Often I get asked the question: when is the right time to take venture capital? My answer is: Never. Unless you absolutely need to take a round, the best way to start a company is by bootstrapping it yourself.
When I founded Shutterstock in 2003, I decided to take a different route than most entrepreneurs. Way too typically, one would put together a business plan and find funding. What most people don’t realize, is that there are plenty of tools out there to start your own company with just a few thousand dollars. If you can figure out how to avoid an angel or venture round, you will have much more control in the long run. This isn’t always possible – but I would recommend trying everything you can to remain independent.
Eventually Shutterstock did a growth private equity round five years in. At this point in the company’s lifecycle, we had much more control than we would have in the venture phase.
What are the advantages to bankrolling and not taking venture capital?
- You will fail faster. It took me 10 tries to get to Shutterstock. Most of my startups never made it off the ground. Being an entrepreneur means being able to pivot quickly, shut down a business that isn’t performing and move on. If you use somebody elses cash, you may be forced to continue even though you know it’s time to move on.
- Every dollar counts. I was hyper-focused on ROI from the start when I was buying Adwords keywords. Since I could feel the money moving out of my own bank account, I was very sensitive to my return on investment. There was no room for error. This efficiency later translated into a complex lifetime value calculation that drove our acquisition model to this day.
- You will concentrate on profitability from the start. All businesses need to create value at some point to survive. While some companies have had successful exits without profits, they are few and far between. By building profitability into your model from the start, you will be able to start scaling. Self-funding will force profitability thinking at every stage.
- You will own more of the company later. The earlier you are subjected to dilution, the less of the company you will own in the future. Venture capital rounds often involve loss of control, and a majority of the company to be sold.
What are the advantages to taking venture capital?
- I recognize that self funding isn’t an option for everyone. If a large amount of capital is required and not taking on a venture round will be truly detrimental to getting your company off the ground, then by all means do whatever you need to do.
- Often venture partners provide support with areas that the company is weak in. If you need help hiring, scaling, or operating, often a venture partner can provide this help as part of the deal. If you don’t take capital, you’re on your own.
How do I make sure that my startup uses as little capital as possible?
- Use as much open source software as you can. Use MySQL instead of MS-SQL/Oracle. use Linux (and specifically free versions like CentOS instead of Redhat). CPAN alone has over 120,000 perl modules that are already written – so why re-create the wheel?
- Learn how to code. There are great affordable online learning platforms that can help you learn how to code, create html pages, link up databases, etc. Learn as much as you can because the more you can do yourself, the less you will have to hire.
- Be every job. It may seem overwhelming, but it’s possible. When I started Shutterstock I was the customer service rep, the website developer, the first photographer. By making sure I gave each role a shot, I knew exactly how what I needed so I didn’t over-hire I wasn’t necessarily good at each job, nor was my expertise even close to each job, but I learned a ton and got to delay some hiring. This culture of lean innovation is still very much alive at Shutterstock and has contributed to much of our growth.
- Use your product as if you were the customer. Not only will you get to know your own product better, but you’ll be doing quality assurance work and testing throughout the process.
Bottom line is that it isn’t always possible or practical, but the longer you wait to raise money, the better off you and your business will be.