Why you should build your tech business without VC funding

Will Capper argues that tech businesses do not always need venture capital funding to scale. In fact, VC funds can actually harm your business

Despite the havoc wrought by the pandemic, venture capital fundraising hit record levels in 2020. But should we really be surprised? For many (if not most) entrepreneurs, building a business that will grow and be taken seriously without VC funding is a frightening prospect. In the tech space, it is almost unthinkable.

And yet there are advantages to being founder-funded or turning your back on eager VCs hoping to snag the next Facebook or Stripe. Shopify, Mailchimp, ShutterStock — these businesses flowered without VC funding and even became what are known as “invisible unicorns”. But you do not have to be a unicorn to benefit from going it alone.

>See also: Moonfire $60m seed fund invests in dozen start-ups

Growth is not the goal

Venture capitalists are money makers, not business owners. To them, your business is an asset — one of many within a portfolio of businesses, some of which some are bound to fail. But “hyper-growth” tactics and premature scaling, often encouraged by VCs who hope to dominate the market and build a unicorn, put pure growth over steady and sustainable profit-making.

Over time, operating costs will likely rise due to this “growth is king” mentality. Returns, meanwhile, will likely fall. In fact, the Startup Genome Project found in 2011 that premature scaling is the reason that 74 per cent of high-growth start-ups to fail.

And if your business fails, you don’t have another one.

VCs on the other hand have a whole load of them, and only a small number have to succeed to yield a substantial return on their portfolio investment.

Be a money-maker, not a money-raiser

When the cash you spend comes out of your own pocket, you tend to be hesitant to part with it. You have to interrogate the reasons why you are spending the money, and ask yourself whether there is a better way to spend it. This is why the owners of bootstrapped or self-starting start-ups are acutely aware of how much things cost. If they aren’t, they learn quickly. They want to get the most value out of each purchase and to make the kinds of choices that will please their customers and teams, not a group of investors. In a nutshell, these founders aim to make money by providing a product or service rather than raise money from outside parties. This is a fundamental difference in mindset with tangible ramifications for how your business functions day to day.

‘You don’t need millions or even thousands of dollars in funding to prove there is a market for your business’

Make decisions on your terms

Those who decide to seek out and accept VC funding are giving up equity and taking on another (loud) voice at the decision-making table. Diversity in the decision-making process is, most of the time, highly desirable, but, in this instance, it can cause problems. For one thing, you as the founder — someone who lives and breathes your business, and understands its culture, vision and values — will lose the right to make choices as and when you need to make them. You may find yourself in conflict with a VC, whose priorities will be different, or you may just find that decisions take longer to make, and you cannot set the pace that is right for you and your company.

>See also: City of London to reinvent itself as technology start-up hub

Become a more complete founder

If you have no experience in sales or marketing, for example, VC funding might give you the cash you need to hire a professional. But without that money, you are forced to learn the skills you need, and you become a more rounded founder in the process.

Of course, your time is precious, and it is unrealistic to expect a founder to learn every skill she or he needs to provide a complete service. But a wealth of online resources and tools make it possible for any founder to develop a basic understanding of certain skills. Some roles can be outsourced almost in their entirety at the early stage to digital tools, such as accounting software.

Don’t dream it, do it

Our approach at DirectlyApply was to solve a problem that we knew existed, which we knew needed solving. That still lies at the heart of what we do every day. Business owners who have ignored VC funding do not waste time dreaming about what they would do with vast pools of cash. They focus by necessity on doing what they can each day to perfect their product and find people to buy it. So, though a carefully articulated vision is often necessary and motivating, it is the work you do to make it concrete — tasks you complete every day– which counts. VC funding tempts you to dream big, when what really matters in any business, is the work and the detail.

Going it alone

None of this is to say that VC funding is not the way to go. There are circumstances in which it is preferable to go the VC route, if that route is available. And, although I have generalised, not all VCs are the same by any means. If you find the right investor and founder, you may have found exactly what you need to make your business successful.

However, you should never be daunted by the prospect of going it alone. Even with limited resources you can build a minimum viable product (MVP) that will enable you to discover if there is a market for your product or service. If you start to see traction, calculate how many more clients or users you will need before your idea becomes financially justifiable.

Alternatively, if take up is slow, you can either pivot or go back to the drawing board without having spent large sums of either your own or VC funded money. It is crucial to remember that you don’t need millions or even thousands of dollars in funding to prove there is a market for your business.

The best source of capital, for us and for others, is a satisfied customer. That keeps founders honest and striving to be better. It forces you to focus on value over brand, on product over promotion, on service over sales, even though those other aspects of business life matter. Aspiring tech founders should know, then, not just that VC funding is not needed, but that often — perhaps more often than not — it is desirable to go without it, too.

Will Capper is co-founder of job discovery platform DirectlyApply

What do you think? Is it sometimes better to forego venture capital funding and bootstrap, even when you’re scaling? Please comment below

Further reading

Series A to Series D, everything you need to know about funding rounds


Will Capper

Will Capper is co-founder of job discovery platform DirectlyApply.

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