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Why I Turned Down $5 Million in VC Funding
- codegeek 13y agoI really like reading groovehq's blog. The writings are very specific with lot of actual details. This one is no exception and great piece of writing. The actual customer email screenshots are a gem. Just one suggestion: To get rid of the pop up that comes up first time when you visit the page, you have to click the cutesy "No Thanks I don't want to grow my business". This even though is trying to be different does not look professional enough to me. I would just re-word it to "No Thanks, take me back to the page where I was". EDIT: Found one typo in the blog where it says "4) How Much are You Willing to Get Dilluted?". Should be Diluted right ? EDIT 2: Typo has been fixed.
- deleted 13y ago[deleted]
- alexmturnbull 13y agoGood catch :) Fixed...
- codegeek 13y agonp. So are you thinking about re-wording the "No thanks I don't want to grow my business" thing OR you believe strongly in it :)
- alexmturnbull 13y agoto think about :)
- jc4p 13y agoI loved the post and was not done reading your concluding statements before I got a giant pop-up that asked me to give you my e-mail to read the exact same post I was reading. I understand pop-ups like that work for making mailing lists but can you at least make it come at the bottom of the page not in the middle of the last paragraph? That combined with clicking the "No thanks, I don't want to grow my business" button being the only way to get out of it made me leave the page without even finishing your article.
- alexmturnbull 13y agoSorry about that, should have only popped up if you were about to leave the page... Fixing now. Thx.
- waterlion 13y agoI just see a HUGE ad asking for my email address and a passive-aggressive "No thanks, I don't want to grow my business", the rest of the page blacked out. I can tell there's content underneath but screw that, I'm not reading it after that.
- alexmturnbull 13y agoSorry about that, should have only popped up if you left the page :( Gonna have to talk to bounceexchnage.com about this... Thanks for the heads up.
- waterlion 13y agoFWIW I opened it in a background tab. Still completely unacceptable. (EDIT: as in, your site is giving a value proposition and I don't accept it if it includes a massive popup)
- girvo 13y agoWell that's entitled. It's his site, he can do what he wants. Even if that does mean that I'll put it through Instapaper to avoid that stuff and not sign up to his mailing list.
- waterlion 13y agoIt's not. I'm just giving a data point, as is jc4p, as is codegeek. So are the up-voters. What part of what I said gave you the impression of entitlement? I didn't say "I deserve to read this without ads". I said "I stopped reading because you put a massive pop-up that filled the entire screen and prevented me from reading it, I don't find that acceptable, and so closed the tab". Would it be better to have no feedback about why people are bouncing?
- girvo 13y agoBefore your edit, you had one sentence saying you had an issue, then one other sentence saying it's completely unacceptable. It's not about your feedbacks content (I agree with you!) it's how you worded it.
- ujsfdo 13y agoCan I have it?
- grosbisou 13y agoI find this so refreshing compared to all the "super todo app raises $30m" news. And I love these blog posts. So much information and facts about how they try to grow. Please keep going.
- alexmturnbull 13y agothx! really glad you enjoyed it :)
- dblacc 13y agoI started the article: He's a mad man. I ended the article: Hmm.. I never looked at it that way. Refreshing read.
- alexmturnbull 13y agohaha, I am mad though :)
- deleted 13y ago[deleted]
- howeyc 13y agoProbably off-topic, but something I've never understood reading these things: How does this funding actually work? From what little I know (the stock market) you'd sell an equity stake in your company for a certain amount and you have money in your personal bank account. But it sounds to me like all these funds somehow go back into the company?? how?? what am I missing?
- benmccann 13y agoThe company issues new shares and the funds go into the company bank account. You own the same number of shares as before, but a lesser percentage.
- deleted 13y ago[deleted]
- jfoutz 13y agoThat's sorta it, yeah. rather than the money going into your personal bank account, the company sells part of itself, and the money goes in the company's bank account.
- JeffJenkins 13y agoThe really short version is that the company sells (probably newly created) shared in exchange for money. The owners of the company are generally not selling their own shares. That would lead to serious complexity. If you want to know more, read Venture Deals[1]. It's very thorough and well written. [1] http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist-ebook/dp/B00AO2PWOI/ http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalis...
- mattzito 13y agoOkay, so yes, you are mechanically correct in that if you sold 10% of your shares for $1m, you would get the cash not the company. However, the way funding events work in real life is that new shares are created by the company and then sold to the investors. As a very math-simple example, I have 1m shares in my company, and I own 100% of them. Some VCs want to take a ~33% share of the company for $5m. My "board" (me) creates 500k new shares, and sells/gives them to the investors for $5m. Now there are a total of 1.5m shares, of which I own 1m, and the VCs own 500k. EDIT: sometimes, though, a founder will sell part of their shares to the VCs during a funding event. That's usually to help give the founder a little liquidity and cash.
- yesimahuman 13y agoI'm excited by companies like this. I think you actually get the ability to do something that transcends just making a product and selling it. You get a chance to change what it means to grow and run a business. Groove might end up being very influential and meaningful beyond just customer support, like 37signals has. That's hard to do if you are shooting for an exit in 3-5 years just to be swallowed up by a big company.
- sheetjs 13y ago> Importantly, with eight months of runway, Groove didn’t need the money. There were great arguments to be made about how we could use the money, but weren’t running out of cash. No other reason is needed. If you don't need the money, and if you believe in the business, you don't need to justify turning down external investment. In fact, I'd argue that turning down money is harder than accepting it
- power2u 13y agoGreat read, however, I don't agree to the following: >If we had taken in a few million dollars, my focus would’ve been on scaling: getting as many customers as possible to use our shitty app. VCs are not devils, so when you tell them you need to reach the Product/Market fit before you scale, I'm sure they would understand.
- pytrin 13y agoUltimately, this is a decision every founder must make for themselves. Without knowing the specifics of the offer, it's also hard to really know what went behind it. Having said that, the rule of thumb is that you want at least 12 months of runway, and that's at the rate you want to go at. It takes typically around 6 months (if things go well) to raise VC money (unless they come to you - which is pretty rare). From what I understood, Groove had 8 months at the current runway - before hiring the additional people they want to bring on board. That's typically when you start raising before you go into the danger zone with your runway. Also, considering the current perceived drought of Series-A funding, a $5M offer for a business generating $16k monthly is an outlier. Of course, I hope Groove does well and never needs this money. Also, it's possible the deal terms were not favorable, though it's not mentioned specifically in the post. If that was not the case, in my opinion they had a chance to significantly derisk their business and they choose not to take it. Time would tell if their gamble pays off or not.
- ernestipark 13y agoWell written article. In my brief stint with YC and other startup circles, I think one big takeaway I've had is that most (or at least many) people who want to start a startup or hit it big with a startup actually really want a lifestyle business. Hyper growth isn't the goal of the founders. Their goal is to create a good product that helps people and allows the founders to live comfortably and be happy with their work. Raising VC funding is not counter to many of those goals, but it's not the only (or best) path to them in most cases.
- talkingquickly 13y agoI wish I could upvote this more than once. What's more because of the focus on hyper growth, I think a lot of people are discouraged from working on valid problems which lack immediate potential for that kind of growth.
- byoung2 13y agoThat sounds like a conversation I just had yesterday with a coworker. We were translating Visio diagrams into user stories in Jira and we thought it would be cool to have a visual project management tool that had an interface like Visio that created tickets and managed dependencies, etc. He joked that he would only invest in it if you could apply Instagram filters to the diagrams and the Jira tickets disappeared after you viewed them.
- janlukacs 13y agoMaybe we can all thank WallStreet and their “infectious greed”.
- joelle 13y agoMusic to my ears. It may not be as sexy to talk about bootsrapped businesses that are profitable and creating great lifestyles for the founders and employees... but that's what I'd choose for myself over the the VC route any day. It's two completely different universes - but one is falsely glorified.
- byoung2 13y ago
- frankdenbow 13y agoGreat post, love the series on groove. Question on convertible notes: doesnt a 1M seed round on a note suggest that a second round needs to happen? How do the investors feel about not having a second round to set the price and convert to equity?
- nhangen 13y agoTLDR; I turned down 5 million so that I could practically name the investor, get attention for my startup, and still make page 1 of HN. ---- I wonder how investors feel about posts like this. If you are an investor, would it change the way you feel about the CEO or the company?
- beat 13y agoWho cares? It's not like he's taking their money. edit: I'm not losing sleep over someone hurting the feelings of venture capitalists by publicly saying he didn't take their money when offered. Just as I doubt they're losing sleep over the companies they turn down.
- nhangen 13y agoI'm simply curious, that's all.
- refurb 13y agoI didn't think he disparaged the investor at all in the post. He simply stated that he didn't need the money. I don't think his decision had anything to do with the investor.
- georgiecasey 13y agoThese huge rounds are crazy, a $5 million exit would be life-changing for most founders.
- TheBiv 13y agoIt wasn't an exit, it was a funding event.
- georgiecasey 13y agoI know, that's my point. These funding event amounts are big enough to be great exits for most founders.
- TheBiv 13y agoVery rarely, if ever, will a founder take money off the table in such a small funding round that is used to accelerate the business.
- misterparker 13y agoGreat writeup. I'm so sick of hearing about VC funding, growth-hacking, hock-sticks, and user-acquisition and all in the name of an exit strategy. I hope to see more and more companies take this more bootstrap-ish approach to building sustainable businesses, solving a real problem for real people.
- Codhisattva 13y agoWorth while read. It's great to see an entrepreneur want to build a company instead of a product to sell to investors. Go Groove!
- PMan74 13y ago> Are you taking funding for the sake of taking funding, or do you actually need the money? "Needing the money" probably needs to be defined here. If you're going to the VCs because you "need the money" as in the lights will go out pretty soon, unbutton your slacks and bend over because you are in no position to negotiate. On the other hand if you "need the money" because, in spite of the fact that your runway looks very very healthy, you can foresee a point well down the line where you will actually need the money then that's a much better scenario to be going to a VC.
- ChuckMcM 13y agoDuring the dot com boom it was a always an issue if your company took too much VC money. Having a fat bank account balance can make you lazy, you can spend on things you don't need (Aeron Chairs for Everyone!) and you don't "sweat the details." but a lot of the things startup teams need to learn how to do are the exact opposite, spend only when necessary, sweat all the details, understand where every dollar of your monthly burn is going and ask yourself every month "Did that dollar work as hard for me as it should have?" With too much money it is easy to lose the discipline to keep the business at the forefront of your thoughts.
- deleted 13y ago[deleted]
- codelust 13y agoIt is not just a discipline issue, it also alters your desired growth trajectory as your sole aim is no longer being a healthy profitable company; you also have to account for the endgame the investor is playing, which, more often than not, is a big exit. As much as it is celebrated and desired in the valley, a large number of businesses don't have the mystical hockey stick as a viable option for growth. Throw enough money at it and any business can hit the hockey stick, but it won't last for too long. For every big exit that we read about, there are probably ten companies out there that attempted it and failed.
- GrinningFool 13y agoI really dislike the specific way in which Aeron chairs have come to symbolize all that was bad about the dot-com era. The nature of that chosen symbol speaks volumes about the values our culture holds. Spending a thousand dollars on every employee to keep them comfortable while they sit at their desk and work for your company all day?! The epitome of profligate spending! A shining example of decadence! For shame, for shame!
- ChuckMcM 13y agoPerhaps Aeron chairs filling the mostly unused conference room would be a better symbol?
- jasonkolb 13y agoSo here's a question... with the new rules around fund-raising, why wouldn't he just throw up a box to this side of this article that says something like: "By the way... now that you've seen our numbers, if you're interested in a buying a small piece of equity in our company, leave your email address and we'll let you know terms." Is there any downside to an approach like this? Setting your own terms and then selling equity if you find people interested?
- obiefernandez 13y agoIn this particular case, they probably still don't need the money.
- adventured 13y agoThe downside is, you still have to deal with investors and all that comes with them. Dealing with a lot of small investors is often a much bigger headache than dealing with one or two large investors. Taking on ... 300 small investors is a nightmare. They require far more work on average per dollar invested than larger investors do.
- majani 13y agoMany countries have rules against publicly recommending a stock without a proper certification
- melvinmt 13y agoPublicly advertising an investment opportunity is simply not allowed.
- jasonkolb 13y agoI thought the recent rule changes allowed this now... isn't this what Angel List is essentially doing?
- danielweber 13y ago> Importantly, with eight months of runway, Groove didn’t need the money. Geeze, stop right there. If you need the money, IT IS TOO LATE. You get money because you can use it, not because you need it. Sorry if this comes off as a rant. I was at a dysfunctional start-up once and I guess it comes out at odd times.
- mwilcox 13y agoIt's a case of need to grow vs. need to survive
- frandroid 13y agoAlso: If you need the money, you're going to get fucked in the negotiation. You should be able to walk away from an investor who talks to you, otherwise they'll use your desperation against you and dilute the hell out of you.
- michaelt 13y agoThere's a distinction between "need the money" as in "cannot achieve the business plan without investment" as compared to "running out of runway can't meet payroll" For example, if you need $$$ to build a nationwide network of warehouses, or to get your new electric car through safety testing, or as a bond for your new bitcoin bank's banking license, or to order the first batch of widgets from your manufacturer, you "need the money" because you can't achieve your business goals without it, but you aren't in a desperate hurry and you can shop around. If you need the $$$ to meet payroll and keep the lights on and the rent paid, but your business plan basically calls for you to keep doing what you're doing, you probably don't have a lot of time to shop around for investors. If you're not in either of those categories raising more capital now is optional, and you've got to consider whether it's worth what you'll have to pay for it.
- not_that_noob 13y agoGreat stuff. It's hard not to buy into the standard startup myth of raising money and going big. 'Lifestyle business' is not a positive term. So I for one salute your courage.
- mrgreenfur 13y agoBetween this and the recently reading about the Expensify team taking a month trip every year, I have this question: how do people get jobs at these well-meaning, intelligently planned companies? Seems like every startup I've worked at is more of the "OMG GRAB ALL THE CASH ASAP" kind, not the "Lets build happy users for a quality product".
- edash 13y agoThe new job board from 37Signals would be a good start: https://weworkremotely.com/ https://weworkremotely.com/ They've been beating this drum for a long time now.
- inthewoods 13y agoOne element that this misses is the fact that it isn't always clear what size business (or something even what business) you have at the beginning. Meaning, you might take $5m thinking you've got a high growth business only to discover, a long way in, that you've really got a slower growth business. I've seen this happen multiple times where the founders say things like "I love this business - if I was just running it myself, I'd really love it, but the funding makes it a constant fight." Truth is, high growth, highly scalable businesses are probably a bit rarer than we'd all like to admit.
- smoyer 13y agoThis series is great but I wish it had the number for each part of the series somewhere in the URL. Or perhaps a sidebar (ruining a really clean site) with the series listed in order. Of course, my best recourse is to read each one as soon as the announcement shows up in my e-mail client's inbox!
- xfax 13y agoFirst rule of taking VC funding - be aware that you're on someone else's schedule once you do.
- mswe 13y agoFunding is overrated.
- yetanotherphd 13y agoThe only point that didn't ring true was on scaling. I think it makes more sense to scale while you have the money, and use that same money to deal with the issues that arise as you do so. Otherwise, you are leaving customers without your product for longer than you have to. And that could be their loss, not just yours.
- juskrey 13y agoI think that VC funding principle is an upside for VC funders and downside for majority of fundraisers. What VC funders basically do is a transferring of economic fragility to fundraisers, while hunting for positive "tail events".