Do VC Backed Founders actually make any money?

If you are a founder that takes a lot of Cash and your company isn’t growing in leaps and bounds like facebook chances are you aren’t going to be holding more than 5% of your company if a payday comes along according to the clickz’s article (Union Square Ventures  has a presentation saying less than 10%) .

http://www.clickz.com/showPage.html?page=3626306

The author says that if you build quickly and sell quickly you’ll make more money. I agree with that,  but if you are a programmer you really don’t need any VC money and can build a decent product in your spare time.  Taking your hobby company to $100,000/year in profit is the same thing as holding 5% of a company that makes $2 million a year in profit. Not only will you own 100% if your company but chances are that you are far more likely to be successful AND have a buyer  AND its far easier to grow to 200k in profits than it is to get to 4 million in profits.

You’ve probably heard 90% of business’s fail in the first year.   Its probably the biggest urban legend in the business world that won’t die.    The US government says that 65% of new business’s are still operating after 4 years.  There is a report that says more then 66% of companies founded in 98 -2002  are still operating today.

Anyone know what the average VC success rate is?   I bet its no where near 50%  or even 30%.    Would be interesting to see how much money founders walked away from in smaller VC deals.   Even for something as huge as myspace the “founders” only walked away with $5 million or 1% of the sale price.   What would you rather own,   100% of something  or  5% of a dream?

47 Responses to “Do VC Backed Founders actually make any money?”

  1. maurizi0 Says:

    This post reminded me of a character on Dilbert’s comic strip. I don’t remember his name, but it was something like “The Desperate VC Man”..
    :-)

  2. Dave Says:

    I didn’t realize VC’s took that high of a percentage up. I’d more than definitely rather have 100%. The main difference is while you have to make $2M in profit to get that same $100k with VC backing, the VC backing allows you to normally generate much more buzz and spend more to promote and get the word out there. That obviously increases chance of success.

    If you are confident your product or service can do it on its own, stay away from VC’s! I believe that you should only look for funding in which shares of your business are taken away if you believe you really need it to grow.

    For example, I own a company that manufactures aftermarket parts for Nissan and Infiniti vehicles. It has been more of a part-time hobby over the past years with my business partner, but I know our limitations right now are a lack of funding if we wanted to go full-time and really be successful. This would allow us to do things like more in-house production, hire help, more marketing, product development, etc. All things that would essentially increase profit margins drastically while also increasing sales volumes drastically. It’s a pretty solid model considering the numbers we’ve done without that…but with my partner being in WI and me being in NJ, it’s a tough decision to take it to that next level.

  3. Brad Says:

    They definitely do…and they do succeed, its a question of the stages of the business and the VCs backing them.

  4. Ted Rheingold Says:

    I believe 1 in 10 is the current VC success rate. Though a VC success in human terms is an outstanding to-the-moon success. I think 3 in 10 reach an exit of some sort.

    I never liked those odds.

  5. Mayo Says:

    By my personal opinion taking VC money before you even start business(esp. internet) proves you are a brainless sob… there are tons of things you can do legally to achieve sufficient capital influx! Thinking first of running to VC “gurus” is really like winning a girl by using someone else to do the dirty business, or cheating in a game.. yes cheating can be fun but when you get going against a pro who started with nothing and came to the level you are now in(MM’s and MM’s) be sure that he can eat you for breakfast if your “friends” leave the boat..

  6. Ryan Says:

    maurizi0,

    Here is a link to the dilbert cartoon you speak of:

    http://www.troyangrignon.com/blog/_archives/2005/12/16/1452368.html

  7. JT Says:

    Dave, I’d like to this speak to this point you made in your comments:

    “…the VC backing allows you to normally generate much more buzz and spend more to promote and get the word out there. That obviously increases chance of success.”

    It’s true, but what if you gave a smaller portion of your money to a high tech PR firm instead? Or got a loan or angel funding to hire them? You do get a higher profile on the web, with the propeller-head’s like us that follow these things but Grandma doesn’t know anything about, say, Meebo. You know? Even if you have a company that aims at that crowd, if you’re creative about it, you don’t need the VC funding to “legitimize” you.

  8. mikesabat Says:

    I think you are right Ted. Out of 10 investments, 6 will be dead, 3 will be ok and 1 will be a hit – and those ratios are for a successful VC. That one “hit” is paying for all the other misses. I think Fred Wilson wrote about this a week ago.

  9. Markus Says:

    So basically 9 times out of 10 you will make more money if you don’t take VC cash?

  10. raincoaster Says:

    You’re totally right about that ridiculous urban myth of startup failure. And the statistics in Canada for starting companies and keeping them going are even better. Thanks for spreading the truth; more people need to read it.

  11. Dave Says:

    JT – You’re right. I wasn’t saying there was no other way…I was just stating the point that if a VC firm like Sequoia Capital invests in you (for example)…you’re more than likely automatically going to generate a buzz.

    I’m all for finding ways to grow successful without giving up any portion of your business let alone taking any financing if possible.

  12. Dharmesh Shah Says:

    Interesting article, but it really depends on the situation.

    I’m generally in favor of putting off raising VC for as long as possible (if not definitely). But, there are times when it is needed.

    I think the 5% vs. 100% argument is a bit simplistic.

  13. Markus Says:

    Dharmesh, for stuff that is capital intensive its clearly needed. But there aren’t a heck of a lot of projects that need 100 servers right off the bat today.

  14. Zoltan Says:

    Markus, I am against the VC capitals but we can not say that the only need for VC is to fund some servers… The media buzz and is one of the advantages, also when you are going to sell your company, you can definitely sell in better conditions if you are backed by a VC.
    However, as long as you can grow with your own funds, forget the VCs.

  15. Neil Says:

    VC money is useful for a company not generating enough cash to cover their anticipated or current growth, but with a business model that supports the company short, medium and long term.

    A company making 10 cents per user per month, growing at 20% per month, with a fixed cost of storage of 15 cents per physical user needs Capital of some kind right?

  16. ModernMagellans Says:

    Business Launch – Success Rates

    Success breeds overconfidence is once again proven my Marcus Frind. Marcus is the now famous founder, sole-employee, and current media darling from PlentyofFish.com. His story is a great on. Start a company and build it slowly over time. Google search…

  17. Roger Anderson Says:

    Marcus,
    Go back to fishing. You are way off here.

    On the success fail rate issue: First off the US numbers include franchises which, while an owner may fail the location may remain. The data I have heard quoted say that franchises have a 90% success rate. That could be because the franchiser protects the data by keeping the business open. Second, many of the businesses in the US survey are Sole-Proprietor ships which can just go dormant but are not by definition considered a failure. So, while the legal entity may not be operating and the government does not consider it a failure – it is for all intents and purposes – out of business.

    Second – Why didn’t you quote this part of the Startup Journal article:

    The study also shed light on some characteristics of successes. To sum up: Businesses with more resources fared better. Being an “employer” firm — not just a solo operation — was one of them. Starting with capital of more than $50,000 was another, as was a college degree for the entrepreneur. Starting with an office from home also increased success rates, presumably because it keeps initial costs low, Mr. Headd says.

    On the other hand, failed businesses tend to be started by younger entrepreneurs in the service or retail trade, beginning with little or no capital.

    Maybe my problem is that I am over 30…(I noticed that post disappeared.)

  18. francis idada Says:

    Hello,

    I have been a great admirer of your business philosophy having been introduced to plentyoffish via a friend (it doesnt get much attention from mainstream/blog press, but it is immensly popular), and I just stumbled upon your blog.

    I reside in Toronto and my start-up would soon roll out. I need someone in the know, like you, to benefit from your experience.

    I know you are very very very busy but I would love just 30 mins of your time to sit down to lunch (I read you live in Toronto), just to get a feel of a successful entrepeneur in the web 2.0 world.

    Looking forward to hearing from you.

    Francis.

  19. Markus Says:

    The Presentation from Union Square ventures says that only 1 in 100 companies should even think about looking for VC money. VC backed companies are a tiny minority of companies. People make it seem like its the only way.

  20. Dinesh Says:

    Markus,

    I’m currently working on a (non-venture backed ;) social-networking platform that is telephony/voip based. We’d like to integrate with your platform. Please check your email and get back to me when you have some time.

    Thanks,
    Dinesh

  21. Jonathan Frate Says:

    Markus – for a VC to be operating, they need to make a big multiple. That’s the nature of their game.

    That means if they put 10 million $ in, they’re looking to make at least 100 million out.

    So go backwards, even if the VC owned 30% of a company, that means on an exit or trade sale, the company was worth 300 million$.

    So now let’s work backwards with your theory:

    How many single man, one man shop, work 2 hour/day type of companies do you know that actually get a trade sale or exit at 300 million $?

    I know of none.

  22. Xela Says:

    I don’t wanna sound like I’m the only voice of reasoning out there. Therefore, I start saying Markus is great :-)

    Secondly, stats is always good when you deal with a representative sample. That’s what VC’s do. A failure or a success of every particular enterprise is irrelevant for them, while an average rate is the most important indicator.
    As opposed to that, an entrepreneur shouldn’t care about an average rate but rather believe in himself, his abilities and his dreams.
    That’s exactly why Markus deserves the worshiping. He ignored the very fact that “then at the end of June Adsense came out up until then I had no real way of monetizing my site. I had a single affiliate program but it didn’t even make $40/month.” (Quote from Markus The Great)
    Doing smth, no one else dares against all odds is a nature of entrepreneurship. If you weight chances and probabilities, cons and pros, that makes you sound more like The Desperate VC Man.
    The second point I’d like to make is for Markus The Great, himself. Sir, you are dead wrong evaluating the rate of survival of start-ups in Canada. You had to keep in mind that the gov. estimates the companies by the very fact of the incorporation. At the same time a new business and a new corporation are 2 different things.
    The vast majority of contractors, big and small, low and high tech would choose to incorporate for tax purposes. Does somebody working as a consultant on a temporary position is considered to run a business? The answer is No. Since this type of business cares no risk, it changes the survival rate picture completely.
    At the same time, if this fact discourages someone from getting feet wet, then it wasn’t a right person @ the right time @ the right place.

    Good luck to any1 who is working hard to make the dream come true against all odds and stats mentioned on this blog!!!!!!!!!!!
    All the averages are irrelevant if it your Dream (capitalized “D”).

  23. Markus Says:

    Internet business’s are looked at seperate from all other business’s in the report. So i’m not sure why everyone is talking about non internet related startups etc.

  24. Mayo Says:

    You can open business in US for cca. 300$US… but it is not the business that fails that is important, it is the idea that fails in it’s making!

    BTW Markus, it is true that it is important the amount you are willing to produce: are you willing to work for 100K$US, 10MM$US or 100MM$US p.a. of profit..

    I am sure Markus that you could be making 30-50MM$US p.a. basing your business on free base like you had been doing till today.. all by your self(still working under 4 hours daily) + some outsourcing..

    I am still to launch my site but i am setting my goal of making 100-200MM$US p.a. in time span of 5-7 years working on the site all by my self + some external consultants that i will outsource part of the work(that means team under 15 people that i can use when ever need arises)..

    btw.. learning all by your self is the best thing you can do for your business.. esp. learning something on the go… i really liked the notion of you learning ASP on the run instead of going through some dry tutorial book..

    Keep the good work Markus & rest of you hackers! :D

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  26. name(required) Says:

    How about the kindof VCs like Y Combinator?

  27. GoFrostfire.com Says:

    Interesting post, i believe there are only about 3000 VCs worldwide, not many is it? – chris @ http://www.gofrostfire.com

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  30. bl00d Says:

    If you recieve enough traffic you can easily make money with adsense, there are a ton of HUGE websites that run solely on advertising revenue just look at digitalpoint. I dont understand why people who get VC funding even need it? Look at dating sites the industry is a mess a 4 person company is taking on companies with hundreds of employees and servers.

  31. Shawn Says:

    For me I would prefer to own 100% of the business but for lots of business owners 5% is tempting too.

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