I have been building Omdena for 3 years. Data science enthusiasts and experts from all over the world collaborate to build impactful AI solutions to solve environmental, health, and social problems. Through the platform, we ran over 165 projects, with 80 organizations from 42 countries, and over 5000 data scientists from 103 countries participated in those projects. We also have 65 local chapters around the world. Since we started 3 years ago, we grew 300–400% year-on-year. All of this we achieved by raising almost no investment (we only took $35,000 investment in the very beginning), and by spending Zero dollars on paid advertisements.
I am writing this article to share my thoughts on why we did not raise VC investment and how one can build a fast-growing global startup without raising money from VCs.
Why not raise money from the Venture Capitals?
There is a norm among entrepreneurs that raising money = success. Founders start talking about funds raised from famous VC funds as if they are already super successful. Yet the truth is that most companies raise money because they are not financially sustainable, i.e. they burn way more cash than they earn. The VC money becomes necessary for the survival of the company.
However, the money comes with baggage.
VCs are interested in making global behemoths that are monopolies in their industry — they want the company to kill their competition, and return x10–20 of their initial investment. The ideal strategy is: Pump a lot of money, burn cash, get new users (kind of buying the users), incentivize them to spend more (even if they never planned to), kill all their competitions (buy or bankrupt them), and then create a monopoly that users are forced to use. Such a model is not good for the people, the economy, or the world.
In addition, the VC model is not even good for perhaps 90% of the startups. It leads the startups to
- Exploding on the unsustainable growth path by pumping more money. Most startups that raise money have not figured out how to make money and sustain the business. The pumped-in VC money doesn’t force founders to build a sustainable financial model either but instead forces them to grow fast. In the end, all the VCs care is high growth that can help raise even more money in the future.
- Burning unnecessary money on things like fancy offices, and hiring. This helps in creating a ‘successful’ image but often leads to a downhill path because money is spent on things that are not necessary.
- Stressing the team to grow at any cost. This leads to burnout and unimaginable stress for the founders. I have heard multiple cases of founders breaking down, or crying due to the massive stress from the investors.
- Not achieving modest success. The VCs model do not really care if this company succeeds or fails, or if the employees keep their jobs or not. What they care about is that any one of the startups they invested among say 50 of their portfolio company grow massively. If a startup does not meet its massive growth targets, they rather close the company, even if the company can grow modestly and add a lot of value to its customers and users.
There are many such examples, like Fast, a one-click checkout startup that raised $100M in 2021 at a valuation close to $800M, while only generating $600,000 in revenue during the period. They hired 700 people, went on to burn cash like anything, and had to close within a year firing all the employees. Perhaps if they had not gone on this non-sensical growth path, Fast could have become a valuable company for many of its users and customers. And there are many examples like WeWork, Robinhood, etc. On the other hand, companies that did succeed through VC funds ended up becoming monopolies like Facebook, Amazon, etc, without any competition and thats is not good for the world either.
The question that every founder needs to ask: Is this a model I want to follow?
In my case, the answer was simple No.
Alternatively, what is a community-first venture?
A community first venture is one that puts community first. The community is the stakeholder — the community does not have to be only customers or users but anyone who can benefit from what the company is doing. What unites the community is the shared vision and mission of the venture. Everyone in the community feels invested in the company as if they are shareholders. The members are not bought by giving discounts but are incentivized, both extrinsically and intrinsically, by meeting their expectations, aspirations, and desires. In such a model, the members are self-motivated to help grow the company because they feel part of it and want to share with others. The growth is completely organic through the support of the community. The key to building such a startup is
- Let the community speak and the company listen. Build a bottom-up environment where key ideas come from the community and the company just decides on executing the ideas. In our case, all the best ideas came from the community. Whether it was opening the local chapters, the school, the career services, or the entrepreneurship program.
- Key decisions are taken based on what is good for the community, not what is good for select shareholders (or investors). There are many VC-backed startups that have a community, but the core decision that drives the company are still taken for the benefit of the investors. In a community-driven startup, key decisions are taken that benefit the members of the community.
- Provide ways for the community to share and grow. People are extremely motivated and happy when you do something for them, and add value to them. They in turn want others to go through the same experience and share their joy with the rest of the world.
- Constantly think of how can you add value to the members of the community. This will also keep the founder in touch with its community as everything in the company (sales, marketing, growth, product) is driven by the community. The community of course also includes employees, users, customers, and shareholders. It is possible that each of the groups of the community will have a different incentive structure and expectations.
- Build a more sustainable world. The company is not growing by pumping money, but by constantly thinking about what the community truly values. This will ensure that the company is not doing anything bad to the world as the community will not support/trust such companies or initiatives. This explains why most people do not trust corporations.
All of the above creates a sustainable growth model which is good for the world as well as for the people. The community members remain loyal to you while at the same time, the company needs to remain loyal to the community and the world.
What kind of world do we want to build?
The question that every founder needs to ask.
What kind of world do we want to build and be part of? Do we want to build a world with hyper-growth startups straining the natural resources driven by consumerism? Or do we want to build a world where the demand and supply are balanced, and where we do not have to artificially create the demand? Do we want to build global monopolistic behemoths? or do we want to build sustainable growth companies which are always in touch with their community, doing good for the community, constantly adding value for the community, and the world?
The choice is yours.
However, I just tried to show that, if you choose to, there is an alternative model of growth to the one promoted by media and incubators/accelerators.
PS: I do understand that there are certain kinds of startups, in sectors like deeptech, and pharma that needs a lot of funding, at least during the initial stages. VC money is important there. Also, not all VCs are as predatory or aggressive as mentioned here. There are some VCs who are trying to do things differently, but often they are much smaller.
(The original article was published in The Startup here)