There’s a widespread belief among founders that venture capital is a precursor to success. VC is a common denominator of the most successful tech startups, ..
Venture capital is a hell of a drug, and it’s possible to overdose on VC, but for most founders that is a champagne problem. More often the question investors hear is “how do I get a VC to back my startup?” These founders aren’ t worried about how overcapitalization will make their IPO prospects trickier — they’ re scrambling to get someone, anyone, to sign their first term sheet.
There’s a widespread belief among founders that venture capital is a precursor to success. VC is a common denominator of the most successful tech startups, but it isn’ t a prerequisite, especially at the early stages.
Entrepreneurs can prove out quite a bit with little to no capital. Capital won’ t make your company insightful. If you can’ t creatively turn $1 into $10, why do you expect to be able to turn $1 million into $10 million?
To help illustrate how startups can move forward, here are 35 examples of companies that started with a few thousand dollars, or even just sweat equity, and went on to become exemplars of what I call “efficient entrepreneurship.”
Many of these companies have subsequently earned billion-dollar valuations, some even have billions of dollars in revenue, but none started with anything other than what would be considered a seed round. Most of these startups raised money from VCs, but only after they established the fact that their success would come with or without a wire transfer from an investor. Even now, many of them aren’ t widely known — they are the invisible unicorns of the tech industry.
So before scrambling to schedule meetings with investors, read these stories. They provide a counterbalance to the VC-centric outlook held by many founders, and provide alternative ways to think about funding.
What follows are brief and simplified descriptions of these companies (categorized by approaches they share) and links to stories where you can read more about them. Remember, taking venture capital should be a choice, not a compulsion. These companies show how it’s done.
You don’ t need venture capital to get started in most industries if you can solve a real problem for customers and charge money for it. Here are three ways to think about this:
Automate your workflow
The easiest way to build a useful product is to automate some part of your daily workflow. This will ensure you’ ve got proven demand for what you’ re building and a pre-existing funding source for your project.
MailChimp: Co-founder/CEO Ben Chestnut was running a design consulting business in the year 2000 and had a stream of clients who wanted email newsletters created. The only problem was that he hated designing them. So, to spare his team the tedium, he decided to build a tool that would streamline the process. MailChimp, a $400 million run rate business, was born.
Lynda: Lynda Weinman started as a teacher in need of tools to instruct web designers in the late 1990s. The offerings at bookstores were bland, so she began producing training films that better educated her students. Tutorial by tutorial her company helped software developers and designers improve their skills. She spent two decades building a content library and tech assets that had enough scale to entice LinkedIn to pay $1.5 billion to acquire the company.
Start with a capital-efficient product
Many entrepreneurs make frontal attacks on industry leaders, usually resulting in failure. This is especially true in the case of hardware. Instead of trying to compete with a company like Apple, these scrappy startups filled the gap left by RadioShack and built businesses worthy of respect and emulation.
AdaFruit Industries: Limor Fried started her DIY electronics e-commerce empire as a student at MIT by assembling DIY kits comprised of off-the-shelf parts. Fried merchandised the same building blocks found at electronics stores, but also crafted quirky content that made the prospect of soldering a replica Space Invaders cabinet seem reasonable. Now she has 85 employees and earns $33 million per year.
SparkFun: Similar to AdaFruit, Nathan Seidle started SparkFun out of his dorm room by selling electronics kits and oddball components to a coterie of engineers who wanted to explore exotic new sensors and systems. Now his e-commerce empire employs 154 and has revenues of $32 million per year.
Solve an existing problem and leverage an existing business model
Startups don’ t have to be particularly innovative in terms of business model. Building a better mousetrap on top of a more modern technical platform, or with a UX layer, can be enough. None of the companies that follow reinvented the wheel, but all wound up creating real value.
Braintree Payments: Exchanging money online, without being fleeced by fraudsters, is one of the oldest problems on the web. All parties to a transaction happily agree to pay a fair “tax” for a superior experience. Braintree built a better tech solution and survived on the proceeds of those transactions for four years before raising $69 million in two rounds of venture capital, which preceded an $800 million acquisition.
Shopify: Shopify’s founders were looking for a shopping cart solution when they were starting an e-commerce site for snowboarders. Unable to find one, they decided to scratch their own itch and built a bespoke solution on the then red-hot Ruby on Rails framework. It turned out to be a perfect solution for plenty more people, and the founders ran the business independently for six years on the revenue they generated. They ultimately raised money from VCs and later IPOed, which rewarded them with a billion-dollar valuation.
Many entrepreneurs waste their time “playing CEO, ” crafting a strategy and drawing up a dream org chart for what their business might become. Don’ t do that. Instead, figure out what you can do, today, to advance this idea using only the resources you have.
