Your Startup Isn’t VC Material and that’s ok
Main point: High growth businesses don’t always meet the pattern recognition framework of the person you seek money from. Their biases say very little about your potential.
Craft brewery delivers taste and returns
Jim Koch is the founder of The Boston Beer Company Inc, the company that created Sam Adams and led a revolution in the quality of beer. Those of us who like beer and don’t live in Germany owe him a great deal of gratitude.
As of this writing Boston Beer has a market cap of $14 billion, a “decacorn” in tech parlance. In the past 20 years its stock has produced a 158x return. People like good beer.
Rejected by Venture Capital
Koch estimated that he needed $250,000 in seed capital to launch his craft brewery. He went to multiple banks and was rejected given his lack of proper collateral. Without access to bank financing he had to get creative.
He went to see a venture capital firm in the Boston area. The feedback he received wouldn’t surprise anyone today: his business plan to sell beer didn’t have enough upside potential. Specifically, it didn’t meet the minimum 10x potential that this particular VC was looking for from each of his investments. Beer wasn’t VC material.
Fortunately that didn’t stop Koch. Like many entrepreneurs before and since, he turned to friends and family, who provided 60% of the seed money he needed. He used his own savings to complete the round.
How things turned out
Family and friends, including his dad, gave Koch checks ranging from $1,000 to $50,000. An investment of $10,000 at that seed stage would be worth $240 million today. That is a 24,000x return in 35 years, which translates into a 33.4% annual rate of return.
Not VC material, but an acceptable outcome nonetheless.
Beer vs. that VC firm’s numbers
Assuming that venture capital firm was one of the good ones, it would generate returns of 3x in each 10 year fund. If we give them a 3x return in the final 5 years of the 35-year stretch, that firm would have turned a $10,000 investment into $810,000. That’s an 81x and a 13.4% annual return. Impressive.
But not as impressive as $240 million.
What this means for you
Beer is a 7,000 year old product. That might explain why a VC looking for 10x upside didn’t feel much enthusiasm. There might have been other reasons. Who knows and who cares.
Jim Koch didn’t wait for permission from the banks or the venture capital firms. He made a decision and followed through, improving a product that people love and creating a movement within his industry.
What the Jim Koch story means is that you shouldn’t get distracted by third party opinions. If you’re in it for the right reasons, if you care and you’re willing to learn, nobody can stop you.
Validation is nice, but it is not necessary. Long term effectiveness at building a great business is not dependent on the opinions of some random people you meet early on. If you listen to the people who matter, your customers, you’ll know what to do. Beer in the US was tasteless, Jim Koch listened, took action and the rest is history. Your history can look a lot like this, it’s your choice.
PS If you're wondering if this applicable to software and if so, how far can you go without VC funding, the answers are: yes and $1.8 trillion in market value.