I learned a lot of lessons during my time as CEO of Virtrue (identity management & background checks). I loved it. I hated it. I worked with zero pay. It messed up plenty of personal relationships. Despite all the work, it still failed. I’ve written about why a bunch but have yet to publish the reasons (coming in another post).
However, today was YCombinator Demo day and two companies in that batch clarified a key learning for me: FOLLOW THE MONEY [or users if you’re consumer focused].
In Silicon Valley, it’s easy to get wrapped up in your own hype of how you are changing the world. You forget that first and foremost, you are building a business. At Virtrue, we pivoted three times but stuck with our core technology throughout. While iterating on our core product, we also built out a nice side business for some of our customers – running background checks. It’s not sexy. Our product looked pretty bad. A large part of the process we used for our customers was manual. They did not see this (classic MVP move on our part).
Background checks were the only part of Virtrue that ever made real money. We had early talks with Lyft and a variety of the early (and now successful) pioneers of the Sharing Economy. They wanted something really custom for background checks. We wanted to push our social identity verification. Background checks were just an added bonus to using [what we thought of as] our core product.
Whoops. One of the hottest companies at YC Demo Day was Checkr. I’m sure they will raise a massive round. They are a background check platform. They are crushing it. They do the same thing we did but built a nicer platform and actually made background checks the core of their business. They saw a need (at their previous jobs) and followed it.
At Virtrue, we saw a need. Heck, we even saw good revenue. We ignored it. The whole team was made up of first time founders. We should have followed the money.
Side note: We actually looked deeply at the background check market and spend days debating whether to build something like Checkr. In the end, as that would have meant giving up our core product and vision – i.e. a massive pivot (vs a mini market pivot) – we decided against the change. Whoops.
Side note 2: for those who are curious, the other company that made me think “follow the money” was Edyn. I was in an accelerator with Jason Aramburu and team way before they were called Edyn. They followed the money and made a major leap. Jason had the balls to follow the money. The story of early Edyn is Jason’s to tell so I’ll leave it at that.
I am a member of a startup community: the Founders Network. Within the FN community, we have a variety of discussions on everything from how to hire, how to fire, how to build an app, how to raise funds, and more. A recent discussion started me thinking and I figured I would repost my answer (with a few modifications).
Another member brought up the “Series A Crunch” talk that’s going around the Bay (world?) right now. She wanted to hear some opinions that would provide a counter-balance to the negativity. Her links included the following:
The main gist of these articles is this: 1. 2013 is not like 2012. Got it, not news. There are always cycles. 2. As a startup, you better be good or else you won’t survive. 3. Sentiment “might” be heading in the negative direction. BUT smart investors know that is the time to invest (don’t follow the herd, lead). 4. If you believe in your startup, then macro sentiment doesn’t matter. Remember how long it took Jeff Bezos to raise his first round of funding?
One of the FN members had this to say in response:
“I think cooling in the funding markets could be good for our members for a few reasons:
- Valuations were unsustainably high. The market needs to correct in order to prevent another bubble/implosion.
- Too many copy cat companies were getting funding (e.g. 1,000 daily deals sites). Less funding means less noise in the marketplace so the good companies (the ones in fn) can get the attention they deserve. 🙂
- Less funding out there also means more engineers back on the market for you to hire!
- A growing number of our members are bootstrapping longer, farther and some have no intentions of raising outside funding.”
Here is my reply:
- High valuations are [generally] good for startups [if the startup can deliver]. They aren’t good for investors but that’s not my problem. Note: the flip side is that your next round is a downround. However, that is more a function of a) the startup not delivering, and, b) greed (albeit understandable – it’s hard to walk away from a lot of money at a high valuation).
- Copy cats – if an investor wants to fund it and that funding enables even a modicum of innovation, that’s a good thing. Once again, not the startup’s problem. Of course, I’d recommend most startups think about a “big” idea and go for it but there is a reason for the copy cats – there is a market for their services (and for acquisitions).
- Re bootstrapping – definitely great if you can do it. Then again, startups are about growth. Money usually accelerates growth. If you bootstrap for too long in the hopes of receiving a higher valuation (i.e. You give away less equity), then you are making an already big risk (i.e. Your investment in your own company) even bigger. Taking an investment de-leverages you. Yes, you give up some equity but, in exchange, you give up some risk. Plus, you have a better shot at growing you company faster and leaving your competitors in the dust.
- Re the Series A crunch: while the macro economic environment could change this, I actually don’t buy into it much. If you are a good company, you’ll be funded in good or bad times. Even if you are a subpar company, you probably can get funded – startups still offer the potential for much more growth than almost any other investment (of course, the risk is comparably high).
- I view all the hype around this crashing as just that, hype. Yes, some things may change a bit but there is a lot of money floating around. As a startup, it’s your job to a) find the money for funding, and, b) find the money from your customers. If you can’t do a or b, then don’t play.
- Note: take what I write with a grain of salt… 😉
The same FN member who has the somewhat negative view ended on a very high and true note: “While it’s good to listen to industry news and commentary, I think it’s more important to focus on what you can control: building a great startup.”
I’ll take that advice. Back to it. Heads down. See you in 2013.