Do you need VC to grow?

A lot of startup entrepreneurs ask me about when / if they should raise VC$? There is no one answer of course. It depends on many variables such as: opportunity size, your ambitions and track record. But my natural reflex is to tell most folks that if they are pursuing something that is fundable (a big opportunity in a growing market that is being pursued by a great team) then sooner rather than later they will probably want to raise VC.

A few things put that assumption into question for me last week. First, I was on a panel at Accelerate Alberta with Anthony Lee from Altos Ventures. Anthony pointed out that the top tech companies in the World (think Apple, Microsoft, Google…) all raised < $20M in VC each. Several, such as MS and Cisco raised very little VC and did not even need the $.

Now $20M is a lot by most people’s standards but far less than what many of today’s privately held (and hence still VC-backed) startups have raised. A big reason for this is that startups are going public much later than in the past. Facebook would have been public already if it was built a decade ago. So, there’s a bit of apples and oranges going on here and hence hard to compare today’s tech leaders with the last generation.

The other data point though was Profit Magazine’s Profit 200 list of Canada’s fastest growing companies. The companies on this year’s list generated average 5 year sales growth of 1,464%. As an investor, I’d kill to have that in my companies. But here’s the funny thing, while 36 of the 200 companies on this year’s list are software companies only 12 of the 200 raised VC$. So, this begs the question – do you need VC to grow?

The Profit 200 is a mixed bag. It covers all sectors and sizes. It has young startups and big tech giants like RIM. So, we would need to slice and dice the data to isolate tech companies that are still private and see whether they raised VC to get the 5 years of sales data needed to make the list. Still, the overall stat stands. Out of all 200 companies which generated $ 27B of sales in 2010 and crazy growth only 6% of them raised VC to get there.

So how did they finance their businesses? The main sources included the founders’ own $, friends and family, government, banks, leasing and private (non-angel) investors. Banks and leasing really only come into play once you’re profitable. So, the high level distinction for me comes down to your growth strategy: does it make sense to invest in growth (at the expense of profitability) or should you grow profitably and organically?

I can only speak to the web / software World where I spend my time. Here, most sectors are winner take all (or at least winner take most). Time to market leadership is a serious determinant in company success. Add to that that most startups generate revenue on a recurring basis (either through subscriptions, e-commerce or advertising) vs. the previous generation that largely sold on a licensing basis (where they got big upfront $). And there’s also just a lot more competition now. The barriers to starting something are non-existent. So, if you have a great idea chances are others have the exact same idea.

So for me anyway, when you consider time, competition and per user economics (where you pay to acquire a user upfront but earn revenue from that user over time) in most cases if you’re doing something fundable and big then you need outside capital (from angels and/ or VCs).

But I do recognize that VC-funded businesses tend to defy the laws of nature (i.e. profit does not matter) and so it’s good to ask if there are other ways to grow. 37 Signals have built a huge business with relatively little capital and no VC. I’m sure there are many other examples.

So, what do you think? Do you need VC to grow?