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The VC-free startup

The big-bet model works on occasion in Silicon Valley, but it seldom works elsewhere.

A couple of items caught my eye in the notes from Paul Graham’s Y-Combinator talk on trends for the future (circa 2009):

  • There should be an O’Reilly book for business. It would be really short. “Make something people want, charge them money for it. Advanced: charge more money.”
  • B-school is West Point for industrial capitalism. It trains generals, not foot soldiers. Market now rewards people who can do stuff.

Much of the discussion about tech entrepreneurship focuses on the courting rituals of venture capital — effectively pitching VCs for funding. The Silicon Valley startup model depends on VC money, and one might argue that entrepreneurs are judged more by their ability to raise money than to succeed in the business the money was raised for. I wonder if the Silicon Valley startup fits a narrow set of Facebook-sized opportunities — high-growth businesses that demand a lot of capital in a short period of time. The big-bet model seems to work on occasion in Silicon Valley but it seldom works elsewhere. Yet a lot of energy goes into trying to figure out how to get the right conditions for a Silicon Valley model to emerge outside of Silicon Valley. Startups outside Silicon Valley wonder if there’s any way for them to succeed. So I got to wondering about opportunities for VC-free startups.

How can you start a business that a) has low capital requirements; b) begins producing revenue quickly and c) becomes self-sustaining? Such businesses won’t necessarily grow into great big, scalable businesses. However, they could provide the opportunity for small teams to work independently and for the founders to do something they care about. Such startups would be mission-driven, organizing around a core set of values. They don’t need an exit strategy because the goal is to keep doing the work you want to do.

One idea is that these businesses should try to fit into an existing ecosystem; they don’t have to create the ecosystem. If you develop an app for Facebook, Android, or iPhone, you can take advantage of an existing ecosystem for marketing and distribution. That ecosystem allows you to get pretty good feedback quickly on whether enough people like what you’ve made. You shouldn’t require more than a small team of people to develop a product for these platforms. Mitch Waite’s iBird app for the iPhone is an example.

The hype around Silicon Valley may distract us from the basic business idea that Graham emphasizes: make something other people wish they had. If you can do that and you can reach people who will buy, then you can have a successful business. I’m seeing makers who are creating products for other makers to buy. Limor Fried’s Adafruit Industries is one example and so is Nathan Seidle’s SparkFun Electronics, both businesses that were started without venture capital. Makers of physical goods have some advantage in that people seem to understand paying for them. Makers may also find good opportunities making things that businesses need rather than selling direct to consumers.

Paul Graham writes about the organic startup in much the same way I think of makers getting into business unexpectedly. He uses the example of Apple where Wozniak built a computer for himself, only to find out that there was a market for building computers for other people as well. He had intrinsic motivation to make something; he wasn’t motivated by extrinsic goals such as money or status. Graham says that “organic startup ideas usually don’t seem like startup ideas at first.” It’s because a lot of ideas seem like hacks, a quick and dirty solution to a problem. He also recommends that startups should focus mostly on developing the idea and worry less about being a startup.

O’Reilly has been an organically grown private company, starting as a technical writing company that morphed into a publishing company. Tim and I wrote our first book, “Unix Text Processing,” because it grew out of our experience of using these tools for writing computer manuals. In many cases, we tried to write the book we wish we had when we were learning a new technology. What made me want to work with Tim over 25 years ago was that he wanted to create a new business, not just be a business. Over time, we succeeded not just by building products but by developing a network of customers who are our colleagues. It’s amazing that we’ve been able to be self-sustaining and use the business as a platform to keep doing what we love doing. The business connects us to a lot of really interesting people — inside and outside the company.

Today, there’s a good degree of disillusionment with VC models and even more so with Wall Street’s brand of few-take-all capitalism. I find there is a lot of interest in creating a business that looks more like O’Reilly than the Silicon Valley startup: building a business as a foundation for creating value and meaning. How can people pursue their own ideas and interests while developing a product or service for real customers? How can they maximize the value of their work and gain more control of their future? Perhaps the answer is to think small, as in small business. I’m reminded of the wonderful title of E.F. Schumacher’s book: “Small is Beautiful: Economics as if People Mattered.”

According to SCORE stats, there are almost 29 million small businesses in America. These small businesses “hire 40 percent of high tech workers, such as scientists, engineers and computer workers.” A lot of consulting businesses fit this profile as well. Do something you’re good at, provide a useful service to people you know and get them to pay for it. Programmers, sysadmins, graphic designers and others run their own firms, providing services to existing companies. Think of how web development and design firms flourished in all kinds of markets. Today, it’s social media marketing and SEO firms.

Web-based business services can make running a small business easier, lowering administrative overhead and increasing collaboration. There are tools for project management, customer relationship management, billing, shipping, and more. Many of these lightweight services are much better than their enterprise equivalents. Being smart about social media allows you to develop and maintain your own network of potential customers, partners and clients. But none of this matters unless you have a good idea and you set out to do something about it.

If O’Reilly were to develop a business book, I’d like to see us explore new alternatives to creating and managing businesses, looking beyond business as usual.

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  • polyGeek

    Organic is the only way to go. That’s how I did RunPee.com. It was originally a project that I built because I wanted something to work on to gain experience developing database driven applications. Just 4 months before RunPee.com launched I didn’t know what a SELECT statement was. I hoped, but never expected, that RunPee would be a useful site. While working on the site my wife asked me if it was worth all the time I was putting into it – given that it wasn’t likely to be a commercial success. I told her that it was worth doing, “even if no one ever visits the site because I’ve learned so much in the process of building it.”

    After it was complete it sat for almost a year before being discovered. Now it provides a modest income for me and my wife and I don’t have to look for clients anymore – I was a freelance Adobe Flex developer. Now I have time to work on other ideas without the distraction of client work. I know that most of my ideas won’t be successful but they are fun to build and the money they make is all gravy.

    And who knows: one of them might be the next big thing. It’s a dream but that dream gets me out of bed each morning excited to create something new.

  • Roger

    Paul Graham’s advice on starting up a successful business reminds of this gratuitous advice on how to catch fish: “throw your line where the fish are biting.”

    If someone bites at this ‘perl of wisdom’ then feed them to the Venture Capitalists. For everyone else, some real pragmatic advice and insights on the nuts and bolts of bootstrapping a contemporary tech business would be valuable.

  • Brian Gruber

    Beautifully written and personally inspiring. I raised $4 million for my previous start-up and spent most of my time fundraising or working to package a basically good idea for an independent media company into something that could “get big.” I am now bootstrapping a new venture with a small amount of angel capital and a very passionate team focused on a clear vision. Thanks for the excellent thoughtful article.

  • Rick Bullotta

    OK, I’ll bite.

    Um, I almost don’t know where to begin, since there are aspects of your position I support wholeheartedly and others that typify valley arrogance. Let’s take the negatives first, so that we can finish on a pleasant note…

    “Startups outside Silicon Valley wonder if there’s any way for them to succeed”. Um, no they don’t. There’s a big world out there and plenty of companies outside the valley doing ambitious things that have no problems raising capital. We do have to battle the “perception police” who control the blogosphere and social media and insist on hyping their own incestuous community (with myriad conflicts of interest, but that’s a topic for another day).

    On your basic premise, however, that great companies can be built on little or no venture money, I “somewhat agree”. All too many entrepreneurs try to swing for the fence when in fact, they should be building solid lifestyle businesses. Resisting this temptation and being grounded in your business potential is critical. Too many companies (virtually all of them zombies now) took on too much external capital and set in place an unachievable exit strategy. Focus on the present, on building real value, on delivering that value to customers/consumers, and the rest will follow. Also, there is simply no better source of funding than REVENUES and PROFITS. Certainly some grand ideas require investing in R&D and infrastructure ahead of the curve, but even the dynamics of elastic infrastructure are changing that as we speak.

    The downside of underinvesting or in overhyping the so-called “lean startup” approach is that all too many startups are pursuing not-so-ambitious goals or me-too/copycat strategies as a result. The recent spate of companies at the YC demo day was graphic proof.

    Ultimately, the type and amount of financing is one of those “it depends” questions. A company that needs to build out substantial physical infrastructure, such as Better Place or a manufacturer such as Tesla or Fisker, inherently requires a lot more capital. A company that is joining the ranks of “shallow startups” and creating YALASN (yet another location aware social network) or embarking on an ambitious undertaking like “Facebook for Pets” can get by with substantially less.

  • http://startuptodo.com Bob Walsh

    Good post, but behind the curve:

    1. self-sustaining micro software companies (

    2. The Starter Startup. Increasingly, I see developers launching their first startup as a way to get/reward angel investment and early exit. Then, they are ready to try for the VC-funded gold ring. Given that a tightly focused software startup can go from inception to exit in 18 months, “Starter Startups” make sense.

    3. The Web Startup Success Guide (Apress 2009) :)

  • http://startuptodo.com Bob Walsh

    Good post, but behind the curve:

    1. self-sustaining micro software companies (

    2. The Starter Startup. Increasingly, I see developers launching their first startup as a way to get/reward angel investment and early exit. Then, they are ready to try for the VC-funded gold ring. Given that a tightly focused software startup can go from inception to exit in 18 months, “Starter Startups” make sense.

    3. The Web Startup Success Guide (Apress 2009) :)

  • http://startuptodo.com Bob Walsh

    Good post, but behind the curve:

    1. self-sustaining micro software companies (

    2. The Starter Startup. Increasingly, I see developers launching their first startup as a way to get/reward angel investment and early exit. Then, they are ready to try for the VC-funded gold ring. Given that a tightly focused software startup can go from inception to exit in 18 months, “Starter Startups” make sense.

    3. The Web Startup Success Guide (Apress 2009) :)