Why We Turned Down VC Funding
The topic of investment funding has come up a few times in the past and earlier this year we actually reviewed a formal offer. Ultimately, we turned down that offer and through that process have decided not to entertain any others in the near future. Traditionally web funding isn’t targeted towards services companies; but it is by no means uncommon. We work with and talk to a lot of start-ups and aspiring entrepreneurs; Angel or VC funding seems to be top-of-mind for all, but we felt that most really didn’t understand why. We questioned ourselves a bit as well.
There is this common misconception that if you build it they will come, and if they come, investors will fund you. There is an even greater misconception that funding equates to hitting the jackpot of sorts. Funding by no means gets you the Porsche or even helps clear your credit card debt. While investors are investing in you first and foremost, that funding isn’t for you at all. It is to help sustain, grow and broaden the potential of your product or service offering. Funding is more times than not just a short-term loan, one with ambitious expectations of a return four to ten times over.
In this post-bubble post-web2.0 era, there is still this very cool, exciting, stigma with being funded or even with just engaging in polite conversation regarding the opportunity. VC’s and Angles are like these mythical figures we’ve placed on high pedestals that we revere, admire and respect and whose approval and acceptance we so desperately desire. Wanting to be funded for the sake of being funded is much different than needing to be funded to grow in the direction you’ve planned. The real question you have you to ask yourself is why do you want it, what will it do for you and do you need it? Do you need it? That is the big question!
That is the only question we had to ask and answer, do we need funding to do what we want to do. Well, honestly, that one question typically prompts the answering of another question first; what do you want to do? A fundamental question that should be asked and answered before you seek funding; one that should be answered before you even start your endeavor really. We wanted a small team of talented people that love what they do, love where they work and have that be a recipe for creating great things. It is a recipe that has been successful for us from the beginning and has proven to scale well with respect to our ultimate goals. Can this be done without funding, should it be?
We’ve been fortunate enough to be profitable as of our first day in business. Never having to put personal funds into the business, borrow money from friends and family or take investment. We’ve always been careful, some might say too cautious, to grow at a reasonable and responsible rate – even though we’ve already grown a lot in a short period of time. We’ve always been booked and traditional business logic says when you’ve got more work than manpower, hire more manpower – we respectfully disagree. We’d rather turn away project after project before we’d want to grow bigger than we can handle; perhaps bigger than the culture we want.
Culture is important; to us it is most important. That might make us unique and perhaps even unusual. But it was a defining factor in not accepting funding; or better said, in not accepting a business partnership with a VC. Not being pressured to hire for the sake of hiring, not being pressured to grow outside of the culture we wanted to create and not being held accountable for our unusual focus on creative talent, environment and culture over revenue and profits. We, nclud co-founders, are a bit of a wildcard, slightly unreasonable people to make a deal with, in the fact that becoming extremely rich and getting that unnecessarily large home outside the city isn’t a driving factor for us (at least not right now). We of course like to make money, drive a nice car and own a nice home … being happy and comfortable and reasonable is what we strive for. But when there is more money we don’t buy nicer cars and bigger homes, we give out raises and bonuses, higher more talented people, get a better studio space and just reinvest in making the company, the culture, better. It is just about creating an environment where great people can do great things, rinse and repeat; that is it. We have one more thing we’ve seen missing in other entrepreneurs, patience. We were in no rush to stop working out of our condos, no rush to hire our first employee and in no rush to be an award-winning agency. We got a studio space as soon as we could afford it; we got a better studio space as soon as we could afford it. We hired our first employee as soon as it made sense; we hired our second employee as soon as it made sense. There is a lot of excitement and anticipation in an entrepreneurial venture; but don’t let that misguide you to unnecessarily and inappropriately rush.
We turned down VC funding simply because we didn’t need it. Not because we don’t believe in it, but because we are able to do everything we want to do on our own. The day we can no longer do that is the day we may reconsider. Funding isn’t a check box on the start-up list of “things to do”; it is simply an option for those who require help to get where they want to go.
Posted by Martin Ringlein on May 12, 2008 | Permanent Link |
Well said, sir. And besides, does VC funding cover any Mario Kart work breaks or evening gatherings? I doubt it.
“We’d rather turn away project after project before we’d want to grow bigger than we can handle”
I applaud your attitude and insight on this issue. Too many companies see a solid project pipeline and immediately want to start throwing bodies at the work. Inevitably, the quality of the work will suffer and so will the business.
Your post is not just specific to VC money. Anytime there are outside financial forces influencing the bottom line (i.e. in public companies) it becomes more difficult to maintain that culture you’ve described.
Best of luck to you and Alex!
@Patrick, thanks! Yeah, it is all about culture for us. If we can’t play mario kart and have to start pinching pennies and reporting to a higher force; we might as well just go back to an in-house 9to5.
@Scott, thanks for the comment. We definitely are not the only ones that have this methodology, but I do hope more and more adopt to it; especially as a track record of success becomes more evident.
For us, our differentiator was never that we did “web design” — everyone does that. It was in how we manage, inspire and give energy to creative talent. We all love what we do, imagine what happens when you love what you do at a place you love to work — wow, powerful stuff happens then.
It’s great to see a sobering point of view when funding is what everyone seems to care about these days.
I used to work for a company that sacrificed culture for the bottom line. They had the attitude that if you weren’t the biggest, you might as well not exist. Wasn’t the best place to inspire creative people.
While funding can be important, sincerity and a passion for what you do can take you much further.
@Jeremy, I agree. I fear that most, with respect to funding, take it, seek it out or even romanticize about it without considering if they actually need it. Funding is not something to aspire to; they are helpful resources to utilize when needed to help accomplish a much bigger dream — don’t let funding be the dream, only a way at getting to the dream.
Martin – A great and needed post. I’ve been on both sides of funding transactions in past ventures, and it is actually a lot less fun to be on the side receiving funds (once the initial high of getting the money wears off). That’s for the reasons you cite – outside financial controls change the options and fundamental culture of a company. Not that outside money is not necessary for certain ventures, but as you say, it definitely should not be romanticized.
@Victoria, you are right on. Once that high wears off and reality sets in; funding isn’t the sexy objective it once was.
Very nice write-up, Martin. I have very same thoughs. Since I moved my studio to a better space and start some potential side projects, many people asked me to invest their money. The answer is very simple: “I don’t want other people control my dreams”.
Fund yourself, it’s the way to go, start-ups!
@Min, right on man. great reference by the way to the 37signals link — those guys inspire the hell out of me. Not so much that I follow what they say, but they give me justification to my own crazy and unconventional thinking that to me just seems like plain old common sense.