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The Myth of Venture Capital

We have created a tech culture that celebrates the act of securing capital as an achievement.

Shutterstock/Slavoljub Pantelic

We’ve all heard the story: Brilliant founder raises millions of dollars in venture capital and attains new heights of wealth and success. While this has been true in a few exceptional cases, I’m fascinated by how often this narrative is portrayed in today’s media. It has become commonplace in the tech industry for companies to be considered successful (or on a path to success) only if they have the validation of raising millions by venture capitalists.

That’s why, when I get asked, “When is the right time to take on VC funding?” my answer — “In a lot of cases, never” — is often met with surprise.

Unless you absolutely need to take a round, the best way to start a company is by bootstrapping it yourself. This was the approach that I chose when founding Shutterstock in 2003. As I look back at that decision nearly 11 years later, I’m still confident that it was the right choice.

We have created a tech culture that celebrates the act of securing capital as an achievement. Many entrepreneurs have shifted their focus to pursuing VC funding as a primary strategic priority, instead of concentrating on generating value for their users. This is worrisome, because raising capital alone is misleading as a benchmark for success. I hear so many startups talking about how they can raise VC, instead of questioning whether they need it in the first place.

John Mullins, author of “The Customer-Funded Business,” recently addressed some of the drawbacks of accepting capital and dealing with VCs. I’d like to add my own perspective on how accepting seed funding can impact your skills and experiences as an entrepreneur, something that is often overlooked in discussions.

Many entrepreneurs think that cash is the ultimate solution to all of their problems, the one thing standing between them and their dreams. This is a dangerous mindset for several reasons. For one thing, it’s not necessarily true. Prominent and successful VCs like Fred Wilson will tell you that data actually shows that the amount of money startups raise in their seed and Series A rounds is inversely correlated with success. He writes that “less money raised leads to more success.”

Working with limited resources is an excellent way to hone skills that will serve you well for the rest of your career. You will prioritize profitability from the start. All businesses need to create value at some point to survive, and while some companies have had successful exits without profits, they are few and far between. By building profitability into your model, you’ll be able to start scaling. Self-funding will force this thinking at every stage. When it’s your own money on the line, you will be motivated to focus only on the essentials needed to move to the next phase, and you’ll keep yourself lean for efficiency.

Since I could feel the money moving out of my own bank account, I was very sensitive to my return on investment. This translated into a complex lifetime-value calculation that drives our acquisition model to this day.

Building a business from the ground up can take years, and that time is incredibly valuable in self-paced growth. An injection of capital can act like an immediate boost that allows you to move much faster, but gives you less control over your trajectory. The faster you go, the less room you have for error. I believe that businesses have an inherent natural rhythm of growth that needs to be respected, at least in the early years — an influx of capital can disrupt that balance and push you and your team to take on projects before you’re ready.

Companies without capital will grow at the pace that makes sense to their business. You’ll only hire, introduce new products or expand into new markets when it makes financial sense for you to do so. I started Shutterstock with $10,000, and I carefully spent each dollar and worked to get a return from the start. Because of this, I still own 45 percent of the business. This is extremely rare among public companies — it’s usually closer to between five percent and 10 percent by the time businesses get to our stage.

You will also fail faster. It took me 10 tries to get to Shutterstock. Most of my startups never made it off the ground. Being an entrepreneur means being able to pivot quickly, shut down a business that isn’t performing and move on. If you use somebody else’s cash, you may be forced to continue even though you know it’s time to move on.

I recognize that self-funding isn’t an option for everyone, and some people might truly benefit from working with a VC. If a large amount of capital is required, or if not taking on a venture round will be truly detrimental to getting your company off the ground, then, by all means, do whatever you need to do. In those cases, a VC partner might be a valuable resource, providing support in areas like hiring, scaling and operations, if you and your team lack experience. They can also provide access to media, talent and technology.

But if you can figure out how to avoid an angel or venture round, you will have much more control in the long run. I would recommend trying everything you can to remain independent. Whether it’s exploring micro-funding, asking family and friends for support, reducing overhead costs by using open-source software, or learning new skills, I firmly believe that the longer you wait to raise money, the better off you and your business will be.

There are plenty of tools out there to start your own company with just a few thousand dollars. Bootstrapping doesn’t have the same allure as receiving millions in funding, but it will help you develop a solid foundation that will give your business the best chance of succeeding.

Jon Oringer is the founder and CEO of Shutterstock, a technology company that powers one of the world’s largest marketplaces of creative content used by businesses, media and agencies. In October of 2012, Oringer took Shutterstock public on the NYSE, and has since grown the company to more than 400 employees and over $230 million in annual revenue. Reach him @jonoringer.

This article originally appeared on Recode.net.

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