Reader, Are you building your startup for the customer or a VC? 💻

Till today, we have been talking about validating our idea in the easiest possible fashion and finding growth levers for our startup, among other things. In these discussions, we have always assumed that we are working towards a solution for our customers.

To be fair, that's how it should be. But, are all startups always building for their customers? Or are they tricked into believing that, but are actually just building for VCs? Yup, I said it. It occurs more frequently than one can imagine and I had to share it.

But shouldn't the two - building for customers vs. VCs - be the same? Well, we all understand how VCs work. So let's just dig into it a little bit, and maybe we can find the answer together. Along the way, this might help me tell you why I decided to bootstrap Flexiple.

On an aside, we decided that we need to embrace COVID-19 and try to enjoy it. Here is our first remote team dance: Flexiple Team Dance. Hope it spreads a bit of cheer :).

So, how do VCs work?
Just a refresher, but this is important. VCs typically get money from LPs (Limited Partners). Who LPs are, is sort of irrelevant to us at this point. What matters though is that VCs usually have about 10 years to return the money back to LPs, hopefully with a good return. Since, it takes time to find good startups - let's say 3-4 years - the startups have 6-7 years to deliver the good return.

Now, what are good returns? I want to do some quick math here - so bear with me. For the sake of discussion, let's choose India and assume that number to be 20%. So, in 10 years the VC would need to return ~6 times (1.2^10) of the original principal. But here's the catch - the startups have to generate that 6x return in not 10 but 6 years. So, they need to be generating about a ~35% return every year.

But that's not it. Clearly, the VC business is risky, and not all startups are going to do well - only 5-10% startups lift the load of the entire fund a.k.a. the 6x return. So, if 5% of the startups need to generate 6x returns, each of them has to grow to about 120x - boom!

What does this mean for an entrepreneur?
Firstly, VCs basically evaluate each startup for a potential 100x+ return. Further, they need to exit any startup in about 6 years. An exit for them means you IPO (let's not even go there), sell to another startup (pretty rare), or raise another round from a different VC or PE.

This is a good time to ask yourself if this vision of a VC aligns with your vision for your startup. Are you ready to grow your company in alignment with defusing someone else's time bomb? In such a context, are you going to build features that make your product valuable to your customers? Or are you going to make your startup more "marketable" to future VCs, so that your current one can exit?

When I spoke to VCs, I found it strange that they were more interested to see the demo of my recommendation engine instead of discussing some business fundamentals. My friend told me another story about a Series F-funded startup he worked in. Even with $150 million in, they had only been optimising for non-financial metrics such as the number of users, time spent by them, etc. When they finally decided to focus on revenue generation and profitability, the founders were totally clueless about the method to achieve them.

What this meant for me
VC investment has many benefits - the money enables you to acquire talent easily, invest heavily in marketing, you get easy PR, and also access to the VC's wide network. So, to be honest, there is no right way of growing your company. It is always about doing what needs to be done. That's exactly how even VC investment should be thought of - consider it only when you need it and not as the only way of growth.

For Flexiple this need hasn't arisen yet. Bootstrapping has allowed us to remain fiscally responsible. We hire because we need to and not because we can - in fact, during COVID-19 we gave all our employees the promised raise and bonus. We evaluate our success in being able to keep our customers happy. It doesn't mean we aren't ambitious about our growth. We are just patient about it - you see, we are in this for a lifetime and don't have a time bomb ticking for us.

So Reader, next time you decide to work on an initiative, ask yourself if this is for your customer or just your investor. If it is both, that's great. If it is only for your investor, do you think that's a sustainable route?

You can read this issue of the newsletter on my website too: https://2.flexiple.com/newsletter/who-are-you-building-your-startup-for.

Thanks,
Karthik

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