But is that really the right conclusion? If most investors have lost money from early stage investing, then it must also mean that most entrepreneurs who have brought outside investors into their businesses early on have had a pretty miserable time.
Surely a more useful conclusion is that you should develop your business as far as possible before raising equity investment from outsiders? The answer often given is that it can’t be done. To build a world class technology business requires lashings of cash from investors early on, otherwise opportunities are missed and competitors build unassailable market positions. ‘Look at the United States,’ people say.
Well yes, look at the United States. How did Microsoft get started? Not by raising venture capital early. Bill Gates and Paul Allen funded their start-up by winning a contract to develop a BASIC language for the Altair 8800 home computer. Even the product which put Microsoft in the position to conquer the world, MS-DOS, was funded by a development contract from IBM, not by equity from Sand Hill Road.
But you can’t do that with a hardware company, I hear you say. What about Apple? Steve Wozniak developed the Apple 1 in his spare time when he was still working for HP, and Steve Jobs sold 100 of them to Byte, taking cash up-front and using that as working capital to get the product built. Then the company went on and raised several rounds of VC, but only once they could demonstrate that there was a market opportunity that they could satisfy.
At the more modest end of the scale, the university spin-out that I worked for before becoming a venture capitalist got itself going by persuading Thorn EMI to sign a contract to develop a range of industrial robots, the profits from which were then used to fund other products based on the same technology. Life became more difficult when the customer’s strategy changed and the contract was cancelled but that is another story.
I have heard it argued that if you follow this model and develop a product for a third party, rather than being true to your vision and building the perfect product that you believe the market wants, the compromises you have to make mean that the product is not suited to the wider market. In my experience, the opposite is more likely to be the case, because the product is developed to the specifications of at least one customer who wants it. Nor is rushing to be first to market necessarily the right strategy; a more gradual and measured approach often delivers the best market share after others have spent their expensive equity creating demand for you. Google was not the first search engine. Apple did not invent the download of music. Microsoft did not develop the first GUI.
So don’t raise money too early; get as far down the road as you can without it. Start by free-wheeling down the hill and only fill the tank to accelerate when you have already built some momentum.
About Simon Acland -
He worked as a venture capitalist for over 20 years. He was also managing director of Quester, one of the UK's most active technology investors with more than £250 million under management. He was non-executive director of 23 companies in Quester’s portfolio. 7 of these were floated, 2 reaching the FTSE 250, and 8 were successfully sold.
His book ‘Angels, Dragons and Vultures – How to tame your investors…and not lose your company’ is published on 14th October and is available from Amazon
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