Entrepreneurs: why do you need VC anyway?

Some of my favorite companies have started without any VC or outside investment.

Think that’s not possible?

Well, go look at GoPro‘s new HD sports video cameras. CrunchGear loves them. Heck, even if you don’t need a great sports video camera, you really should visit their website and look at some of their videos. Wild! Lots of other people around the world love this company too, like the videographers at Discovery who used them for Shark Week.

But listen to this audio I did at GoPro:You’ll discover that they are not venture funded. How did they get funded? Sold shells out of their VW bug to get the $10,000 to file their first patent.

Or, look at SmugMug. One of my favorite Silicon Valley companies. A great photo and video sharing site and community. They funded themselves, too. Recently I visited them and spent an afternoon there and you’ll see they built one of the coolest companies around (and profitable one, too).

Or, visit PCH in Shenzhen, China. Huge supply chain company, builds lots of stuff you probably own. Started by Liam Casey. Did you know how he got funded? It’s a fun story. He had an order to build a bunch of circuit boards, which would cost about $200,000 to build, but couldn’t get funding anywhere to get them built. His bank? Turned him down. VCs in California? Turned him down (he loves California, though, PCH stands for “Pacific Coast Highway.” Funny enough GoPro is located on the real Pacific Coast Highway about two blocks from my house.

So, what did Liam do? He went to the factory owner and begged him to build them. Liam, when he told me this story, turned to me and asked “how did I get them built?” I said he must have turned over something valuable as collateral. He answered that he had nothing of material value, but that I was right. “So, what did he get out of me,” Liam asked. I didn’t know, but Liam soon offered that the factory owner asked for his passport. I love that story because it shows you can start a sizable company with nothing but hustle and your passport (the factory owner hired him to go and check on other factories, which soon became the database that is at the heart of PCH now).

So, again, why do you need Venture Capital to build a great business? Can you do it on your own without taking outside investment? These three companies, among others, like 37 Signals, demonstrate that yes you can.

About Robert Scoble

As Startup Liaison for Rackspace, the Open Cloud Computing Company, I travel the world with Rocky Barbanica looking for what's happening on the bleeding edge of technology and report that here.

22 thoughts on “Entrepreneurs: why do you need VC anyway?

  1. Since I am the founder of “that company” who GM and GMAC seemed they needed to shut down just as GM was going bankrupt in June 2009 and due to the fact that these US Treasury funded conglomerates have totally crushed and shut down my New US Automaker business and chased away my prospective investor groups and even our brokers…. Anyone have any idea where to go? What to do?

    This video of SmugMug’s drive and ‘where-with-all’ is inspiring, but I feel as if my life’s work has been ripped away from me and the US is blocking me from following the lawsuit. [If you only knew what I am referring to you'd understand and agree]… Once would have been a really great company (in my opinion) with that ever so important once in a lifetime “breakthrough technology (engineering actually)”, anyhow, once something like that is intentionally destroyed, what do you other entrepreneurs, inventors, businessmen do?

    I’d take VC, bank, Angel, or any other follow up funds these days… So what’s this big downfall with VCs?

  2. You need VC money to build big, game-changing companies. If you want to build a company that will be worth a few million dollars, you dont need VC money.

  3. Absolutely and I did it myself when I sold my first startup in 2007.
    I’m not going to say it was easy, nor am I going to say I sold it for $20 million.
    But dang if it didn’t feel great!
    Good post.

  4. Interesting post Robert.

    You’ve chosen a nice variety of companies.

    Loved that story of PCH tho.

    It certainly reminds is that Anglegate is the storm in a teacup. Things like this don’t stop entrepreneurs.

  5. Yes there are many examples of companies that started with virtually no money. But the elephant in the room about the lean startup model that no one seems to dare talk about is this; you can only have an un-funded (or lean-funded) startup when your employees can work for little or no money. This therefore limits your employee pool to (a) people just out of school who have no expenses (but also no experience) and (b) people who are wealthy. The result is that these startups do not get the wisdom and experience of the large pool of people who have lots of experience and success.

    Des Pieri http://www.ChangeAgentDes.com

  6. Hey Rob, even if you take VC money as an entrepreneur you should often think like you don´t have any. That helps enormously on your path to break even.

  7. Always greatly enjoy your posts and thought I could comment on this one. First of all, perhaps this is a sentiment born out of jealousy, but working at an European start-up I often see those wild valuations for US companies that don’t even have a business model, or more resemble features than actual companies. At the same time, I think there’s still plenty of reasons for VC funding:
    - You don’t pass a clinical trial with a boot-strapped start-up or create the sort of company that a friend of mine is starting where they build grain-sorting machines based on spectroscopy. That stuff is expensive to build, even just the prototype, and the engineers and physicists that build that thing don’t come cheap either.
    - Speed and market structure. In markets with network effects, you sometimes have to be faster. The main reason MyCityDeal got acquired by Groupon at a rumored 9-digit valuation is because they scaled like crazy in no time. A similar notion applies to markets where your product is better and will/should most likely prevail but needs to overcome the incumbent’s user lock-in.
    - Breath. I recently had a chat with someone senior from Open Table and he said that one of the reasons for their success was that they had more money in the bank than their competitors, especially because of the dotcom crash.
    - A lot of this comes down to the “initial cost” to win the market: In any market where the start-up cost (biotech, cleantech, engineering, etc.) or entry barriers are large (e.g. multi-sided markets that are quite prevalent on the web), and where the natural market outcome is quite rewarding (e.g. a monopoly), it can certainly make sense to raise money to achieve that goal.
    Not saying that it’s always the right to do, but ultimately VC funding is only cash to tide you over anyway, means to an end.

    Marc Andreessen makes some great and much more eloquent point on this issue: http://bhorowitz.com/2010/03/17/the-case-for-the-fat-startup/

  8. Great article and comments. Yes, The principle for borrowing for a business must be the same as we will do for our personal living. Just because, a business has options to raise loan/VC and has tax advantages, it is not wise to get into it borrowing unnecessarily. After all the business is run by a person and must be able to focus on his business and get get good sleep -

    Colin’s comment is worth reading over and over again

    “Ihave a new guideline for both starting and investing, if there’s not a customer interested now, and willing to pay now, the excess value created by the solution, although meaningful and perhaps a sustainable ‘lifestyle business’ model, probably doesn’t justify the costs of raising enough money to make it worthwhile”

  9. Thanks Robert. Enjoy every story I read about a consumer focused startup and hustling entrepreneurs. More proof that businesses don’t always need VC to grow healthy. My favorites are the stories of kids that that generate revenue in the hundreds of thousands of dollars range without doing any of the production or shipping in house.

  10. From the examples you’ve provided, sounds like you don’t need angel (or “super angel” as is in vogue today) funding either. just drive, determination, and a lil’ ingenuity.

  11. Good question Robert, I’m wondering all the time why entrepreneurs are chasing VC money – and if they get VC money treating it as a sign of success. Why not create something of value, value being demonstrated by someone takinng money out of their pocket and paying you for it.

    I talk to multple people a week in Seattle that are working in companies that are not making a profit. Many have a hard time articulating a sound business model. And their goal is venture capital.

    I started LexBlog out of my garage. My goal from the start was to build something that people would pay for. I had no capital other than my time and some credit cards. When my revenues were sufficient to support a loan, I went to the bank and got a line of credit.

    Sure, there are businesses that require a boat load of money to get going. But a lot of businesses I see don’t.

  12. Good one, Robert! Mike Stelzner took Social Media Examiner – a simple online magazine/blog site + his online summits – from zero to over $1M in revenue in ten months with a mere $5k startup capital. He built a small team around him and leveraged other bloggers’ top content with a win:win formula. He’s one of my fave biz peeps out there.

    1. Why?

      With pay-by-the-drink services like AWS and similar, you don’t need VC funding to build a data center. Manufacturing startup costs likewise are falling.

      Need enough funding to pay your devs and engineers to design the product? Either be the engineer yourself, or fund out of savings/credit, or maybe get an Angel.

      Need to scale up a sales staff? That just means you haven’t refined your product enough. If it is awesome and you have delighted your first customers, THEY will be your sales staff.

      Again, what sort of scaling do you need?

  13. I have raised VC funding. And I’ve raised funding via strategic investment (clients how want our stuff). And I’ve funded companies myself. I used VC’s once. And that was enough.

    I have a new guideline for both starting and investing, if there’s not a customer interested now, and willing to pay now, the excess value created by the solution, although meaningful and perhaps a sustainable ‘lifestyle business’ model, probably doesn’t justify the costs of raising enough money to make it worthwhile.

    SO I spend the time that I used spend finding investors, finding customers. And refining the offering. Until it’s irresistable. Those customers will be your biggest fans if you take care of them. And have a vested interested in your success. Also, and this not to be underrated – they actually know something about the market you’re in.

    VC’s should be the course of last resort for most businesses – unfortunately, I think there’s a lot of people in the tech biz who want the 4square, “I got VC funding” badge. Which is fine. Just know how much it costs…

  14. Amen.

    Just like a country which sit on massive oil reserves, getting funding can be just as much of a curse as a blessing.

    It dilutes your stock, makes you take on unnecessary staff and doesn’t make profitability as important because you can live off the money you raised. Also, the very act of raising money can be an enormous shift of focus from what really matters.

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