Rachel Chalmers of Ignition Partners warns founders that VCs really aren’t their friends.
Pity the venture-backed startup founder. That’s the conclusion you might draw from pair of blogs posted this week.
“Why your company should avoid venture capital,” was the headline on the post from Pittsburgh-based growth consultant Andy Birol.
“Five reasons not to raise venture capital,” was the theme of a blog from Rachael Chalmers, the IT analyst turned VC at Ignition Capital in Palo Alto.
Birol’s advice seems focused on entrepreneurs that probably aren’t building the kind of businesses VCs would be interested in anyways. It’s often better to focus on pleasing customers than satisfying the demands and priorities of venture investors, he says.
“Turning to venture capital for money to grow your business is sort of like going to a bar looking for someone to marry. The longer the night goes on, the clearer it is that most people you meet have short-term objectives,” Birol writes.
Chalmer addressed Silicon Valley entrepreneurs more directly.
“The seductive narrative of Silicon Valley stars a genius-hero who goes on a journey, overcomes myriad obstacles, has a flash of insight and is rewarded by wise and benevolent investors with Series A funding. This narrative is bullshit, but it’s everywhere.”
The point of both blogs is that venture funding isn’t the best source of capital for a lot of businesses and getting VC backing is far from being a guarantee for success.
Chalmers estimates that of the 1,000 VC-backed enterprise startups she encountered in 13 years as an analyst, only eight got all the way to an IPO. A total of 188 were acquired and “28 of them failed so hard they don’t even fog a mirror any more.”
A report this week from CB Insights provides even more data on this point. Of all the VC-backed companies that raised seed money in 2009, 75 percent are orphaned, dead or became “self-sustaining.”
This last group is often termed, disdainfully, by VCs as “lifestyle businesses.” That means that there is probably a business that will spport the founders and their families but will never scale.
About 21 percent of the Class of 2009 were acquired. The rest, only about 4 percent, are still around.
The report and the two blogs make the point that the chances of success as a venture-backed startup aren’t great. They may even lead readers to wonder if things have gotten worse in that regard.
But very few VCs I have dealt with suffer fools gladly who think that startup success is easy. They actually go out of their way, as Chalmers does, to dissuade founders from that idea.
The reality is that it has never cost less to build a tech startup and it hasn’t been considered this cool to be a founder than during the tech bubble of the 1990s.
But the facts show that extremely few of these startups are likely to survive, and that doesn’t seem to be anything particularly new. It just runs counter to popular myth.
Cromwell Schubarth is the Senior Technology Reporter at the Business Journal.
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