Venture Capital’s Biggest Fear

I enjoy running my own business. One of the things I find most interesting is learning about business mechanics from a completely hands-on perspective. While I would not classify my education as nearly complete, in the several years I’ve run Red Sweater I have a learned a few objective truths about all businesses, and many subjective preferences about how my business should be run.

One of the most important questions any business deals with is how it will be funded. If you’re thinking of starting a business, you should probably decide how you want to be funded early on, so you can orient your business towards being successful in the context of that funding.

Broadly speaking, a business will either be “bootstrapped” or funded by outside investors.

The goal for a bootstrapped business is to come up with your initial funding, be it in the form of cash, free time, raw materials, or some combination, and parlay these resources into a service or product that generates revenue from customers. Once the revenue from customers pays for the founders’ initial investments and sustains the recurring expenses of the business, theoretically including your salary as a founder, the company is profitable and poised to grow. The huge benefit to bootstrapping your own business is that, once the company is profitable, you retain 100% control of the business’s strategy and resources.

Another method of starting a business is to seek outside investment in the form of angel funding or venture capital. You give up some clearly specified percentage of the company’s ownership in return for cash, guidance, and social connections. From here, the goals are basically the same: to become profitable, but at the end of the day you end up with a smaller stake in your own company than you would have if you bootstrapped it yourself.

I think there are good arguments for both approaches, but I am strongly disinclined to seek venture funding for my business. When friends ask for my opinion, I almost always strongly discourage them from seeking it as well. Why? Because venture capital doesn’t speak to our priorities, and is unlikely to build the kinds of companies we want to run.

I was listening to the always-inspiring This Week in Startups podcast when an interview with Tony Conrad led to a perfect synopsis of why venture capital is not right for me. Jason Calacanis and Tony Conrad were discussing the state of venture capital in the technology world, and observed that consumers are spending a ton of money online, but there is a “risk” that the money is being distributed among too many companies. In a nutshell, they said, the online business world was becoming more like “Main Street,” with too many small businesses, and not enough “Walmarts” to pay back the massive returns.

This, Tony Conrad said bluntly, was his “biggest fear.”

Venture capitalists would rather fund a single billion-dollar company than a thousand mom-and-pop million-dollar shops. I can’t say that I fault them for this, but it cuts to the core of where their priorities lie: they gamble on high stakes, massive returns, while shunning the concerns of any business that wants to maintain a mom-and-pop Main Street business ideology. Personally, I prefer the Main Street shopping aesthetic to Walmart, and I know which part of town I want my business in.

If you want to be Walmart, by all means seek venture funding: you’ll need lots of it to stand a chance at succeeding. If, on the other hand, you want to build a company guaranteed to preserve your values, fund it yourself and maintain control. You’ll own something to be truly proud of while helping to scare the crap out of venture capitalists.