Why Aren't There More Venture Services Firms? POLL RESULTS
Last night, we asked folks if they'd rather have cash or services (like marketing, development and HR services) to help their early stage startup grow.
While our readers' responses were pretty evenly split, the split between startups that seek capital first far outweigh those that seek to make equity-for-services deals. Also, the number of VC firms (well in excess of 700 in the U.S. alone) is far greater than firms offering services or a mix of cash and services.
Are we just too used to capital? Are "venture services" firms still too new? Why don't we have more services-for-equity programs?
The readers we polled last night were about evenly divided when asked if they'd take services (54%) over cash (46%). However, our commenters last night were overwhelmingly in support of taking services over cash alone.
"You need money to buy services, and most of the time, since you do not know where exactly to shop, you overpay or pay for something you do not need," wrote commenter Marfi.
Commener Jorge made a good case for mentor-driven accelerators when he said, "Just getting the cash won't get me some good mentors[...] The main reason why startups need cash is because the model is either not clear or not set to work in the short term[...] Just cash ins't enough unless you're an experienced entrepreneur."
Power commenter Warren Bendetto spoke to the sometimes arbitrary nature of valuation, saying, "When you're starting out, you really have no idea what you'll need. You base your anticipated amount of capital you need to raise based on assumptions and guesstimates that are 99% bullshit.
If you're lucky, you'll raise too much money[...] So you buy servers you don't need, you hire too many people, everyone gets 36" double LCD monitors, and your kitchen has a vending machine that spits out free MacBooks.
That's all fun, until you realize that you gave away 80% of your company in exchange for the funding. By the time you realize that you could have raised less and kept more equity, it's too late."
Salient points, all.
So, what is it about the magic and allure of VC that keeps startups pitching for more funding when they might be better served to take services instead?
Chris Wanstrath, founder of the bootstrapped and profitable GitHub, was in the to-VC-or-not-to-VC panel I moderated at SXSW yesterday. When I asked him if he'd ever considered taking capital to get his business up and running, he said that he absolutely hadn't. He had instead chosed to make business deals, strategic partnerships that would allow him to get the goods and services he needed without being financially dependent on others or having to give up equity.
In that panel, I asked audience members in the packed room how many were currently considering seeking or were actively trying to secure capital for their startups. Between 80 and 90 percent of folks indicated that they'd be making the rounds on Sand Hill Road.
I wish I'd had the chance to ask them if VC was still their preferred option after the panel was over. It seems now that there are more options and alternatives for smart, lean startups to get further with less reliance on the complicated and sometimes predatory business of venture capital.
As for why there aren't more venture services firms in existence, some have said it's because getting the capital to run a VC firm is a heck of a lot easier than building the infrastructure to offer startups mentorship, office space, and other business-building services.
Do you think there's enough justification - both in terms of demand from startups and in terms of return on investment for firms - to warrant more of this new breed of startup support? We'd appreciate your thoughts in the comments, particularly if you're involved in the VC/startup ecosystem.
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Money are overrated. I don't believe somebody can come to you and say he will offer a service for 80% of your shares, while with money one can easily do that.
Not everybody starts a company for the sole purpose making money. When you give up the majority of shares, you also give up what your company stands for.
I think the main reason why there aren't more is because being a VC is easier. Giving just money is helpful and many businesses get well funded and do well, but many others fail.
The reasons of failure are the same all around the world: little knowledge of the market, not enough research, the product changes the market in an unwanted way, too much cash is needed.
So creating a Venture services firm will be a lot of work and will requiere maybe a model that hasn't been created yet. For example I can see VC Services partnering with Coworking spaces to provide for office space while they hire part time consultants to guide the process. Also, many entrepreneurs won't value the services as the VC Services frim will do. While money is just a number....a service could be worth $1 million dollars to the VC and $250k to the entrepreneur getting the funding.
Regardless of the reason why or why not I see mentorship as key to success. In house everything is just too heavy a burden to be nimble in my view.
There is such a limited amount of mentorship happening that Venture Services is the inevitable recipe should any new venture hope to make in the current and to come landscape.
to hire or to sell? Sell and succeed.
D.I.K.W.
It's a great idea, but not a new one. The Ben Franklin Technology Partners network in Pennsylvania has been combining funding, work space, business assistance/mentoring and many other startup services for more than 25 years, with companies like OraSure as graduates. The newest incubator is Ben Franklin TechVentures (bftechventures.org) and is already planning a new expansion.
Very interesting post and poll. When we do seed stage entrepreneur workshops, almost every (>90%) person says money/funding is the most important priority.
Serivces are indeed critical, and I tend to agree that a "general fund" often tends to get siphoned by unnecessary or expensive services.
ActSeed just launched and is focused on this issue - helping aggregate core services, capital and people who want to contribute to new business creation and seed stage growth, including the "mentor-driven accelerators" mentioned in the post above - both non-profit and for-profit ones.
I stongly believe a concentrated bit of preparation will go a long way. You shouldn't over-plan, but an ongoing preparatory framework for planning AND improvising when necessary is really valuable.
Again, a very informative post!
I am happy with the almost equally distributed results from the poll. And yes, "venture services" firms are just too new.
Imagine it this way - salt vs. money - centuries ago out ancestors traded goods for goods - it was bulky and risky - same with services - it is not so convenient, not so easily measurable.
I totally agree and congratulate Warren on the excellent point he made - money get you drunk, you never have enough and at the end you do not even have a company :)
I will be very happy to see this poll repeated again in a few months with results this time in favor for the services :)
great post jolie. i think it boils down to the fact that we don't have enough venture service models, and we don't have the right one (at least i have not seen it). i think a big part of this is that "the right one" is going to be very much about offering great services. in other words, it is going to need to be run by an entrepreneur -- not a venture capitalist! (nothing against VCs but i think venture service really needs to be more service-oriented [as the name implies!] and thus needs to be more entrepreneurial, more workaholic, etc. more hustle!
also jolie did you see marshall's FANTASTIC article putting the smackdown on soc nets that violate privacy by sharing data with the govt? how awesome was that??? i may have to get started on the verses to the song.....but your name is in the chorus, so i will need you to step up like marshall did in order to finish it.... ;)
We too have been wondering why there aren't more firms investing talented teams in companies.
There are several what I would call traditional incubators that tend to be non-profits offering subsidized rent in a tenant landlord type relationship. Then there are the new mentor driven programs, that to a large degree invest their connections to funding sources by giving you some advice, stamping their seal of approval on you, and sending you down the line to the typical angels and venture capitalists.
But how many places are getting their hands dirty helping startups write code, or design a brand? There are a few dev shops or consulting companies that will do some work for equity, but in my experience, the equity work isn't the focus and gets ignored to work on 'paying' clients.
At SproutBox, in addition to mentors, we invest a team of full-time, talented and experienced professionals. We are for-profit, operate on a fixed 6month cycle, don't take outside work, and build companies that don't have to be fed into the funding ecosystem.
Why aren't there more people like us? I think there will be. When you were building a piece of software and sending it to stores in boxes, you needed money for packaging, marketing and shipping. But those days are gone. As the cost of distribution drops, the battle becomes over talent. The market has changed and so to must the funding mechanisms.
This Venture Services model almost describes the Seed Accelerator model - think @ycombinator, @techstars and @capitalfactory except the mentors are the actual the service providers directly. There is a growing number of these mentor-driven funding groups and they will grow or shrink as companies they support become successful or fail. I can see how this model will grow based on a trusted, effective and credible bundling of the services offered.
The idea above that the answer having to do with VC being easier than providing work is true in its way, but tells half a story about VC. Remember, after those guys give you their money they almost always want a management role. Sure, it's about controlling you as much as helping you, but it sure isn't simple.
That said: from my perspective playing all sides of this game, it seems that those looking for help want money and not "help", almost all the time. And when they do want help they'd rather pay with equity than cash.
Do you see the real-world disconnect(s) here?
Jeff Yablon
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