who exited for $50 million — is currently working on a new startup, and he took VC money almost immediately. When I asked him why, he told me he had to. He claimed it’s impossible for most startups to successfully scale in the current entrepreneurial world without venture capital because markets are too crowded, the competition for talent is enormous, and customer acquisition costs have gotten too expensive.

Is that really true? Are entrepreneurs stuck in a world where scaling our companies means venture capital is a necessary evil?

I sure hope not. And not because I personally don’t like raising VC. After all, I’ve raised VC before, so, if I needed to do it again, I feel like I’m decently positioned to be able to do so successfully.

Instead, I hope venture capital isn’t a requirement for startups because I’m also a consumer. As a consumer, I know that a startup ecosystem entirely dependent on venture capital would be bad for all of us. It would mean innovative companies could only operate in markets capable of supporting outcomes large enough to satisfy venture-style returns. The result would be less niche-focused entrepreneurship and more large, one-size-fits-all entrepreneurship.

Luckily, I don’t think that’s what’s actually happening. So, before you panic and start reworking your super-niche product so it can appeal to a broader market, I’ll remind you that the history of innovation tells a different story. It’s a story that shows how VC only arrives in markets after they start becoming more broadly popular.

For example, let’s return to the entrepreneur I mentioned at the beginning of this story. When he launched his first company, Google Adwords was brand new. Because of this, significantly fewer people were using it and/or understood how to use it, and getting sales leads using Adwords was exponentially cheaper. As a result, he could acquire customers for (relatively) cheap.

Since then, the market has changed. The reason the entrepreneur I spoke with could build his first B2B, SaaS company without VC and has to build his second company (also B2B, SaaS) using venture capital isn’t because startups have fundamentally changed. It’s because when he started his first company, the market was less crowded and the resources for growth were more affordable. In the intervening decade-plus, more entrepreneurs entered the market, more venture capital entered the market, operational costs got much more expensive, and now… yes… building B2B, SaaS startups is a lot more expensive than it used to be. Yay for capitalism!

But that’s not true for every market. If you’re thinking of starting a company, rather than chasing the same business model as half the people in Silicon Valley, I challenge you to search for a different opportunity. Don’t look for a growing market with lots of attention. In other words, if the market is growing fast enough to have mainstream news outlets discussing it, you’re already too late, and you won’t be able to scale without venture capital.

Note — that doesn’t mean you shouldn’t launch a startup in that market. It just means you’re going to have trouble doing so without VC.

In contrast, if you want to avoid VC, ask yourself this question: where is customer acquisition very cheap?

If you can get customers inexpensively, you can grow your business without venture capital. It still won’t be easy, but that shouldn’t surprise you. No type of entrepreneurship is easy. However, by not having to fundraise, you’ll remove one big challenge. Plus, like the solo entrepreneur I’ve told you about who sold his startup for $54 million, you won’t have to grow your company nearly as large in order to realize the same rewards.

Go to Publisher:

Entrepreneur's Handbook – Medium


Author: Aaron Dinin, PhD