If you read this blog, I mean really parse through it and find my stuff from 2017 and 2018, you’d be surprised to know that I’m eagerly, enthusiastically, passionately fundraising for my startup this time around.
Yes, me, the guy who wrote Don’t make a mountain of a Sand Hill (Road). I wrote that. I’m not ashamed. As Jay-Z would say, “It’s just what I was feelin’ at the time…”
And this time is different. I’m working on different things, thinking different thoughts, seeking different outcomes. This time I’m not interested in a side hustle that I can grow to ten or twenty thousand dollars a month with very little work. I’ve been there, and it’s great, but it’s not what I want now.
This time I want big, and to get big, I need capital.
The case for capital
My new startup, Shovels, is not a small project. It’s a monstrosity. It’s far too much work for me, or me with a co-founder, or even me with a team of 20 engineers. Shovels, at scale, is a lot of people doing a lot of different things. That’s what I love about this idea.
When it takes money to make money, you have a case for capital. This is the purpose of financing. You need to spend money now to make money later. You deploy money upfront, in a strategic manner, to produce more later. The expectation, of course, is that you make more money than you originally deployed.
In startups, we talk about seeds. This is a good analogy. You by seeds at a store. Seeds cost money. You plant seeds in your yard. Yards cost money. You water them. Water costs money. The seeds, the land, the water, it all costs money, and you haven’t grown a thing yet. But when that seed sprouts and fruits, the harvest yields back a multiple of the fixed cost (the seed and land) and the stream of variable costs (the water). This is why businesses need capital.
I didn’t need capital for my personal projects. I could build the seed myself, plant it, water it, and grow it. I didn’t need to borrow anyone’s money or sell any equity. Even when I was surreptitiously offered it, I turned it down. But those were small ideas with small outcomes. I know this now because I’ve exited my side projects.
I told myself that what I wanted to do next would have three ideal attributes:
- Be big: have a chance to be very large in scope, having real impact in the world
- Be green: move our climate crisis response forward in some meaningful way
- Be local: have an impact on my local community or somehow be involved in it
I explored a lot of ideas. I talked to a lot of people. I worked for free. But none of them quite fit. An idea might tick two of the boxes and the missing third one would continue to bother me.
Finally, I hit upon Shovels.
- It’s big: on multiple levels, but for one, this dataset doesn’t exist anywhere and it will take a TON of work — that alone proves its size to me
- Be green: our first two customers are climate tech 🌲
- Be local: building permits are inherently local — better yet, it incorporates local government, which I also care about
Since our revenue will be tied directly to our ability to gather local building permits, we have the chicken-and-egg problem required to justify a capital infusion. And since Shovels will one day be huge, we have what we need for the loftiest of all money: venture capital.
The case for venture
If angel investment is a used Honda, venture investment is a Formula 1 race car. The idea is to move fast, as fast as possible, and get all your growth-hampering mistakes out of the way early. The VC firm gives you an F1 team, coaching, and credibility to raise even more capital.
What I disliked about venture in the past was this vicious cycle of ever-higher valuations, burn rates, and the constant pressure to fundraise. It felt like our business was to fundraise rather than to build and sell product. I see now, years later, that this was a case of bad fit. We got in a fundraising cycle and couldn’t get out, and that led us to crash and burn. The company was over-capitalized.
Knowing this, and knowing what austerity feels like too, I want the venture capital. I have conviction that what I do next will be big. If I can’t convince a VC that my idea is big enough, then I need to reassess my pitch or, worse, reconsider my idea. Venture capital has become a yard stick for me this time. I want VC to prove that my idea is big enough.
Playing devil’s advocate for a moment, can I be wrong about this? Aren’t I putting too much weight on VC, hinging my perception of my idea on what one group of people think? I could argue that VC is too short-sighted, not creative enough, too focused on shiny objects (web3! AI! NFT!) but I don’t think that’s true. I read this post from Y Combinator calling for climate tech companies, and it’s one of the most thoughtful posts I’ve read about the climate tech opportunity. It reassured me that VCs get it.
Climate is mainstream, and construction tech is coming up. Shovels is positioned between two big market opportunities that will attract a lot of capital. The constraint, therefore, is my ability to pitch and position what we’re working on. If I’m not successful in partnering with a VC firm, it’s my fault, not theirs.
The typical case for not taking venture capital is the expense. VCs take equity, upwards of 20% in a single round, and that capital can ultimately cost millions or even billions of dollars. Why bother with that when a loan would cost a fraction as much? The answer has to do with risk. VCs get rewarded for accepting the risk (80%+, they would say) that they won’t make their money back. This is why equity financing is so expensive.
The case for debt
I want to briefly touch on the case for debt. I’m reading a great book right now, Debt: The First 5,000 Years. My takeaway so far (just 11% in, according to Kindle) is that debt is a natural relationship between members of society and society itself. Debt is ancient, and it’s necessary. It’s unavoidable too; taxes are a form of debt payment.
So, would I take out a loan to build Shovels? Not right now, no. There’s too much risk in this early stage and I don’t want the obligation to pay the loan back or the risk of suffering the consequences of bankruptcy. Shovels doesn’t have enough revenue to de-risk taking a loan. I would be very open to this form of financing at a later stage, though.
I’m on a mission now. I want take a venture capital firm on this journey with me. Along the way, I’ll probably start with an incubator or a small, specialized VC. Then we’ll go after the brand names. I have a good feeling about this strategy this time.