this thing is going to work. You’re there all day. The VC takes four 4-hour meetings, so why is that considered validation? People try to raise money too early, they think they’re getting something more valuable than it really is at that early stage.”
“Why would you raise VC early?” Chabot continues. “You would raise it very early if you absolutely had to. TiVo is a classic example—you need to build hardware or commission a fab [to make chips]. There’s simply no way to get capital…But for online guys, get it up and try to get traffic with a small number of developers working very hard. You want your validation from customers, not financiers. There’s only one source of validation for business, and that is your customers. Every waking moment should be spent seeking reference customers…Always raise money when you don’t need it.” (Chabot points out that Tableau has been profitable both times it raised venture capital.)
Chabot’s time as a venture capitalist from 2000-2002 left a marked impression on him. “Companies with no revenue were out spending VC money,” he says. “Venture capital doesn’t just come from rich guys anymore. Their investors are large financial institutions, banks, pension funds, workman’s comp funds, universities. I left with such a bad taste from all these companies…spending money way ahead of revenue. I thought that model would die after those years. But once the market came back, it was still predominant. VC is a cost of capital. Why is this a milestone? Would you celebrate your bank loan? Is selling half your company worth that?”
But Chabot draws a distinction between venture and angel funding. “Raising venture capital is still communicated as a great victory and used as a point of comfort for employees to an extent it doesn’t deserve. Angel funding, because of the scale—and there’s usually a personal connection—it’s different. I don’t think angel financing is associated as much with internal cultural problems as is venture financing, but it will only take you so far.”
“In bad times like now, you can pretty much count on extremely low valuation for your company,” Chabot says. “Maybe if you do enough meetings and do a great job, you’ll find a financial partner who’ll take 20, 25 percent of the company…But if you have a new venture, should you spend the next 6 months full-time raising money, as opposed to getting some reference customers? One silver lining of an environment with low valuations is that it does bring some clarity to these choices.”
Chabot sums it up this way: “Way more people could bootstrap than do. The two biggest reasons are, one, fear—they’re simply afraid, it’s too risky—and two, a desire for validation. They’re hoping the act of raising venture capital is going to give them what they desperately want. A real entrepreneur [has] neither of those. You think Steve Jobs needed that?…Those are people of action. They don’t care what the world thinks.”
