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Is venture capital really the best way to secure start-up funding? From Kumulos (Backend as a Service)

Nowadays it seems like creating a startup company, especially in the tech world, almost has a formula to it these days.

1. Establish Company
2. Solidify Company
3. Get VC Backing
4. Profit

This is the model that many start-ups seem to follow, to the point where they exclude any other options. VC backed startups are seen as the big fish in the pond and many want to emulate, or be acquired by, these clearly more successful companies.

The trouble with this is that VC backing is not the “be all, end all” that some think it is.

Writing all the way back in 2003 (is it not slightly worrying that the problems with VC backing haven’t changed in nearly a decade?), Joel Splonsky of joelonsoftware.com said that the main reason his company Fog Creek Software never looked for VC backing is because:

“…VCs do not have goals that are aligned with the goals of the company founders.”

This is the core problem of VC backing, and it’s one that is still a clear problem today.

It seems strange that someone who is investing into a project wouldn’t have the same goals as it, but when you break it down it makes a saddening kind of sense.

Let’s say you are the founder or co-founder of an app development startup.

What are your goals financially?

Most of the time is to create and build a company that is very likely to give you a return on your initial investment into the idea, even if that return isn’t a (relatively) massive amount. You’re less likely to take huge risks because this company is everything you have, which in turn will make you careful about your moves and ensure you plan well.

This is sensible and prudent if you want to create a business that will last and, hopefully, turn a profit once it’s established.

On the other side of things we have the VC backer.

What are their goals?

Well, they again want to see their investment in the company returned. The difference is though, that your company, the one that is essentially supporting your life, is but one of say, ten different companies that the VC currently has money in.

What does this mean?

Well, essentially, it means that your company’s individual success is not the VC’s number one priority. If they have 10 companies holding their money, they’re not looking for each one to be an Instagram style mega-hit. All they need is for one of these companies to become T.N.B.T (the next big thing), and they’ll see their investment in all ten of the companies returned and then some. What happens to each individual company is irrelevant so long as one brings home the cash cows.

There’s a direct conflict in overall goals between the VC and the founders from day one, and it only gets worse as time goes on.

VCs, in an attempt to speed up the process of getting returns, will strong arm founders into throwing money into their companies in order to expand them artificially fast, thus creating a massive potential for companies to start losing money faster than the titanic.

There are some VCs, usually called “Vulture Capitalists” who will use these tactics to force companies into extremely constraining deals where the VC essentially can’t lose as if the company goes under, they’ll get a return from the bankruptcy, and if they succeed, the VC has them in a deal that essentially means most of the profits go straight to them.

Interestingly, or disturbingly depending on your viewpoint, this is the kind of game now Presidential Candidate Mitt Romney used to play.

So if not VC’s then… what?

Well, this is where it gets interesting.

Recently in the app development world it’s becoming more and more common for celebrities to invest money into App developers who are making apps that these celebrities like.

And who’s one of the most prominent spenders so far?

Well, Justin Bieber of course.
He and his manager Scooter Bruan have arranged deals with a number of companies, including social ratings app Stamped and perhaps more famously, Viddy, with lesser known deals into companies like Sojo Studios, Tinychat and even Spotify.

Before Beiber got a hold of Stamped it was languishing in the endless sea of apps. One tweet later and it had shot to the top of the free apps top 100 and social apps top 10 lists in the US. It’s success wasn’t very long, but it’s name is out there.

Other celebrities have also been in on the act, with Selena Gomez herself putting money into Postcard on the Run, Shakira investing in Viddy and Lady Gaga investing in the social media startup Backplane, which she’s now using as a platform for her Little Monsters project.

These stories are becoming increasingly common in our ever more connected world, so as the founder of an app developer (supported of course by Kumulos’ kickass mobile backend as a service of course), before you pick up the phone to call that 100th VC, why not instead redial to Justin Bieber?

You never know, maybe your app is exactly what the pop prince has been looking for.

For everything else?

Well, there’s always Kickstarter…

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