5/4/2015

Your Startup Can Thrive Without VC That it Will Probably Never Get Anyway

SMALL BUSINESS FINANCE

Your Startup Can Thrive

Without VC That it Will
Probably Never Get
Anyway
John Mullins
Contributor
Author And Associate Professor Of Management Practice,
London Business School
SEPTEMBER 04, 2014

Everybody believes that running a lean start-up,

pivoting when the time is right and raising venture
capital are the trifecta of todays entrepreneurial
world, right? Hang on! These days, the rejection rates
at accelerators, angelsand VCs are off the charts.
YCombinator, 97.2 percentrejected.Only 74 of
2,600 applicants were accepted into their latest
cohort.
AngelList, 98.8 percentrejected: Angels are not
more welcoming. Of the 85,000 deals listed on
the AngelList site in 2013,only around 1,000 won
funding, according to The Economist.
Andreessen Horowitz, 99.3 percentrejected: Of
some 3,000 inbound deals a year, 15 to 20 are
funded. As Mark Andressen puts it, Our day job
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Your Startup Can Thrive Without VC That it Will Probably Never Get Anyway

is crushing entrepreneurs hopes and dreams.

Our main skill is saying no, and getting people not
to hate us.
Related:Can't Get a VC to Notice You're Alive? 3
Alternative Funding Sources for You.
With these kinds of odds, most entrepreneurs will
have to find a better way to start, finance, and grow
their businesses. But how?
Customers cash.Consider Claus Moseholm, cofounder of GoViral, a Danish company created in
2003 to harness the then-emerging power of the
Internet to create and deliver video content for
advertisers in viral fashion. He funded his companys
steady growth with his customers cash from the
proceeds of one successful viral video campaign after
another.
Moseholm and his partners built GoViral into Europes
leading platform to host and distribute such content.
In 2011, GoViral was sold for $97 million, having never
taken a single krone or dollar of investment capital.
The business wasfunded and grown entirely by its
customers cash.
Is customer funding better than VC?In my view, the
time and place for VC iswhen your business is
already firing on all cylinders and just needs more
fuel to grow. One reason rejection rates are so high is
that most of the companies that prospective funders
see havent gotten anywhere near that point just yet.
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Your Startup Can Thrive Without VC That it Will Probably Never Get Anyway

So if your business isnt there yet, or maybe wont get

there at all, what should you do?
What the largely unknown Moseholm and the more
celebrated Michael Dell and Bill Gates have in
common may surprise you. All three of them started
and grew their companies largely (entirely, for
GoViral) with their customers cash. Happily, there are
five customer-funded modelsthrough which they and
many others have done exactly that:
1. Matchmaker models, such as the USAs Airbnb and
DogVacay.
2. Pay-in-advance models likethe USAs Threadless
and Indias Via. Its what Michael Dell did, getting paid
in advance before buying the parts for and
assembling his customers PCs.
3. Subscription models likeIndias TutorVista andthe
USAs H.Bloom.
4. Scarcity models, for example Spains Zara, Frances
venteprivee, the USAs Gilt Groupe.
5. Service-to-product models, including Denmarks
GoViral andPuerto Ricos Rock Solid Technologies.
Bill Gates and Paul Allen, after getting started as a
services business that wrote operating system
software for the then-nascent PC industry,
transitioned to selling application software like MS
Word and Excel in shrink-wrapped boxes.
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Your Startup Can Thrive Without VC That it Will Probably Never Get Anyway

Related:4 Common Venture Capital Myths

If you're wondering is these models better than
raising VC, face the facts. Sadly, as any experienced
VC or business angelwill tell you,the Plan A that you
have so lovingly conceived is unlikely to work.
Peter Drucker, arguably the leading management
thinker of the twentieth century, observed, If a new
venture does succeed, more often than not it isn a
market other than the one it was originally intended
to serve, with products and services not quite those
with which it had set out that arebought in large part
by customers it did not even think of when it started
and used for a host of purposes besides the ones for
which the products were first designed.
The way forward.If youre an aspiring entrepreneur,
an early-stage entrepreneur or an angel investor,
mentor or business accelerator or incubator
professional who supports high-potential
entrepreneurial ventures, a customer-funded
approach may offer the most sure-footed path to
starting, financingor growing your business or one
you support withoutinvestors, at least at the outset.
If all goes well, as was the case for Claus Moseholm
of GoViral, once you get started, you may well find a
way to go the distance without outside funding. If you
do, youll end up owning a much larger stake in your
business than if youd taken venture capital. Who kept
a greater share of the value his company created,
Michael Dell or Steve Jobs? It was Dell, hands down.
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