Don't follow Silicon Valley startup advice
Anthony Price
Silicon Valley investors and their ilk seek the next big thing to grab market share, and produce fame and Jeff Bezos-sized wealth. They call it disruption.
But when it comes to raising investment capital for a startup, should the one-size-fits-all Silicon Valley model be your guide?
This model of investing in startups works for only a cadre of well-connected venture capitalists. The firms invest, coach, and implore entrepreneurs to build fast while sprinting toward the finish line: a $1-billion IPO.
VCs control the process, money and promote this model as the way to raise capital, scale and grow.
Rarely is their way questioned by the media, lawyers, accountants, the army of advisors, or graduate schools cranking out MBA students like internet spam.
Bucking the trend
No two businesses are the same. Yet, startup entrepreneurs are blindly following arbitrary rules from investors often leading them off a cliff.
One venture-backed entrepreneur is speaking out.
Rand Fishkin, founder and former CEO of Moz, wrote the book “Lost and Founder.” He raised more than $29 million. Fishfin says, “Silicon Valley startup advice is flat-out wrong, mangled by survivorship bias, and only applicable to a tiny subset of companies and founders (even though it’s dispensed to everyone with one-size-fits-all uniformity).”
The media is a reliable partner. Rand Fishkin states, “The media, the hype, the legends of how Silicon Valley startups work are just a carefully crafted model home. They’re a set of pieces, painted by interested parties for their own benefits, built to hide embarrassing flaws. None of it is real.”
Jenny Kassan, an attorney advising mission-driven enterprises and author of the book “Raise Capital on Your Own Terms,” says, “Entrepreneurs are some of the most creative and innovative people on the planet, so why should they accept a standardized, cookie-cutter funding model?”
Small returns not wanted
Startups reaching $20, $50 or $100 million in revenue don’t make the investment cut.
These smaller companies are considered failures from a VC perspective. Simply because they will not return enough capital to the VC’s limited partners who provided the capital. The baseball analogy is VCs must always hit grand slams. Read Tomer Dean’s piece on Medium: “The Meeting That Showed Me the Truth About VCs and How They Don’t Make Money”.
Alternatives to the Valley model have sprouted up.
Since April 2009, projects on Kickstarter have raised the profile of reward-based crowdfunding with more than $4.2 billion pledged by 16 million people.
Overall, 161,193 projects have reached their funding goals – including this author’s project.
The JOBS Act was passed in April 2012 and led to regulation of crowdfunding in May 2016, allowing small businesses to seek an investment (debt or equity) up to $1,070,000 each year from the public on internet platforms such as Wefunder, Republic and Start Engine.
Silicon Valley-style investors will insist there is only one way to attract investment to a startup. But this doesn’t work for most.
“Using a one-size-fits-all approach to bringing on investors is one of the surest ways to make your life a living hell,” says Kassan. “Never trust anyone who tells you there is only one way to raise capital.”
Silicon Valley’s model should not be your template. You must source capital aligning with your business.
Anthony Price is founder and CEO of LootScout. He is the author of the book, "Get the Loot and Run: Find Money for Your Business." Reach him at anthony@lootscout.com.
WBJ Web Partners
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