Fundraising is often one of the top priorities of most entrepreneurs out there today. But should it be? At PulsoConf, Melanie Moore asked attendees to consider just that.
Moore, the founder of the now-defunct ToVieFor and her new endeavor Elizabeth & Clarke, opened her presentation with a few numbers. Only 1% of all companies will ever raise institutional funding, and of those companies, only 2% will experience an exit of over US$100 million. In other words, 0.02% of founders will have the spectacular success of startups like Instagram. A wake-up call, no doubt.
However, the news isn’t all bad. In reality, 44% of small businesses survive, and the top quarter make over US$1 million a year. Building a business is a question of building a product and selling it, and it is, Moore said, entirely possible – much easier than VCs and many founders would have you believe. What’s hard, if not impossible, is becoming part of the 0.02%. She asked, “If it is that hard, why do founders and VCs keep chasing this mirage? Why this mentality of go big or go home?” This is where the motives of VCs come in.
Moore explained a bit about how VCs work. VCs, she said, are fueled LPs like insurance companies, pension funds and university endowments looking for small alternative investments. LPs expect their money to be returned to them three to 10 times over within 10 years, hoping to come upon huge hits like Twitter, Facebook and Google. However, the reality is that 80% of companies that receive funding from VCs fail. Of the remaining 20%, 15% return investments three to eight times over, and 5% return 10 times or more. These 5% are why VCs still exist.
In seeking out these huge successes, Moore said, VCs encourage their investments to go after huge markets and garner millions of users. When a VC realizes that startup being funded isn’t going to hit it out of the ballpark, they leave it behind, fire the owners or just stop showing up to meetings.
There are numerous entrepreneurial paths, Moore said, and not all of them entail 80-hour-a-week work ethic and constantly chasing huge investments. In fact, pure startup focus and lofty investments don’t necessarily add up to a successful business.
Moore warned attendees against “drinking the Kool-Aid” in believing that full-on focus on investment and huge markets is the recipe for success. She placed a part of the blame on the tech press, which celebrates investments and early-stage startups and hardly ever covers bootstrapped businesses that, after years of work, are earning consistent and high revenues. She named Spanx and Subway – two huge companies that have received no funding, their founders still owning 100% of their businesses.
How has Moore concluded all of this? She learned the hard way. In 2009, she founded ToVieFor, a fashion startup that took off fast. The company received a grant worth US$75,000 for winning the NYU Business Plan Competition, was a stand-out at TechCrunch Disrupt, and participated in Tech Stars New York. Despite its early success, ToVieFor crashed and burned during the Tech Stars acceleration process. Moore explained, “Acceleration is like rocket fuel. If you’re not ready for it, your company will explode.”
Now, Moore has taken a different approach with Elizabeth & Clarke. She began the company with just US$75 in startup capital, founded it herself and even learned to code. She created her MVP in one month, and one year after launching, the company has become profitable.
What was Moore’s message for entrepreneurs? Not do as I do, but instead, follow your own path. Don’t listen to investors or the press, but instead to yourself. Solve your own problem. Be the consumer. And whatever you do, do not drink the Kool-Aid.