In 2008, Aashish Dalal, cofounder of ParkWhiz, had a signed term sheet and was set to raise $1 million. Then, he said, the venture capital firm pulled out at the last minute.
That may have been what saved his startup.
“Had we proceeded, had we had that $1 million to finance the business, I’m pretty sure ParkWhiz would be dead,” he said.
Dalal explained that he sought to raise money because it felt like a part of the startup narrative, rather than something they actually needed to grow the business. “We didn’t necessarily know what we wanted to do with the money,” he added. “The expectations from a growth perspective would have been extremely high.”
Of course, ParkWhiz did go on to raise $36 million over three rounds from 12 investors, and it’s helped ParkWhiz stay competitive as the on-demand parking industry grows. But Dalal’s story is one many founders struggle with: should a startup pursue venture capital?
Venture capital has become an almost inextricable plot point in the startup fairytale, ruled by VC kings in their Silicon Valley castles chasing unicorns. The VC funding model, based on high growth and venture returns, has birthed new giants and made legends of their investors.
Despite this narrative, less than 5 percent of businesses take venture funding (though to be fair, 37 percent of companies IPO’d between 1980 and 2005 had VC funding). In addition, forecasters have warned of a venture capital slowdown.
Venture capital also remains systemically biased: Among the top 100 venture firms only 7 percent of partners are women, only 15.5 percent of venture backed businesses have at least one female founder. That number drops to 1 percent for African American-run startups.
So founders in fear of a freeze, or those who don’t have as ready access to it in the first place, are increasingly looking to alternatives to venture capital, especially in early stages. Though an influx of cash would be helpful, entrepreneurs say they can retain ownership, grow at their own pace, and focus on their customers and product. That isn’t to say they’ll never take venture funding, but the single story that venture capital is the only way to grow isn’t as pervasive as it once was.
Here’s a look at four Chicago startups writing their own funding stories.
Aashish Dalal, cofounder of ParkWhiz: “Understand the unit economics of your business”
After being burned by VC, ParkWhiz took extra revenue and reinvested in the business. “By not having that [venture] capital, we really focused on unit economics of our business,” Dalal said.
But by 2012 the tides were turning, at ParkWhiz and in the larger parking world. SpotHero and Parking Panda both raised rounds, and ParkWhiz was looking to expand their services. Dalal realized they couldn’t expand at the rate they wanted without outside funding. “At some point, the equation will be such that raising an angel round or institutional round does makes sense, and that started to make sense for us in 2011 and 2012.”
Dalal said it’s been tough juggling additional opinions of investors and board members with a stake in the company. But “having a board to bounce ideas off of” is also an advantage as a company grows, he said.
Now Dalal said he sees a “systemic” issue in startups in which entrepreneurs are “taking money and growing for the sake of growing, without really understanding the formula of customer acquisition relative to retention.”
His advice for founders? “Understand the unit economics of your business, and say, ‘Here’s what I’m trying to create, and…how do I get there?'” he said.
Sharon Schneider, founder of AIM Local: “We’ve gotten confused in the startup world”
Sharon Schneider raised $1.89 million for her first startup, Moxie Jean, a clothes resale platform that sold to Schoola in 2015. For her second venture, AIM Local, a subscription gift box service, she plans to stay bootstrapped.
“I’m not looking to prove anything by bootstrapping,” Schneider said. “I’m just looking to build something for the long term that is sustainable and profitable and where the customers dictate our growth. I purposefully chose to create my second company in a way that would allow for that.”
On a broader scale, she said, “We’ve gotten confused in the startup world.”
“We think raising money from big investors equals success,” Schneider said. “But it doesn’t. Closing a round isn’t the end of the work, it’s the beginning.”
She said she sees entrepreneurs chasing investments as a badge of honor, then scrambling to support infrastructure for growth before they’re ready. That can lead to a vicious cycle of raising funds to support unnecessary expansion, which distracts from working on a product or service. “So you have to raise more money, only now it’s much harder because your growth isn’t fast enough, whatever ‘fast enough’ means,” she said. “So then what?”
Reid Lappin, founder of Vokal: “There’s no black and white answer”
Even for industries where the venture capital culture isn’t as strong, the VC question for entrepreneurs still looms large.
Reid Lappin launched Vokal, a digital agency focused on mobile apps for business, in 2009, supported by a friends and family round. They stayed lean through the first two years, ensuring they could deliver high quality products to an eager market. The next few years, they scaled through revenue, adding clients, and increasing their offerings beyond mobile apps.
“I always wanted ownership in the way of making decisions that were most advantageous for what our team wanted to do, what our clients needed, and where we saw the market going,” he said. “And not have to answer to investors in terms of… driving the business that wasn’t advantageous to the type of growth we were looking to achieve.”
Now, as mobile apps are waning in popularity, Vokal has been investing in product development, research and data science to stay relevant as the needs of businesses shift with tech. But he said he isn’t sure that venture capital will be the way to grow these parts of the business.
“If we put more money into this, we could grow these disciplines a lot more quickly, we could bring more team members on, but we need to be sure that we have the service nailed down to what our clients’ needs are, that we have the right people to lead this initiative, and that the market has an appetite to buy these services,” he said.
“If we over-invest in any of these activities, we’d be digging out from behind the eight ball in terms of how we monetize various services and investments you make,” he added.
Jennifer Brandel, cofounder of Hearken: “We really care about control”
Hearken, an audience engagement tool for newsrooms that launched in 2015, decided against raising venture capital.
It’s not that they haven’t raised any money–in fact, they’ve raised $1 million from a variety of sources including Matter accelerator, AIR media, and a variety of angel investors and won ‘Best Boostrapped company’ at SXSW this year. But in early meetings with VCs, conversations were about how to retool their product to expand their market potential outside journalism. It’s something that cofounder Jennifer Brandel said Hearken may consider in the future, but it would distract from their current focus on journalism, in which Brandel (a former journalist) has domain knowledge and contacts.
“We really care about control,” she said. “I’m not someone who got into business because I love business. I got into business because I have a passion for a particular problem.”
“We’re interested in revenue, we’re interested in making something people want and proving that early,” she added. “[Rather than] having a million users and then figuring out how to monetize.”
Brandel isn’t opposed to raising funds in the future, but she said it has to be with the right investor that shares the team’s vision of Hearken as part of a larger cultural shift toward a more democratic business, cultural and civic world–a change Brandel believes will happen over several decades.
She’s also interested in new models of investment, such as Indie.vc, which is trying different types of payouts, such as taking a portion of founders’ salaries or only taking ownership if a company goes public or sells.
“I’m really excited about capital catching up with creativity of business models,” Brandel said.
Note: The story has been updated to show the correct year of Hearken’s launch.