The Dark Side of Venture Capital (Too Much Money = 💀???)

0:00What If Money meant to fuel your startups growth actually ended up destroying it in this video I'm pulling back the curtain On the Dark Side of venture capital that most Founders never see until it's too late I'm Rob Walling I've started six companies written five books on entrepreneurship and invested in more than 200 startups the first thing I want to talk about is the Allure of venture capital I feel like it's pretty easy to see why folks are drawn to raising big buckets of money they create big headlines when you say millions or tens of millions in funding have been raised it makes it sound like

0:33it's going to be easy to find success right with that much money in the bank how can you fail it sounds amazing examples like Dropbox and Uber open AI even the social network if you've seen that movie uh about Facebook that movie and others like it not only dramatize but they glorify the raising of funding as if raising funding was the end goal in itself funding is just a tool just a way to help you maybe get there faster or maybe help you implode faster so it's interesting that in our society getting investment feels like instant validation of your idea like someone has anointed you some people act like it's the finish

1:10line but it's not right it's a new starting line now the goal poost is set even further down the field and you have to start running faster and faster or else you can't raise that next round of funding and you hear the stories of what Founders sacrifice in pursuit of these outsized success stories some Founders sacrificed their personal lives their relationships they sacrifice their health by not working out sacrifice their reputations by doing things that are unethical or even illegal as we saw with Theos and one could argue with wework so as we talk about the Dark Side of Venture Capital One Reason that exists is because there are misaligned

1:50incentives because Venture capitalists the way they've designed it they only make money with billion doll or 10 billion doll outcomes but a Founder if they were to sell their company for 10 20 $30 million they would have generational wealth and so these incentives between the Venture investors and the founders are sorely misaligned it didn't used to be the case that in order to be a venture capitalist you could only go after unicorns or a Deca corns but that has become the game over the past 20 30 years so if you're a Founder that wants sustainable long-term success or that wants to be able to sell again when you can sell for 10 20 $30

2:27million that doesn't make sense for venture capitalist it doesn't fit their model if you want to raise Venture you're aiming after explosive growth versus a lasting stability and that can lead to conflict with your investors another reason there's misalignment is that Venture capitalists have a portfolio approach so they might make 10 or 50 Investments a year stocking up dozens or hundreds of Investments and they really just need one or two to have that outsized return the the billion or 10 billion or $50 billion outcome whereas you as a Founder you you have one company at a time and in your life you might have three four five true

3:05shots at bat to grow an amazing company so all of that sacked up creates a misalignment between Founders and Venture capitalists another part of the dark side of VC is the pressure to grow at all costs since Venture investors are going for outsized returns your growth metrics become king and queen profitability and founder well-being frequently if not in all cases take a backseat and the laundry list of venture back companies that could potentially have actually worked at scale but imploded because they raised so much money and they raised it at high valuations and they overvalued growth the list is kind of endless but wew work comes to mind HQ trivia Vine Periscope

3:47you can do a Google Search and kind of see the Boneyard of companies that feasibly could have been successful had they raised smaller amounts of money or potentially bootstrapped obviously there are companies like we work that would have been almost impossible to bootstrap But realize they didn't need to force the inorganic and really ambitious growth that they did another Dark Side of venture capital the third one if you're counting is the loss of control and autonomy so once you accept Venture money you often have to surrender partial control of your vision you have to give up board seats investors have influence often times they can override

4:23a sale if you want to sell for a small amount they have liquidity preferences where they get the first X dollar that come out of the company and frankly there's a lot of oversight that can be both good and bad now I think oversight of a company can be healthy but we do hear these stories of it being a bit too much and if we look at the story of bench accounting which recently had uh basically shut down and then was sold for parts as much as we can tell we see this tweet from Ian Crosby I'm very sad today to see that bench has shut down

4:51I've avoided speaking publicly about bench since just over 3 years ago when I was fired from the company I co-founded I still don't have a lot of appetite to talk about it to be honest but I think at least a short statement is appropriate and he basically goes on to talk about how he was forced out as the founder now this doesn't happen to everyone and often times the board is acting in what they think is their best interest and it's kind of hard to peel apart and say you know who is really right I tend to want to trust the founder but I have seen CEOs forced out

5:20that probably should have been so there is this Balancing Act realistically though when you raise a lot of venture you definitely lose control and autonomy another reason Venture can be challenging is that you're constantly trying to raise that next round about every 18 months and a venture capitalist injects cash and then they want you to burn through that cash and grow grow grow and if you hit those growth Milestones raise in another 18 months so they get their markups but if you don't hit those Milestones you're going to have what's called down rounds where if you raise it an overoptimistic valuation which most Venture is when you raise it

5:53it can't lead to these painful rounds where the valuation is lower so Founders often wind up in these cases with with a fraction of the company they built you get diluted and you know if a Founder is working full-time 60 70 80 hours a week and they own 10 12% of their company you know at what point is this not worth it and the fifth Dark Side of venture capital are the exit pressures so Venture capitalists typically expect an exit an IPO or an acquisition within a set time frame and this exit mindset can force decisions that don't align with the founders long-term goals or the

6:26company ethos here's the thing I'm not anti- venture capital I actually think Venture is a great tool for high growth startups I just think the narrative that every tech company every startup everywhere should only go raise Venture funding and that they can't really do anything until they get permission from some of the money is idiotic venture capital is a tool just like a hammer or just like a shovel and if you choose the right tool for the right job and you know what you're getting into it can be a good tool for the job but realize there are not one but two other Alternatives you can completely

6:58bootstrap which is what I did for my first five companies or you can raise Indie funding alternative funding whatever we want to call it this is funding from an alternative source that doesn't expect Venture returns so let's talk about bootstrapping real quick obviously the pros of bootstrapping are that you maintain full control you can have slower initial growth and basically you run the entire show you don't have any oversight but it also is kind of doing it on hard mode I've raised funding for one of my companies and I bootstrapped five of them and I can ab absolutely say that the one I raised for has been a much easier much more

7:33enjoyable ride just because I have so many more resources with which to hire and with which to just make bets so I can move faster I often say in your personal life money can save you hours because you can hire someone to mow your lawn or shovel your snow pick up a dry cleaning do your grocery shopping you have just a little more money and can save some hours but in your business money saves you years and the more money you have in the bank if you know how to use it it can help you get there faster so I have a rule I call it Rob's 1990

8:03rule where I say I think about 1% of tech companies should Chase venture capital I think about 90% should bootstrap and 9% should consider alternative types of funding now these numbers not exact this is like the 8020 rule where it's directionally correct and I think once again about 1% should Chase VC 90% should bootstrap and 9% should consider raising some type of alternative funding and there are many different types of alternative funding available one of which is Tiny Seed it's the startup accelerator that I run for SAS companies other options include Revenue based financing there are other alternative VCS like Indie dovc but talking about Tiny Seed our goal is to

8:42give you the right amount of capital the perfect amount of mentorship and advice without the loss of control and an incredible world-class community of ambitious SAS Founders we don't put pressure on you to IPO and we have a year-long program for ambitious bootstrap SAS Founders to learn how to grow their startup faster as I said in your personal life money can save you hours and in your business money can save you years you can add to tiny.com program to learn more about Tiny Seed and sign up to be notified when applications open again and if you're watching this and you're an investor you can check out tiny.com memo for our full

9:18thesis or if you are interested in investing head to tiny.com invest there's obviously a lot to consider if you're raising any type of funding and in this next video I walk through my thought process as I was thinking about taking outside capital for my last startup drip check it out and I'll see you next time