Venture capital is pouring in, but these 11 startup founders decide to turn down those big checks. Here’s why.

An illustration of a startup founder “dodging” risk dollars to seed instead.
  • 11 founders tell Insider why they don’t follow the typical Silicon Valley fundraising script.
  • The founders say they can maintain a small board, prioritize clients, and still achieve profitability.
  • Other alternative funding methods used by the founders include crowdfunding and increasing debt.
  • See more stories on the Insider business page.

In 2016, entrepreneur Ben Peterson added a definitive name to a list of 125 venture capitalists interested in investing in his HR software services startup, BambooHR.

He then turned down every VC and hasn’t touched the list since.

“We actually had a reputation in a company of being called the VC Dodger,” Peterson said. To this day, the BambooHR team still responds to weekly inquiries from interested investors, but has not accepted any additional venture capital for the past five years.

In today’s hectic fundraising environment, founders have more options than ever to raise capital, and many don’t always rely on the titans of Sand Hill Road.

Start-up founders like Peterson discovered that they only needed venture capital money early on to start their entrepreneurial journey, but then decide to seed the capital on their own, despite the news. regularly from interested investors.

“It’s the embarrassment of riches,” said Scott Arnold, CEO of Auditboard, another startup founder who regularly turns down emails and calls from interested investors. “It helps me focus on building the business, not fundraising.”

Insider spoke to 11 startup founders about why they choose to continue to refuse VCs to self-finance their businesses. For everyone, it’s about staying customer focused, while retaining control and majority ownership of their businesses without having to deal with a multitude of investors looking for returns on their capital.

“VCs will say they’re friendly to founders, but it’s actually their job to make as much money as possible,” said Andrew Gazdecki, CEO of MicroAcquire, a startup that helps founders acquire their businesses. . “When they invest in you, they put their name behind it. And so in their world it’s a billion dollar results or failure.”

Hunting clients on termsheets led to profits

KiwiCo Founder and CEO Sandra Oh Lin

Doximity, the social network for healthcare professionals, went public in June with just $ 81.8 million in total private funding from investors. On the day of the company’s IPO, CEO Jeff Tangney told Insider that the company had spent none of the $ 54 million raised seven years ago in a Series C cycle from investors. Draper Fisher Jurvetson, T. Rowe Price and Morgan Stanley.

“In the end, our company did better than we expected at the time and we never touched it,” he said. His investors joked at the time that the funding was “mattress money” to help him sleep better at night.

Likewise, KiwiCo, a subscription service for children, last raised funds from traditional investors, including First Round Capital and Mayfield Fund, in late 2014. The company only raised around $ 10 million. dollars in total.

KiwiCo Founder and CEO Sandra Oh Lin said the business has been profitable and cash flow has been positive since 2016. This has enabled her to say ‘no thanks’ to many VCs over the past seven years. , including a step later than last week. .

His recommendation to other founders who are just starting out is to take a close look at the pros and cons of venture capital funding and figure out when and where you fundraise.

“In our case, starting a business where we weren’t dependent on the next check gave us the freedom and control to grow quickly but independently,” she said. “We basically didn’t want a capital increase or the lack of a capital increase to be the reason we couldn’t achieve our ambition.”

Like KiwiCo, BambooHR’s strategy of raising just $ 12 million from a handful of investors like ICONIQ Capital has apparently worked. Over the past five years, BambooHR has grown more than five times to become a profitable, self-sustaining business with recurring annual revenue of over $ 100 million.

Keep a small but nimble board

Scott Arnold, President and CEO of AuditBoard.
Scott Arnold, President and CEO of AuditBoard.

“There is agility in decision making and the move you can do with a lean governance model,” said Arnold, CEO of Auditboard, a startup that helps companies streamline their audit programs, from risk and compliance. “There are no complicated fund dynamics of a different group of investors to manage,” he said.

Battery was the last company to lead the company’s $ 40 million Series B in 2018. Today Arnold sits on the company’s board of directors, which includes the two founders and Michael Brown, general partner. by Battery Ventures.

“Free money doesn’t exist,” Arnold said. “And so it’s very important from my point of view that we don’t inadvertently take on a burden.”

Keep control

Jeeves co-founder Sherwin Gandhi told Insider that raising debt early on was one of the best decisions he’s made. The expense management platform startup emerged from stealth in June with $ 31 million in equity and $ 100 million in debt financing.

While equity provides Jeeves with working capital, debt provides the company with what Gandhi calls “non-dilutive rocket fuel” to support its growing revenue model and expand the company’s global footprint. . Debt also helped to minimize the abandonment of the company’s equity, which was important to him.

“For any entrepreneur and any team, selling equity means giving up economics and control, while debt opens a channel for getting working capital while retaining more property,” Gandhi said.

Debt doesn’t have to be a scary thing. By working with Pollen Street Capital, a lender who he says has extensive knowledge of capital markets, Gandhi was able to craft a deal that not only benefited him but his global startup clientele with an international credit card. business that can operate on multiple currencies.

The type of debt he incurred, he was careful to point out, was not venture capital debt, but rather a type of line of credit called a “warehouse”, or a place where he could. put away loans which can then be provided to clients in different countries. like Brazil and Chile.

With this type of debt, Jeeves was able to grow from Y Combinator to a valuation of $ 500 million in less than a year.

There’s the increase in debt, and then there’s the founders who just don’t agree with the VCs. This is the case of entrepreneur Dawn Dickson-Akpoghene. She received her first million dollar check in 2017, when there were less than 30 founding black women who were raising business ventures worth that much. But after validating her first big check, she realized that continuing on the traditional VC path was not for her.

“It wasn’t right for me to give up a lot of my business to enrich others,” she said. She has since turned to crowdfunding to raise money for PopCom, her automated retail software startup, and has since raised a total of $ 6 million from around 8,000 investors.

“What’s most rewarding is that I keep control of my business,” she said. “We also only have common stock. Nobody has preferred stock. Everyone eats together.”

GettyImages 1095194306
Arlan Hamilton, Founder and Managing Partner of Backstage Capital

Investor Arlan Hamilton had the same idea when deciding how to fund his new recruiting platform startup, Runner. Hamilton could easily have withdrawn money from her own VC firm, Backstage Capital, or contacted VC friends to invest, but instead chooses to start with Runner’s earnings. If the company ever succeeds in exiting, she tells Insider that it is committed to sharing its benefits with Runner employees and investors who have supported Backstage Capital’s Reg CF, a crowdfunding campaign.

“I could probably do things faster [with VC funding], but I’m not doing it because I don’t want to give up that 10-25 percent equity on day one, it just doesn’t make sense to me, “she said.” And I want to open up. the way to the vision that I made it, and it is my decision. “

Source link

Comments are closed.