13 Oct 2016

VC Funding and the Foie-Gras Effect

In the tech start-up scene (globally), it often feels like a company’s progress is measured by funding milestones  such as Seed Funding, Series A and Series B, rather than real business milestones such as revenue targets, turning cash flow positive and reaching profitability. The question all too often is “How can I get VC” rather than “Can I build my company without VC or by delaying VC?”

Thus it is refreshing to review the MailChimp story, which was bootstrapped (i.e. without taking external funding), and is on track to make over $400 million revenue in 2016, employing 550 people. Ben Chestnut, MailChimp’s co-founder and chief executive, says: You can simply start a business, run it to serve your customers, and forget about outside investors and growth at any cost.

Unicorn mobile marketing automation company Applovin, which was recently sold for $1.4 billion, delayed external fund raising until late in their evolution, and only ever-raised $4 million.

Mike Chalfen, a partner at London-based Mosaic Ventures, in his article “When to Take VC” says that “it may be a surprise to hear this from a venture capitalist, but the vast majority of startups should not take money from our industry.  The history of entrepreneurship is the history of owner-managers with no outside shareholders.” One in every 2,000 start-ups in the U.S. takes venture capital.

There are many sectors that do not necessarily lend themselves to VC funding – companies in a particular niche or geographically-bound with local customer relationships. Think of real estate agencies, law firms and consultancies. These are real businesses having to think about revenue and profitability every day.

However, tech companies often do need VC funding, to scale quickly, often globally, in a platform-dominated world, in order to be successful. Where, if you are not the 800-pound gorilla in your category, you are in danger of being taken-out or worse, made obsolete.

The problem with taking VC funding is what Anand Sanwal of CB Insights calls the foie-gras effect. Like ducks or geese, these start-ups are force-fed funding for rapid growth at all costs.

As stated above, this can be a good thing, until start-ups gets caught up in the VC treadmill of burn-rate, runway to the next funding round and valuation events, which can take away the focus from real business – tending to your customers and their evolving needs, running lean, and financing through your own revenue.

VC funding can be well suited to your start-up if:

  • Your vision would be impossible to achieve without outside capital, such as a platform company that has to build a community before it can switch on the revenue engine;
  • You see yourself as a serial entrepreneur, and you are looking at exiting for a pile of cash within a few years, then your goals will be aligned with those of the VC;
  • You’re not in a position to put in the up-front work of bootstrapping – perhaps you do not have the resources or time available to do this.

Either way, it is a good idea to ask yourself “Can I build my company without VC or by delaying VC?” If it is at all possible, avoid the foie-gras effect, or at least delay it for as long as possible.


  1. Interesting read and links, thanks David!

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