11 Startup Founders Reveal Why They Are Turning Down VC Money
- 11 founders tell Insider why they’re not following the typical Silicon Valley fundraising script.
- Founders say they can maintain a small board, prioritize customers, and still reach profitability.
- Other alternative funding methods used by founders include crowdfunding and raising debt.
In 2016, entrepreneur Ben Peterson added a final name to a list of 125 venture capitalists who were interested in investing in his HR software services startup, BambooHR.
He turned down every single VC then and has not touched the list since.
“We actually did have the reputation at one firm of being called the VC dodger,” said Peterson. To this day, the BambooHR team is still fielding weekly requests from interested investors, but has not accepted any additional venture dollars in five years.
In today’s frenzied funding environment, founders have more options than ever to raise capital, and many don’t always rely on the titans of Sand Hill Road.
Startup founders like Peterson have found they only need VC money early on to jumpstart their entrepreneurial journeys, but then decide to bootstrap capital on their own, despite hearing from interested investors regularly.
“It’s an embarrassment of riches,” said Auditboard CEO Scott Arnold, another startup founder who regularly turns down emails and calls from interested investors. “It helps me focus on building the business, not on raising money.”
Insider spoke with 11 startup founders about why they choose to continue turning away VCs to self-fund their companies. For all of them, it boils down to staying focused on the customer, along with keeping control and majority ownership of their companies without having to deal with a host of investors looking for returns on their capital.
“VCs will say they are founder-friendly but it’s actually their job to make as much money as possible,” said Andrew Gazdecki, CEO of MicroAcquire, a startup that helps founders get their companies acquired. “When they invest in you, they’re putting their name behind it. And so in their world, that’s billion-dollar outcomes or failure.”
Chasing customers over term sheets led to profits
KiwiCo
Doximity, the social network for healthcare professionals, went public in June with just $81.8 million in total private funding from investors. On the day of the company’s IPO, CEO Jeff Tangney told Insider the company had not spent any of the $54 million it raised seven years ago in a Series C round from investors Draper Fisher Jurvetson, T. Rowe Price and Morgan Stanley.
“As it turned out, our business did better than we projected at the time and we never touched it,” he said. His investors joked at the time that the funding was “mattress money” for him to sleep better at night.
Similarly, KiwiCo, a subscription service for kids, last raised money from traditional venture investors, including First Round Capital and Mayfield Fund, at the end of 2014. The company has only raised about $10 million in total.
KiwiCo founder and CEO Sandra Oh Lin, says the company has been profitable and cash-flow positive since 2016. This allowed her the flexibility to say “no thank you” to numerous VCs over the past seven years, including one as recently as last week.
Her recommendation to other founders who are just starting out is to carefully consider the pros and cons of taking on venture financing, and be deliberate about when and where you raise money.
“In our case, building a business where we weren’t reliant on the next check provided us with the freedom and control to grow quickly but in a self-sustainable way,” she said. “We basically didn’t want a capital raise or a lack of a capital raise to be the reason that we couldn’t fulfill our ambition.”
Like KiwiCo, BambooHR’s strategy of only raising $12 million from a handful of investors like ICONIQ Capital, has seemingly worked. In the last five years, BambooHR has grown over five times to become a profitable, self-sustaining business with annual recurring revenue of more than $100 million.
Keeping a small, but nimble board
AuditBoard.
“There’s an agility in decision-making and moving that you can do with a lean governance model,” said Arnold, the CEO of Auditboard, a startup that helps companies streamline their audit, risk, and compliance programs. “There’s no complicated fund dynamics from a bunch of different investors to deal with,” he said.
Battery was the last firm to lead the company’s $40 million Series B in 2018. Today, Arnold is among four people on the company’s board of directors, including the two founders and Battery Ventures General Partner Michael Brown.
“There’s no such thing as free money,” said Arnold. “And so it’s really important from my perspective that we don’t inadvertently take on a burden.”
Maintaining control
Jeeves cofounder Sherwin Gandhi tells Insider raising debt early on was one of the best decisions he made. The expense management platform startup emerged from stealth in June with $31 million in equity and $100 million in debt financing.
While equity provides Jeeves with operating capital, debt provides the company with what Gandhi calls “non-dilutive rocket fuel” to support its growing revenue model and expand the company’s global footprint. Debt also helped to minimize giving up equity in the company, which was important to him.
“For any entrepreneur and team, selling equity means giving up on economics and control whereas debt opens up a channel to obtain working capital while maintaining more ownership,” said Gandhi.
Debt doesn’t have to be a scary thing. By working with Pollen Street Capital, a lender he says has a deep understanding of capital markets, Gandhi was able to tailor a deal that not only benefited him, but also his customer base of global startups with a corporate credit card that can work across multiple currencies.
The type of debt he took on, he was careful to clarify, was not venture debt, but rather a type of credit line called a “warehouse,” or a place for him to stash loans that can later be provided to customers in different countries like Brazil and Chile.
With this kind of debt, Jeeves has been able to grow from Y Combinator to a $500 million valuation in under a year.
There’s raising debt, and then there are founders who just don’t see eye-to-eye with VCs. That’s the case with entrepreneur Dawn Dickson-Akpoghene. She received her first $1 million check back in 2017 when there were less than 30 Black female founders raising venture rounds worth that much. But after the validation of getting her first big check, she realized that continuing down the traditional VC route wasn’t for her.
“It didn’t align with me to give up a lot of my company to make other people rich,” she said. She has since turned to crowdfunding to raise money for PopCom, her automated retail software startup, and has since raised a total of $6 million from about 8,000 investors.
“What’s the most rewarding thing is I maintain control of my company,” she said. “We also only have common stock. No one has preferred shares. Everyone eats together.”
Rachel Murray / Getty Images Stringer
Investor Arlan Hamilton had the same idea when she was deciding how to fund her new recruiting platform startup, Runner. Hamilton could have easily pulled money from her own VC firm, Backstage Capital, or reached out to VC friends to invest, but she is choosing to bootstrap with Runner’s revenue instead. If the company does have a successful exit one day, she tells Insider she’s committed to sharing her upside with Runner employees and the investors who backed Backstage Capital’s Reg CF, an equity crowdfunding campaign.
“I could probably do things faster [with VC funding], but I’m not doing that because I do not want to give up that 10 to 25 percent of equity, on day one, makes no sense to me,” she said. “And I want to clear the path for the vision that I have, and that’s my decision.”
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