By David Williams:
For entrepreneurs, the siren call of venture capital is everywhere. In the U.S., VCs raised a total of $40.6B in 2016 (according to Pitchbook data), the largest sum since the jaw-dropping $101.4B in the midst of the dotcom land rush in 2000.
As the CEO of a growing venture, I get 20-30 calls and emails per week from VCs wanting to give us money. And every time, my answer is “no.” Don’t get me wrong—this is not because our company has hit the jackpot and our pockets are flowing with money. Some of our seasons are hard. Banks are tight. Meanwhile, the development of new products and features takes money. And every rising company knows the pain of perpetually adding infrastructure and staff to run their growing business with the income they earned and collected as a smaller organization 2-3 months before.
- VCs are looking for companies that fit their model. Ultimately, they are investing for one reason alone: a profitable exit. This means that for them (and you) to profit, you must exit. Knowing this, the people who join you will need to be incented by the hope of potentially getting in on a little piece of that goal. This may work to a degree for the senior management hires, but the rest of the organization will be regularly looking over their shoulders to jump ship and earn a little bit more or to avoid the risk of being laid off when the inevitable exit occurs. For example, one of the four unicorn companies in Utah continually laments their inability to keep their salespeople and content writers on staff. With no hope of an exit payday, these rank and file workers are willing to move down the street every season for a few more dollars of pay.
- Even if you fit the VC model, your chances for big success are amazingly slim. VCs walk into deals expecting that of every 100 companies that achieve investment, 20 are write-offs, 20 are losers, 40 are low-to-mid performers and only 20 will win. The chances of big success are perhaps 1-2 in 10. Even if you are that 1 in 10, what will be the size of your exit? Regardless of the discomfort of moving forward as a victorious founder and leaving your team of supporting comrades behind, will the sum be high enough to allow you to retire in comfort? The odds are exceedingly low.
- The freedom a VC brings you now will restrict you later. Yes, the VC may provide you with welcome expertise. But if they don’t like the strategy you’re pursuing, they win. You may be removed. Or you may find yourself working for somebody who is not of your choosing, who is suddenly at the helm of your company and now in charge of your invention (your baby). How would that feel? My friend Ray Zinn, who I introduced in one of my prior columns, notes the average tenure for a CEO of a VC-funded company is three years. “I didn’t become Silicon Valley’s longest serving CEO (37 years) by accident,” he says. “I had an enduring company with a long term view, and the employees owned nearly a third of the company. This made them all in, which would not have happened if we’d been VC funded.”
- Even if you exit, it may be less than ideally valued or timed. As you may have noticed, the investment you receive from VCs is generally held and defined by a fund, and funds are bound by the laws of their makers. This is why so many innovative ideas fall by the wayside in the VC model, as the rules may call for only “SaaS-based models with the potential to produce a 10x return within 2-5 years.” So what if the end of the fund’s timeline is nearing and you’re producing only a 2-3x return? Despite your solid performance, you will likely not be getting the chance to achieve your potential return. You may be sold off to the nearest M&A taker or rolled up with another entity to basically be “sold off for parts,” allowing the fund to deliver promised returns for investors within the window allowed.
- Taking a little longer to work through hard things can be good. As Zinn often says, working through the tough things can be exceedingly good. Those who lead by simply pursuing more money to ease the pain of growth will never achieve this hard learning. Likewise, the teams they lead will become accustomed to a system and existence they expect to provide them with ease. The greatest achievements in entrepreneurship, however, require patience and steadfast effort. They will ultimately require all-out grit.Fellow Utahan Ben Peterson, cofounder of BambooHR (a leading Human Resources Information System, or HRIS), led the company launched in 2008 to triple digit growth, waiting a full four years into his business before strategic funding made optimal sense. “You should bootstrap as long as you can, and only take money when you have to,” he says, although he believes that thoughtful and disciplined partnerships in funding have the potential to be a very good thing.
If you have followed my columns, you may be aware that in 2010, in the midst of the great U.S. recession, our majority investor faced the need to divest himself of his ownership, quickly. In our need to find a solution, we investigated every funding alternative, including VCs. We compiled a list of targets and went about the process of making our pitch. Universally, the investors we spoke to loved our business. They admired our success and our character ethic. But we (and they) had an insurmountable problem in the fact that not only were we unable to promise a 10x exit, we didn’t want to exit at all. They were inspired by our desire to create a 100-year-old company. (“Our exit strategy is death,” I said then, and I continue to repeat it today.) But because we didn’t meet the rules for their funds, the answer was “no.”
So we turned to the banks. They wanted to help us, but in the midst of the recession, could not. Finally we were down to one lone bank, Zions, which stood by us in the face of the changing rules and bank crisis and extended us the only enterprise loan they offered in 2010. But it was $500,000 short of our goal. As I turned to my team in humility and 30 days away from our investor’s limit, I welcomed all thoughts. Checkbooks came out. Team members volunteered to take salary cuts, to contribute vacation pay and even opened up retirement loans. These were clearly not the actions of a team (or even a founder) motivated by the desire to hasten an exit. They were the decisions of a group that did not want to be sold, and of people hoping to work for the company for many more years, and perhaps to create a company their children would come to work for as well. They were resolute.
Together, seven years later, we are an employee- and management-owned company that continues to achieve record growth. For the most part, the worries about having resumes at the ready are gone. We experience very little turnover. We are bound together in a common goal that is not driven by the desire for an IPO or to be acquired. We are building a company that is meant to last and we’re determined to win.
But back to the weekly VC calls. Admittedly, not every one of the 20-30 messages per week is from a new investor. Some are repeat contacts from the VCs who know me by now and are “just checking in.” I am realizing a fitting way for a company like ours to work with VCs. We may be interested in the organizations they see that they deem “unfitting”—too small, not growing fast enough for their model, or the profitable smaller entities they’d like to shuck off. Perhaps we’d like to buy them. I’m not entirely shutting the VC community out. I haven’t bought anything yet, but am in the process of opening the door to the right opportunities. I’ve seen at least several worth exploring past steps one and two. So there may be a productive way for us (and others like us) to work with VCs. No, I will not be selling my company. But we may be open to buy…
David K. Williams is CEO of Fishbowl Inventory, in Orem, Utah, and author of “The 7 Non-Negotiables of Winning: Tying Soft Traits to Hard Results,” available here.