Pittsburgh Ventures

Another installment of Ask The VC, and yet another question from our friend, Paul Merrill:

dpaulmerrill: @aveeck also, given equal $, which more likely to be profitable sooner – venture or self-funded?

In theory, there should be no difference between how long it takes for a venture-backed startup and another startup, backed with founder’s or friends-and-family money, to become profitable. As a startup grows, the whole reason to deploy capital (either yours or outside capital) as opposed to bootstrapping your growth is to be able to grow faster, ahead of the curve of revenue growth.

When I was at the startup FreeMarkets, we took a couple large doses of venture capital after our startup had already achieved profitability so that we could grow the size of our team before we had necessarily found the customers to pay for it.  For example, we opened offices in Europe and Asia so that we could go after new customers in those regions – we had to have a sales team and a service delivery team in place, trained, and somewhat experienced before we could start making our first dollar of revenue.  That took money ahead of the revenue.

The same applies for most of the Web 2.0 startups that are recently founded.  Facebook, Twitter, and FourSquare are all examples of companies that have relied on venture money to build large user bases ahead of revenue.   Capital invested ahead of revenue is what allows them to be basically a free service for users and have thoughtful time to figure out the optimal  revenue strategy to provide value to their (large and growing) user bases.

The only  factor that may cause a venture-backed profitability path to be different than a self-funded one is that you are using OPM – Other People’s Money.  And with OPM comes the obligation to treat that capital with respect.  The venture firm that backs you may have  expectations that don’t match yours, such as how big to grow the business, and when to exit.  Once you take outside money, and accept the terms that come with that money, you no longer fully control your own destiny.

One other note:  most professional money,  like venture money, will really like to see that you have some of your own money, and perhaps even friends-and-family money, invested into your startup.  This “skin in the game” shows us that you have the ability to raise money, you really believe in yourself and your startup idea, and that other people trust and believe in you, too.  This is a good vote of confidence that all investors like to see before putting their own money at risk.

If you have a question that you would like for me to answer, please submit it to pittsburghventures [at] gmail [dot] com – all submissions will be kept confidential, if you request it.  Thanks!

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