Don’t start a company just because you can…

Back when I first entered the startup World, it was hard to create a startup. For starters you needed over $1M just to get going. You had to buy gear, software licenses, etc. And there was no real social web to help you cheaply bring products to market.

These days there are effectively no barriers to launching a product. If you have the talent you can build and launch something for free. Most of the teams we meet at Real Ventures come in the door having built and in many cases already launched – even though they have not raised money before.

This is all good! And as seed investors it’s certainly easier to make a decision if you can touch and feel a 1st product.

But just because you can build something it does not mean you should. More and more people are launching products and then trying to turn those products into companies. Accelerator programs like YCombinator and Techstars, and of course our Founderfuel, have aided this trend. We are there at the very beginning to provide capital and mentorship.

But this tweet from YCombinator founder Paul Graham should set off some alarm bells:

That’s over 10,000 applications to YCombinator in a week. Each of these applications represents a team that wants funding and wants to go down the path to building a funded company with all the growth and exit expectations that come with that.

Now, it’s true that only a small % of these applicants make it through. But each one represents someone who wants to build their own company vs. join an existing team. This is one big reason why it’s so hard to find talent these days – especially technical talent.

I’m all for encouraging entrepreneurship, but I worry about this trend. If you don’t get into YC and you take a job, will you leave as soon as you get into another program? What happens when all these companies hit the seed VC market? Will users begin to feel completely saturated and overwhelmed by these app and service companies? Will exit prices go down as there is so much supply on the market?

Lots of things to consider and time will tell whether this is good or bad. But from where I stand, 10,000 applicants per week to one accelerator program is not a good sign. And it brings me back to a fundamental principle for startup founders:

Don’t start a company just because you can.

Don’t do it because you know an accelerator will fund you.

Don’t it do it because you have dreams of riches and getting on Techcrunch.

Start it because you have a passion for solving a real problem or opportunity. One that keeps you awake at night. One that you are uniquely qualified to solve. One that is worth solving and will be hugely valuable to all stakeholders. One that can become a “real” company.

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  • http://www.katherinehague.com Katherine Hague

    YC did not get 10,000 applications. You are going off a stat that PG tweeted only a couple hours before the deadline closed, during the last minute rush:

    "We won't get 4000; closer to half that. Also, you can't simply multiply the application rate times the length of a day, because the rate gradually increases as the deadline approaches." — PG
    https://news.ycombinator.com/item?id=3096302

  • http://www.markevans.ca Mark Evans

    Excellent advice…again. That said, I do love how entrepreneurialism is thriving in the Canadian high-tech landscape.

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  • http://twitter.com/allenlau @allenlau

    "Don’t it do it because you have dreams of riches and getting on Techcrunch."
    "Start it because you have a passion for solving a real problem or opportunity."

    Mark, you nailed this one.

    • http://startupcfo.ca Mark MacLeod

      Thanks Allen!

  • http://twitter.com/bradleyjoyce @bradleyjoyce

    Other than "worrying about the trend" … is there any actual data to suggest there are real negative affects of this activity?

    • http://startupcfo.ca Mark MacLeod

      See my comment above to Daniel. The concern is about alignment of interests and extremes in valuations that will come back to bite people in the ass on the next down turn.

  • http://twitter.com/danielharan @danielharan

    A lot of talented people that go through YC don't actually need to build a real company to get a talent acquisition and get life-changing money. This is a great deal for them. Even if they fail at getting acquired or their company flops, they will learn a lot in the process.

    Two factors will lead to technical talent getting more equity:
    -Entrepreneurs looking to hire will have to offer something as compelling.
    -It's easier to convince an engineer to work for free for 3-6 months and help build a prototype than it is to get VC backing.

    Small VCs will have to adapt. Easier access to prototyping capital, faster deals, free/cheap space, better terms: you're already doing some of these.

    All told though, these are symptoms of more wealth being created; I'm very optimistic about these trends.

    • http://startupcfo.ca Mark MacLeod

      I am completely in favor of engineers getting more equity. Have always felt they were underrepresented on exits. But here's my concern: your points make sense but are not aligned with the reality if every YC company getting an additional $150k with no cap. This presumes going onto to build a real company. Otherwise it delivers little or no return.

      Team exits tend to be in the 1-5m range if they happen pre traction and assuming they don't involve some threatening core technology.

      If the YC companies fail to deliver returns then the program will go away.

      Also seeing some things coming out that are features at best, not stand alone companies.

      • http://twitter.com/danielharan @danielharan

        It seems very rational for engineers to get together and aim for a small exit or talent acquisition — and a bit disingenuous for you to suggest they shouldn't on account of concern for YC's long-term survival.

        YC's performance to date has been incredible because of Heroku, Dropbox and Airbnb. I'm sure Yuri Milner and SV Angel also appreciate your concern :)

        Heroku started off as a ridiculously bad web editor – an online tool for wannabe developers. If anything screams of "features at best" that would have to be it. Yet they exited to Salesforce for $250 million.

        Soon we'll see many of the engineers that were in talent acquisitions come back to YC, this time looking for a much larger exit. AFAIK there are already several repeat YC participants, all of which have better odds at success (and building large companies) than first-time entrepreneurs.

        • http://startupcfo.ca Mark MacLeod

          Disingenuous? Really?

          I'd say taking $ 150K with no valuation cap and no genuine intention to help generate a return on that is disingenuous. I'm not worried about YC's survival. I am worried about individual investors getting burned. Everything moves in cycles and the peaks and valleys of those cycles are influenced by greed. Greedy deal terms from companies now will be matched by equally or more greedy terms from investors during the next downcycle.

          If you raise $ at all, ensure alignment with the goals of your investors. Otherwise, you'e being disingenuous.

        • http://twitter.com/danielharan @danielharan

          If I were actively going out asking investors for money, then yes, I'd have an ethical responsibility.

          But if someone that's already super-rich just hands me $150k without my asking? And I repaid them on acquisition, with interest? I'm having a hard time seeing a problem here.

          Especially considering that they're likely to want to start a new company – and if they take the $150k offer again, it's likely to swing for the fences.

        • http://startupcfo.ca Mark MacLeod

          You have to admit Daniel, that you go into YC knowing you're getting this money and knowing it has high expectations attached to it. Just because someone is rich does not mean you have a lesser obligation to deliver returns.

  • kpswan

    Mark, you have absolutely nailed it. I am guilty of this exact sin back in my early days and it is a lesson I have never forgotten. It is always excited to just "start" something, but the road will get tough and that is when you realize if you really have a passion for what you are doing. Also, I am a believer that joining a killer team and being part of something great can be just as exciting and fulfilling as starting something on your own.

    • http://startupcfo.ca Mark MacLeod

      Thanks Kevin. It;s easy to start. Hard to finish. And I agree being part of a killer team and a startup that is taking off is just as exciting and in many ways a better path to doing your own thing.

  • http://techentrepreneurship.com Helge Seetzen

    Mark, I think we were having the same thoughts at the same time. See my blog post from this morning: http://wp.me/p17btY-8g
    Things get screwy whenever something that only works for a small number of people becomes popular.

    • http://twitter.com/bradleyjoyce @bradleyjoyce

      "Things get screwy whenever something that only works for a small number of people becomes popular."

      Startups and entrepreneurship in general only works out for a small number of people. Very few succeed compared to the number that try.

    • http://startupcfo.ca Mark MacLeod

      Great post Helge! Left a comment on it.