Via Ned Batchelder, I came across this post saying that sweat equity is the best equity. By which they mean that venture capital is a bad idea.
That may be true from the point of view of the founder, but after having worked for two individually-owned startups, two angel-funded startups, and three VC-funded startups, I have got to say that as an employee, venture capital is clearly the way to go.
In my experience, VC-funded startups are an order of magnitude more competent and professional. The senior executives have a higher likelyhood of knowing what they're doing. The final product has a better chance of being something you can be proud of, instead of just being the bare minimum necessary to get someone to pay for it.
Imagine you're building a house. Would you entrust the job to two or three people with minimal training, or would you want to hire a general contractor to oversee professional carpenters, plumbers, electricians, masons, etc? The former will certainly be cheaper, but the latter will have a higher chance of being done on time, within budget, and with a high standard of quality.
Continuing with the house metaphor, it's the job of venture capitalists to fund the construction of new and experimental houses. And part of their job to make sure you pick a competent general contractor. Yes, it makes it more expensive, but in exchange you get a higher likelyhood of having a product that isn't crap. And yes it reduces the amount of control that a founder can wield, but that's actually a good thing. Founders are usually at least as mentally unstable as anybody else, and a benevolent dictator is hard to find.
Posted on June 28, 2004 03:24 PM
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People I know who think venture capital is bad and sweat equity is good tend to talk about experiences at failing companies.
The claim is that if a company gets into trouble, VCs are more likely to panic, clean house, and generally make a mess of things. In contrast, a founders-only venture is (they claim) more likely to keep it's head together and either weather the storm or fail gracefully.
While I don't have enough personal experience to comment, I think that VC or not depends a great deal on the entrepreneurs personality and on the venture at hand. If you want to quickly become an enterprise software company, hit your liquidity event, and cash out, then VC looks pretty good. On the other hand, if you want to change/conquer the world with your Vision, VC money may not be the way to go.
Posted by: Richard Tibbetts at June 30, 2004 10:23 AM