Why I Turned Down $5 Million in VC Funding
After weeks of gut-wrenching indecision, I turned down a dream offer. Today, I’m sharing the five critical questions that led me to make that call.
I had spent the last four weeks sweating over an unexpected offer from a fairly well-known East Coast venture capitalist.
The offer would make it easy to tackle our two-year product roadmap in a six-month sprint.
In that four-week span of indecisiveness, I made more pro/con lists, pulled more straws and called on more friends and mentors for advice than I had in my entire life.
But ultimately, I said no. And as I write this a year later, I’m extremely happy with that decision.
The decision to pass was made easiest by a conversation with a founder friend of mine who made the opposite choice: his SaaS start-up took a big helping of VC cash. And though he made out very well when his company was acquired a few months ago, he shared his own approach to fundraising: five questions that, once answered, gave me the clarity I needed to see the right choice for Groove.
Disclaimer: I’m not trying to build a case against venture capital funding. It can be valuable for many types of businesses. I’m trying to offer a framework for thinking about how to approach fundraising for your own business and to help you reach the right conclusions for yourself.
I’m admittedly not an expert on this; but I hope that by opening up my own thought process, we can all learn from each other.
1) How Badly Do You Need the Cash?
I had bootstrapped Groove with the cash I made when my last company was acquired. After eight months of back-and-forth acquisition talks led to nothing, I raised a $1M convertible note from a small group of local angel investors. I knew these folks well, and I trusted them deeply. And the convertible debt--versus standard equity financing, which is what VC’s generally offer--was frankly much more attractive to us at our early stage.
When the VC offer came, we were pulling in roughly $16,000 in monthly revenue, and had about eight months of cash left in the bank.
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.
Takeaway: Are you taking funding for the sake of taking funding, or do you actually need the money? If it’s the former, consider carefully whether you can grow on your own, if only to put yourself in a better position for funding later. Traction and growth = leverage = more favorable terms.
2) What’s Your Endgame?
As Aileen Lee writes, more than ever, top VC firms need billion-dollar exits to win.
"For example - to return just the initial capital of a $400 million venture fund, that might mean needing to own 20 percent of two different $1 billion companies, or 20 percent of a $2 billion company when the company is acquired or goes public."
As blasphemous as it may be to the TechCrunch crowd, I have no interest in turning Groove into a billion-dollar company.
To me, Groove is a business that I want to work on for a very long time. I love customer support. I love helping other start-ups and small businesses succeed. I would be perfectly happy to do this every day for the rest of my career.
Of course, I want to be successful. I want enough wealth to have the option of quitting whenever I choose. I want to surf.
I want, as DHH so aptly puts it, “maximum happiness for the maximum amount of time.” I want my team to have the same. But I’ve run the numbers, and that dream doesn’t require a billion dollars. It doesn’t require a massive payout, and it doesn’t require an IPO. With that in mind, it’d be tough to find a VC investor with whom our interests truly aligned.
Takeaway: You’re running your business based on the goals you have for it. Your investors need to share those goals, otherwise you may be headed towards a nasty collision. If your goal is to have a billion-dollar exit, VC funding may be the best choice for you.
3) What Will the Money Change?
Although I didn’t think so at the time, but when these conversations were happening, our product sucked.
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 lousy app.
Groove wasn’t mature enough as a product to offer real value, and I wasn’t mature enough as a founder to admit that.
Had we tried to scale, we would’ve almost certainly been left with a ton of angry customers, even more ex-customers, and an app that couldn’t keep up with any of it.
Takeaway: If you want to take funding to help you scale, make sure that your product is ready for it. Think it’s impossible to be over-funded? Think again.
4) How Much are You Willing to Get Diluted?
“It was my own mistake,” one founder friend of mine told me over coffee, “but if I realized how much I was giving away, I probably wouldn’t have taken the money. Now, I’d have more upside if I just took a job.”
That revelation floored me. That a born entrepreneur--a hustler through and through--was so diluted (between three co-founders and one big VC investor) that he predicted his chances of financial success would be higher if he went to work for someone else.
Every time you give equity in your company to someone else, you raise the threshold of profit you need to hit (or the size of your exit, if that’s what you’re after) in order to hit your own personal goals.
A founder with different goals--or maybe one that’s just more brave than I am--might have rightfully decided to take the money. I couldn’t.
Takeaway: Take the time to do the math right. It’s possible that dilution will force you to change your goals so that you can still achieve a favorable outcome. Will your business still be viable if it has to do twice as well as you originally hoped?
5) Is There Another Way to Get to Your Goals?
This is the question that sealed the decision for me.
I thought long and hard about what our near-term goals actually were.
In the end, it was pretty simple: Our goals didn’t require a huge cash infusion. Our goals could be reached, by my calculation, through growing our revenue alone.
How much revenue would we need, exactly, to get to where we needed to be? Around $100,000 a month.
That’s why I turned down the money. And that’s a big part of why you’re reading this blog series today.
Takeaway: Now, more than ever, it’s possible to reach your goals without a huge pile of cash. There are almost unlimited resources out there to help you grow your business on your own. If you don’t take advantage of those, and instead assume that you need funding to grow, you’re doing yourself a disservice.
There’s No Best Answer.
There’s only the best answer for your company at an exact moment in time.
There are hugely successful companies that simply wouldn’t exist today if it weren’t for institutional investors. There are plenty of great bootstrapped success stories, too.
For Groove, earlier this year, the answer was that VC funding was -- I hope -- the wrong choice. Things may be different in just a few months or years.
Of course, many star-tups would kill to just be in the position to choose whether to accept funding or not. That was Groove not too long ago. I hope that reading this leaves you more prepared for that difficult decision when the time comes.
This blog post was originally published on Groove HQ and has been reprinted with the author's permission.