More startups have an unfamiliar message for venture capitalists: Get lost
On a sunny Saturday morning in New York City a few months ago, a group of 50 startup founders gathered in the dank basement of a Lower East Side bar. They scribbled notes at long tables, sipping coffee and LaCroix while a stack of pizza boxes emanated the odor of hot garlic. One by one, they gave testimonials taking aim at something nearly sacred in the technology industry: venture capital.
Josh Haas, the co-founder of Bubble, a software-writing startup, told the group that he and venture capitalists “were pretty much totally on different wavelengths” about the trajectory of his business.
Seph Skerritt, founder of Proper Cloth, a clothing company, said that the hype around raising money was a trap.
“They try to make you feel inferior if you’re not playing that game,” he said.
The event had been organized by Frank Denbow, 33, a fixture of New York’s tech scene and the founder of T-shirt startup Inka.io, to bring together startup founders who have begun to question the investment framework that has supercharged their field. By encouraging companies to expand too quickly, Denbow said, venture capital can make them “accelerate straight into the ground.”
The VC business model, on which much of the modern tech industry was built, is simple: Startups raise piles of money from investors, and then use the cash to grow aggressively — faster than the competition, faster than regulators, faster than most normal businesses would consider sane. Larger and larger rounds of funding follow.
The end goal is to sell or go public, producing astonishing returns for early investors. The setup has spawned household names like Facebook, Google and Uber, as well as hundreds of other so-called unicorn companies valued at more than $1 billion.
But for every unicorn, there are countless other startups that grew too fast, burned through investors’ money and died — possibly unnecessarily. Startup business plans are designed for the rosiest possible outcome, and the money intensifies both successes and failures. Social media is littered with tales of companies that withered under the pressure of hypergrowth, were crushed by “toxic VCs” or were forced to raise too much venture capital — something known as the “foie gras effect.”
Now a counter movement, led by entrepreneurs who are jaded by the traditional playbook, is rejecting that model. While still a small part of the startup community, these founders have become more vocal in the last year as they connect venture capitalists’ insatiable appetite for growth to the tech industry’s myriad crises.
Would Facebook’s leadership have ignored warning signs of Russian election meddling or allowed its platform to incite racial violence if it had not, in its early days, prized moving fast and breaking things? Would Uber have engaged in dubious regulatory and legal strategies if it had not prioritized expansion over all else? Would the tech industry be struggling with gender and race discrimination if the investors funding it were a little less homogeneous?
“The tool of venture capital is so specific to a tiny, tiny fraction of companies. We can’t let ourselves be fooled into thinking that’s the story of the future of American entrepreneurship,” said Mara Zepeda, a 38-year-old entrepreneur who in 2017 helped start an advocacy organization called Zebras Unite. Its members include startup founders, investors and foundations focused on encouraging a more ethical industry with greater gender and racial diversity. The group has 40 chapters and 1,200 members around the world.
“The more we believe that myth, the more we overlook tremendous opportunities,” Zepeda said.
Some of the groups are rejecting venture capital because they have been excluded from the traditional VC networks. Aniyia Williams, who started the nonprofit Black & Brown Founders, said a venture-funded system that encourages many failures for every one success is particularly unfair to black, Latino and women founders who “are rarely afforded the opportunity to fail, period.” Members of these organizations, she added, see more value when whole groups in their communities thrive, rather than venture’s winner-take-all model.
Other founders have decided the expectations that come with accepting venture capital are not worth it. Venture investing is a high-stakes game in which companies are typically either wild successes or near total failures.
“Big problems have occurred when you have founders who have unwillingly or unknowingly signed on for an outcome they didn’t know they were signing on for,” said Josh Kopelman, a venture investor at First Round Capital, an early backer of Uber, Warby Parker and Ring.
He said he was happy that companies were embracing alternatives to venture capital.
“I sell jet fuel,” he said, “and some people don’t want to build a jet.”
Right now, that jet fuel seems unlimited. Venture capital investments into U.S.-based companies ballooned to $99.5 billion in 2018, the highest level since 2000, according to CB Insights, a data provider. And the investments have expanded beyond software and hardware into anything that is tech-adjacent — dog walking, health care, coffee shops, farming, electric toothbrushes.
But people like Sandra Oh Lin, chief executive of KiwiCo, a seller of children’s activity kits, say that more money is not necessary. Oh Lin raised a little over $10 million in venture funding between 2012 and 2014, but she is now rebuffing offers of more just as her company has hit on a product people want — the very moment when investors would love to pour more gas on the fire. KiwiCo is profitable and had nearly $100 million in sales in 2018, a 65 percent increase over the prior year, Oh Lin said.
“We are aggressive about growth, but we are not a company that chases growth at all costs,” Oh Lin said. “We want to build a company that lasts.”
Entrepreneurs are even finding ways to undo money they took from venture capital funds. Wistia, a video software company, used debt to buy out its investors last summer, declaring a desire to pursue sustainable, profitable growth. Buffer, a social mediafocused software company, used its profits to do the same in August. Afterward, Joel Gascoigne, its co-founder and chief executive, received more than 100 emails from other founders who were inspired — or jealous.
“The VC path forces you into this binary outcome of acquisition or IPO, or pretty much bust,” Gascoigne said. “People are starting to question that.”