Venture capitalists are glorified gamblers in the Ace-from-Casino sense of the word. They try their best to collect intel on the players, but ultimately still just place bets. Bets that usually fail more often than they succeed. It’s the 1-in-10 blowout payoff that makes sure the piano keeps playing for them while the tune goes mum for the rest of their bets.
Those are potentially good-enough odds for a VC to make a decent return for their investors. Lots of VC’s can’t even pass that bar, though, and end up net-negative for their backers. But let’s just take the guys who do make it. What’s their seal of approval worth?
According to Adam from Heroku, it’s much more valuable to get the peg from these gamblers than actually having sales in the shop:
When you’re doing your own thing, you have very little feedback on whether your path makes sense. You’ve got users/customers, sure. But for any random thing you might build, you’ll always be able to find some weirdos that want it, and maybe are even willing to pay for it. Whether those people represent the vanguard of a sustainable customer base, or whether they are a niche too tiny to build a real business on, is impossible to tell early on.
But convincing investors of the viability of your idea – enough to place a monetary wager on it – provides early confirmation that you’re on a viable path. It may even provide some course-corrective feedback. This is why VC-backed companies tend to get more respect than non, all other things being equal. A firm whose sole purpose is predicting technology trends believes that there is a reasonable chance that this company’s product will be the next big thing.
It’s funny, I have the exact opposite take from the same indicators.
Real customers who use their own money to pay for your products seem like a much better, much more real confirmation that you’re doing something right than getting pegged by a VC using other people’s money to fish for 1-in-10 chances of a monster trout.
To me, convincing a VC to give you money only confirms that they think your outfit is capable of having a long shot of making a big sale down the line. And that they can dilute you successfully enough that they’ll get the lion’s share of the spoils. As a confirmation of a real business? Meh.
Separate users from customers to determine success
I think the confusion comes from how callously users and customers are conflated. I absolutely agree that if you’re just giving away your shit for free, then interest is only an indirect indicator for possible success at best. Who knows if these freeloaders can actually be made to turn a profit? Better take the money upfront and run for the exit before you have to find out!
But if you stop thinking so much about users (or eyeballs if we’re talking early 2000s) and start focusing on customers, the game opens up. Real customers not only confirm directly that you have a compelling product (rather than the by-proxy way of a VC), they also help fund your operation from the get-go.
You don’t need outside bets to launch a web business
Most web startups don’t have high costs outside of labor that can’t be linked at least linearly (and preferably better than that!) to the growth in customers. If you need lots of servers, it’s presumably because lots of people like your product and if you’re treating your users as customers, that means you’ll be having plenty of dough to bake a profitable cake.
All that being said, it’s certainly possible that being on the receiving end of a VC bet can lead you to the jackpot. The wheels in Vegas wouldn’t keep turning if some people didn’t see a big bucks ringing of cha-ching sometimes. So if the idea of trusting VCs over customers appeals to you, just roll your dice and hope you don’t roll seven!