Venture Capital Futility

 

Here is why I think that most VC money is wasted:

 

Source: Ottawa Citizen, March 3, 2005

 

Out of 20 well funded VC startups in Ottawa in 2000, only 6 survive by 2005. The rest have either failed or been sold off, often for a fraction of what the VCs put in. Of the six survivors, only three are termed having ‘healthy revenues and profits’.  VC startups are just mostly big companies with no revenues.

 

From a macro-economic POV (i.e., from the point of view of the nation’s economy), we are much better off taking the $1.3 billion in VC money and funding 13,000 (!) ‘Bootstrap’ startups with $100,000 each rather than 20 startups at an average of $65 million each.

 

A bootstrap startup like www.GradeAStudent.com (started with around $100,000) is not only likely to be a healthier company with real customers, real revenues and real profits; it probably provides way more permanent, sustainable employment as well.

 

Typical Auto Plant Investment

$1 billion

Number of Jobs

 

500-1,000

Cost per Job

$1 to $2 million

Typical VC Startup

$65 million

Number of Jobs

 

50-200

Cost per Job

$325,000 to $1.3 million

Typical Bootstrap Startup

$100,000

Number of Jobs

 

3-20

Cost per Job

$5,000 to $33,333

 

I personally think the only time you should use VC money is when you have an idea that is the equivalent of capturing ‘lightning in a bottle’. If you have the next Google up your sleeve and there is no other way to get it off the ground other than VC funding, then go for it.

 

I mean Google has changed the world—they have created the brain of the Internet and the brain of the planet; they have real revenues, customers and profits; they have created a company with a market capitalization in the tens of billions; they have an HR process with so many levels that people who don’t get a job offer, brag about making it to Level 8 before flunking out. They are going to digitize whole libraries (including those of Harvard University and Stanford) in a way that makes them searchable (i.e., the content will be accessible not just the titles of the documents—now that is really hard to do properly since the source documents are paper and not all of them are even printed; some are in script).

 

If you can pass the Google test, then VCs want to hear from you. Other than that, try a bootstrap startup—let future clients and suppliers fund it. Let them help you modify your product or service offering so it is truly saleable. If it doesn’t work, too bad, try something else. You won’t have wasted too much of your time on something that isn’t going to work and not too much of society’s scarce capital will get wasted either.

 

Remember that some great Ottawa companies, including tech firms, have been started without VC money and, guess what? The founders and owners are still the owners which is often not the case when VC funds become involved. Rob Hall at www.Momentous.ca built all of his tech holdings from scratch including: www.Internic.ca, www.DomainsAtCost.ca, www.Namescout.com, www.Pool.com and www.Zip.ca. I have strong views that if you build a great company with all the effort and risk that that involves; you should try to hold on to it. See: Build and Hold.

 

Ottawa relied on lumber and GOC (Government of Canada) employment for its first 75 years of existence. Then, with the establishment of Northern Electric in the 1930s and the National Research Council, tech work started to become important. Still later, tourism became a third driver of the local economy. But what exactly are we counting on now in the 21st Century to drive local employment? Tech has been in the dumpster since 2000 and tourism too since the September 11th and SARS disasters. Also, the recent rise of the CAD with respect to the USD has not helped revive US tourist traffic to Canada’s Capital City. So what exactly are we counting on?

 

I think the answer is likely to be a combination of a continuing reliance on our three traditional sources of growth (GOC, tech and tourism—let’s hope for a big rebound in the latter two especially) plus two new ‘pillars’:

 

a)      entrepreneurship;

b)     festivals and trade shows.

 

Ottawa already is a city of festivals, trade shows and outdoor activities; when you have as much bad weather as we do (being the coldest capital city on the planet—yes, colder than Moscow), we might as well make the most of it. If Mount Pakenham (run by Joe Kowlaski and Joanne Clifford) can make their ski hill (with the lowest relief just about anywhere), a huge success by turning its biggest disadvantage into its biggest selling point*, then we can make Ottawa the Capital City of Festivals.

 

(* They did this by making it one of the biggest ski and snow boarding centres for beginners—parents and schools (looking for day trips for their students) want to know that it is safe for the kids to start there. And what better place than the hill with the lowest elevation…)

 

The other driver has to be entrepreneurship and not just in the tech sector. I would also obviously put another proviso on it—we should be encouraging a lot more bootstrap startups. When a city gets to the 1,000,000 population mark as Ottawa-Gatineau has, it becomes somewhat self sustaining. We need a lot more entrepreneurs in a lot more sectors of our economy in order to become more successful than we currently are.

 

Dr. Bruce M. Firestone, Ottawa, Canada. March 6, 2005

 

http://www.dramatispersonae.org/GuerrillaMarketingAndFinance/BootstrapCapital.htm

 

http://www.dramatispersonae.org/BootstrapCapitalSources.html

 

http://www.dramatispersonae.org/EntrepreneurialistCultureFrontPage.htm

 

http://www.dramatispersonae.org/

 

http://www.exploriem.org/