Bill Gurley to founders: Venture capital isn't always the best option
Investment from traditional VC firms is a bit of a bar mitzvah for startups. It's proof that they're on their way to adulthood, and if they don't raise VC money it's like they haven't come of age. When a startup like, say, GitHub, finally does raise a round, everyone wants to know why it took so long.
But at last night's PandoMonthly in San Francisco, Benchmark's Bill Gurley advised some founders to avoid VCs all together. Once you raise venture funding, there's usually another round, and another, each taking chunks of equity with it. Unless you have an idea that’s worthy of that big a bet, Gurley says, it's often better to raise less or nothing at all, own more of your own company, and ultimately sell it for less because you'll end up with more.
If you want to get to 50 to 100 employees "unless you've discovered the next Google AdWords," you're going to need outside funding, but that doesn't mean VC investment is the path for everyone. "One thing I try to drive home to entrepreneurs: choosing venture capital investment may not be the number one way for you to get rich," Gurley says.
Gurley also had a lot to say about relying on angel investors for early funding. “First of all, they love to create the notion that you should always stop at seed before A,” Gurley says. “They’re playing their narrative, and I completely understand why they would do that, but it’s not true.” He mentioned that he's seen companies take one or two angel rounds and wind up giving away half their company.
As an example Gurley pointed to the deals Paul Graham [Y Combinator] strikes: "$75k for 7%. What is the post money on that?" he asks. "That’s down and dirty. But he wouldn’t talk about it in that way because of ‘value added services’ or something."
He laughed and admitted that everyone's got their story, and Benchmark has its own."But keep that in mind in the back of your head," Gurley says to entrepreneurs.