VC funding or not?

In a previous post we discussed a lean startup philosophy vis-à-vis a typical VC-funded startup. Here lies the classic conundrum of an investor who is (supposedly) omniscient and omnipotent, and hence would direct the company in his/her supreme wisdom. There lies the challenge of many “funded” startups, since they are essentially at the mercy of a supposedly “know-it-all” VC whose goals are often at cross-purposes with that of a startup as we discuss below.

Recently, a trusted adviser (and an entrepreneur with a decent exit) mentioned that VCs often have very divergent interests from those of the average entrepreneur. A typical entrepreneur is happy with a 5x or even a 2x exit from a startup. An institutional investor– who is typically invested in several companies simultaneously - is looking for one or two big hits with little heed for the rest. To use a baseball metaphor, an entrepreneur is OK with a double or single, but a VC is looking for a walk-off home-run, and they want everyone in their portfolio to swing for the fences. To them, any startup in their portfolio is expendable in the hope of getting a large payback overall. They want to bet big and win bigger, if some fail “oh well! Too bad”. However to an entrepreneur, their one-and-only bet is their startup on which s/he has invested their blood, sweat and tears.

We think any entrepreneur should consider this proposition very carefully before considering any institutional investment.

Here is yet another fabulous slidedeck from Eric Ries that expounds further about “lean startups”

Eric Ries Lean Startup Presentation For Web 2.0 Expo April 1 2009 A Disciplined Approach To Imagining, Designing, And Building New Products

View more presentations from Eric Ries.