VC Rejection Rate

5/4/2015 Your Startup Can Thrive Without VC That it Will Probably Never Get Anyway

http://www.entrepreneur.com/article/237027 1/5

SMALL BUSINESS FINANCE

Your Startup Can ThriveWithout VC That it WillProbably Never GetAnyway

John MullinsContributorAuthor And Associate Professor Of Management Practice,London Business School

SEPTEMBER 04, 2014

Everybody believes that running a lean start-up,

pivoting when the time is right and raising venture

capital are the trifecta of todays entrepreneurial

world, right? Hang on! These days, the rejection rates

at accelerators, angelsand VCs are off the charts.

YCombinator, 97.2 percentrejected.Only 74 of

2,600 applicants were accepted into their latest

cohort.

AngelList, 98.8 percentrejected: Angels are not

more welcoming. Of the 85,000 deals listed on

the AngelList site in 2013,only around 1,000 won

funding, according to The Economist.

Andreessen Horowitz, 99.3 percentrejected: Of

some 3,000 inbound deals a year, 15 to 20 are

funded. As Mark Andressen puts it, Our day job



is crushing entrepreneurs hopes and dreams.

Our main skill is saying no, and getting people not

to hate us.

Related:Can't Get a VC to Notice You're Alive? 3

Alternative Funding Sources for You.

With these kinds of odds, most entrepreneurs will

have to find a better way to start, finance, and grow

their businesses. But how?

Customers cash.Consider Claus Moseholm, co-

founder of GoViral, a Danish company created in

2003 to harness the then-emerging power of the

Internet to create and deliver video content for

advertisers in viral fashion. He funded his companys

steady growth with his customers cash from the

proceeds of one successful viral video campaign after

another.

Moseholm and his partners built GoViral into Europes

leading platform to host and distribute such content.

In 2011, GoViral was sold for $97 million, having never

taken a single krone or dollar of investment capital.

The business wasfunded and grown entirely by its

customers cash.

Is customer funding better than VC?In my view, the

time and place for VC iswhen your business is

already firing on all cylinders and just needs more

fuel to grow. One reason rejection rates are so high is

that most of the companies that prospective funders

see havent gotten anywhere near that point just yet.



So if your business isnt there yet, or maybe wont get

there at all, what should you do?

What the largely unknown Moseholm and the more

celebrated Michael Dell and Bill Gates have in

common may surprise you. All three of them started

and grew their companies largely (entirely, for

GoViral) with their customers cash. Happily, there are

five customer-funded modelsthrough which they and

many others have done exactly that:

1. Matchmaker models, such as the USAs Airbnb and

DogVacay.

2. Pay-in-advance models likethe USAs Threadless

and Indias Via. Its what Michael Dell did, getting paid

in advance before buying the parts for and

assembling his customers PCs.

3. Subscription models likeIndias TutorVista andthe

USAs H.Bloom.

4. Scarcity models, for example Spains Zara, Frances

venteprivee, the USAs Gilt Groupe.

5. Service-to-product models, including Denmarks

GoViral andPuerto Ricos Rock Solid Technologies.

Bill Gates and Paul Allen, after getting started as a

services business that wrote operating system

software for the then-nascent PC industry,

transitioned to selling application software like MS

Word and Excel in shrink-wrapped boxes.



Related:4 Common Venture Capital Myths

If you're wondering is these models better than

raising VC, face the facts. Sadly, as any experienced

VC or business angelwill tell you,the Plan A that you

have so lovingly conceived is unlikely to work.

Peter Drucker, arguably the leading management

thinker of the twentieth century, observed, If a new

venture does succeed, more often than not it isn a

market other than the one it was originally intended

to serve, with products and services not quite those

with which it had set out that arebought in large part

by customers it did not even think of when it started

and used for a host of purposes besides the ones for

which the products were first designed.

The way forward.If youre an aspiring entrepreneur,

an early-stage entrepreneur or an angel investor,

mentor or business accelerator or incubator

professional who supports high-potential

entrepreneurial ventures, a customer-funded

approach may offer the most sure-footed path to

starting, financingor growing your business or one

you support withoutinvestors, at least at the outset.

If all goes well, as was the case for Claus Moseholm

of GoViral, once you get started, you may well find a

way to go the distance without outside funding. If you

do, youll end up owning a much larger stake in your

business than if youd taken venture capital. Who kept

a greater share of the value his company created,

Michael Dell or Steve Jobs? It was Dell, hands down.

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VC Rejection Rate