hiring too many people with “analyst” in their title. Those are “very important and very smart people,” Houghton says, but there comes a point where it’s overkill.
“People should analyze their own data; that’s part of being a professional,” Houghton says. “And I think I would’ve done that differently.”
—When should a startup raise capital?
Houghton has been a vocal proponent of waiting to raise outside capital until a startup is profitable. For one, canvassing investors for money can suck up a lot of time not spent building the business, and the entrepreneur might end up walking away with no cash anyway, Houghton says.
He thinks aspiring tech entrepreneurs are smart to do their first startup during college because even if it fails, they’ll come out the other side with better experience than an internship, and they can choose to start another company or take a job with an established firm.
“The second you take outside investment, you have ratcheted up the risk,” Houghton says. If the venture fails, “the case is going to be investors take everything out of the business and you get nothing,” he adds. “That’s not bad, and it’s not saying anything bad about investors, that’s just what happens with a startup.”
Houghton challenges the mentality that the first step in starting a business is finding capital, particularly when it comes to tech companies.
“Today, when the U.S. is leading based on software and soft innovation and the information economy, you need good ideas, you need smart people, and you need software,” Houghton says. “A lot of those things can come pretty cheaply. We built iContact and had customers with zero cost other than the time to build the application.”
Houghton certainly isn’t saying entrepreneurs should never take venture capital. (iContact raised $65 million over five rounds, although only two were pure equity deals. The rest were some form of debt funding, he says.)
“At a later point, it’s totally reasonable to trade off some of those things,” Houghton says. “When you’re still figuring it out, it’s great to have the flexibility.”
—Houghton has said it’s a waste of time for North Carolina tech startups to try to raise VC in North Carolina. Huh?
Houghton says this is a byproduct of North Carolina being what he calls a “sub-capital equity market”—a term for the emerging tech centers around the country that have their sights set on the success of Silicon Valley and Boston. These nascent tech ecosystems have burgeoning groups of angel investors and small venture capital funds that have stars in their eyes from the billion-dollar tech exits of Silicon Valley, Houghton says.
“That’s what gets them motivated to get in the startup game, not necessarily the startup down the street that sold for $2 million,” Houghton says.
But when these local investors come to the table with entrepreneurs, they “want the upside” but are “not willing to take the downside risk.” That’s a problem because the result, in Houghton’s opinion, is “less sophisticated investors beating up on the entrepreneurs.”
He says he knows a startup from another part of the southeast that tried to raise money from North Carolina investors. The company, which Houghton declined to name, had $7 million in annual revenue at the time, but North Carolina investors valued it at just $1 million, he says.
“If you’re not someone asking for less than a $2 million pre-money valuation, they’ll laugh in your face,” Houghton says.
Six weeks later, that company sold for $110 million, he says.
“They miss out on all that opportunity,” Houghton says of investors. “It’s less sophistication on the investing side. It makes it hard” for entrepreneurs.
Now that we’ve got a picture of Houghton’s entrepreneurial mindset, let’s take a closer look at
