As an early-stage startup that is now emerging with a mature product, we engage in a lot of sales/business development calls.  We generally get a warm reception to the problem we're solving, which is encouraging.  We're regularly asked about our financial position, but that question has manifested itself most often in one question:  "do you have venture capital?".

Now I understand that folks at bigger companies are looking for assurances that startups aren't risky — you certainly don't want to make a bet on a company that won't be around in 3-6 months.  It's safer to go with an established company, right?

I'm not so convinced that is true, especially in areas of innovation or new business that could just as easily be ignored or downsized by a larger company looking to "focus" in a down economy.  These days, I don't see a lot of larger companies eager to add to their cost structure to tackle new opportunity.  Fortunately, this is the exact realm where startups excel.

I think venture capital is a tough road for startups for two reasons.  One, it just doesn't take a lot of money to get a company started these days, especially if the key executives have runway and don't need to earn a significant salary for a long time.  The costs of doing business are very, very low today, and they're even lower than they ordinarily should be since the economy is so poor.  So in many ways, it's actually a fairly attractive option for a startup to self-fund today.

Add to that one other fact about the venture capital business:  funds are generally raised over a 7-10 year period with a specific investment strategy.  So the VC investment model is currently a mismatch with the way people are building businesses.  You have some exceptions to the rule:  Y Combinator, Techstars, and Capital Factory.  But in my opinion, you have far more demand for smaller investment rounds at more favorable terms than you have supply of venture capitalists equipped to handle this scenario.

So the entrepreneur is forced to make a choice:  pursue venture capital in a difficult environment not entirely equipped for the current paradigm, or focus on building product.  If any of you have done fundraising before, you know that it is most certainly a full-time job.  I have met a lot of startup execs lately who think the fundraising effort isn't entirely worth the time right now — so they instead focus on building more value and a better product.

I actually think this is more aligned with the needs of big business customers/partners — you want focus and attention on your problems and not necessarily on the whims of an investor looking to maximize return.

So if you are at a big company and you ask if a startup is venture funded, I really think you're asking the wrong question.  If I were on the other side of the table, I'd probe more into the startup and the people:

  • Is the product/technology truly a money-making or money-saving innovation?
  • Are the entrepreneurs truly committed to the opportunity?  Do they plan on seeing the opportunity through in a tight economy?
  • What are the true requirements to fund the business over time, and what is the plan to make it happen? (continue to self-fund, grow with scale and revenues, find investment later, etc.)
  • Can the business scale to meet the needs of my customers/constituents/partners?

Although the economy is bad right now, it's also paradoxically the best time to find new opportunities and act when your competition is afraid.  Ask the right questions, and you'll be able to find startups that meet your needs and not ones that would've met your needs in a different time.