My Experience With Venture Capital

I am very open about how I first funded The Hub in its early days, because I think it’s healthy to be honest about it. Initially, I raised from friends and family, which is more about asking people that love you and believe in you already to give you a vote of confidence than it is raising money. They’re investing in you, not so much your idea. I also inherited some money and was able to put that into the business all at once, which means I was able to move faster, in a way that looked like success. I had a certain number of employees and we were burning a certain amount of money and we were trying to grow at a certain frantic pace.

In short, I created a beast that needed to be fed much more than I could afford. That growth hurt me more than it helped.

To try to dig myself out of this hole, I decided to raise money to try to keep up with that. Part of it is because I wanted validation, and I also thought that raising money would be the difference between success and failure. The simpler answer, however, is that I tried to raise money because I needed it. I had 15 employees, and I was losing $200,000 a month. I didn’t want to have to fire everyone and shrink my company down to a tiny, little thing. I simply needed it to keep my business afloat. 

I tried and failed to raise $3 million. I talked to almost 40 investors, and while I got some interest, almost all of them said, “no,” and many of them said it very quickly. As a result,  I had to make the cuts I had been delaying. But as I soon realized, raising the money wouldn’t have helped my company in the long run.

A former Facebook employee, Chamath Palihapitiya, whom I really respect once described present-day venture capital as a Ponzi scheme, in which investors keep passing the buck to the next investor. Most venture-backed companies are not profitable. They're losing money, hand over fist, and investors are picking up the tab. But because the company is growing, those investors pass it along to the next investors. This is incredibly common: Uber has never had a profitable quarter — they lose billions of dollars a year. Airbnb just had their first profitable quarter ever, coincidentally right before going public. Lots of trendy, up-and-coming companies that everyone thinks are doing so well are simply losing a disgusting amount of money that venture capitalists are pouring into their businesses to keep them afloat. 

Sometimes investors keep this up because they believe that one day the idea, and the company will work. 

But sometimes the music stops. 

The investors stopped believing. 

And they stop propping your company up. 

That means the beast starves, and a lot of people lose their jobs in a big, mighty company. A lot more employees are at risk than you realize, because if a company has sort of exploded out of nowhere and now it's everywhere you look, it's probably venture-backed. And if it's growing that quickly, it's probably growing with poor unit economics, which is to say it is unprofitable. And if it's growing unprofitably, then it's subject to die.

Not raising the money I tried to raise was very humbling. That can be bad because it damages your self-esteem, but it can also be good because it makes you reflect. I had to cut a lot off of my company, much of which I didn't know if it was fat or muscle. But you learn that most of it is fat, especially if you have lost sight of what is truly serving your company. 

Over the course of building your company, you convince yourself that everything you do is mission critical, otherwise you wouldn't put these things in motion. You can convince yourself you need a certain number of employees, who all need to be doing a certain number of things. You normalize having that many people and moving and operating in such a fashion. But the core function of the business is almost always just a fraction of that. When you're forced to get rid of a lot of stuff, you realize that your core business is actually resting on but a few blocks. 

Of course it’s difficult to cut any business down, not least of all because that involves letting people go. I had to back out of a lease, which was embarrassing. There's a lot of failure and embarrassment and harming other people. But you also learn a lot about what actually is fundamental to your business, and you can build from that very lean position of strength as opposed to building on ground that isn't as fertile.

If I were to try again to raise money, I would be incredibly disciplined about making sure that whatever it is that I'm about to scale is something that I've proven as being fundamentally very sound using data. If what I am doing at a small scale is working incredibly well, such that when I really add a lot of scale and money to it, I can grow something that is really tight and well-executed, I would feel comfortable trying to raise money. I don’t want to copy-paste mistakes, and it’s been incredibly testing to force myself to slow down and really hone the fundamentals of what the Hub is and what we do. 

But I am in this for the long game, not for putting kerosine on the bonfire before it or I am ready.