Drug dealers live here.

Remember: Most Great Companies Have Never Raised Venture Capital.

How Silicon Valley drank too much Kool-Aid and got hooked on a dangerous drug.

I’ve ranted for a long time that unicorn hunting has warped the startup ecosystem. So when I recently watched this video of John Vrionis explaining all the things wrong with the Sand Hill Road Venture Capital model, I nearly stood and applauded at my desk.

The tl;dr: There are many great ways to finance a startup, and for most founders conventional venture capital is the worst possible choice. It actually increases your chances of failure.

Here’s the thing: We all know that premature scaling is a leading cause of startup death¹. An early-stage venture needs to go slow and take the time to deeply understand customers, find the right beachhead market, establish solid unit economics, and earn referenceable customers. As John puts it in the video: “Go slow at first, so you can go fast later.”

But once you enter the VC factory production line, everything changes. Suddenly, it’s all about hitting artificial growth milestones to set up the next funding round. Your seed investors want you to sprint to $5M ARR so they can markup their investment in a Series A. Then your Series A investors want you to reach $20M ARR so they markup their original investment in a Series B. And so on.

They don’t care how you get that revenue, only that you get it fast enough to keep their portfolio moving.

This often doesn’t end well — which is why 85% of startups never make it from Series A to Series B (but VCs don’t mind because they make plenty of money from the other 15%)².

I often hear people say “The VC model is broken” but that’s actually not accurate at all — the VC model works exactly as designed. What’s broken is the assumption that every startup founder needs to raise venture capital. Venture capital is a terrible financing model for the vast majority of new startups. 95% of all the very successful businesses in the world have never raised any venture capital.

And yet here in Silicon Valley, the VC Kool-Aid flows freely. Startup accelerator programs revolve entirely around preparing founders to be “investment-ready” instead of business-ready. Startup accelerator programs focus on pitch decks, demo days, investor follow-up strategies, and fundraising tactics.

Which are absolutely the wrong things to focus on. We really should be teaching founders how to build durable businesses. We should be helping founders build companies so solid, they don’t need outside capital.

We should celebrate case studies about entrepreneurs who succeeded fantastically without venture money. That’s the path to be on. Because if you put yourself on that path, you’ll still have the option to raise capital for scaling — but it will be your choice, not a survival requirement.

But by making startup accelerator programs all about creating founders who are “VC investment-ready” we’re committing them to a high-risk path from day one.

It’s as if we’re teaching entrepreneurs to be heroin addicts, forever dependent on drug dealers³.

As long as I’m ranting, let me also say that this obsession with venture capital leads to a strange form of social envy. “How come some people get all the delicious venture heroin and not me?!?! That’s just not fair!!”

Which is just completely twisted thinking in so many ways.

So stop obsessing about your pitch deck and instead just focus on building a great business. If you do that, you’ll be able to choose from many different ways to finance your startup’s growth⁴.

That’s the path to real equity (pun intended).

1. There’s lots of evidence that premature scaling is the most common way startups die. As always, I recommend a Paul Graham essay on the topic.
2. Carta has great data on this. During good times maybe 30% make it from Series A to Series B, right now it’s more like 15%.
3. This is especially egregious in the world of impact ventures. Using fundraising as a success metric in the social impact world creates meth-addled entrepreneurs who are chasing the wrong thing. The frothiness of the ZIRP period encouraged the notion that distribution of capital was the solution to every problem. It’s not.
4. There are many great ways to finance a startup. The best way, of course, is being good enough that you can bootstrap. Mailchimp, Shopify, GitHub, and Shutterstock all got to $100M in revenue without taking any venture capital. Farmgirl Flowers is a profitable $80M/year online company that has never raised a single nickle in outside capital. Zapier went from seed to unicorn without entering the VC factory. There are many other examples.

This piece was adapted from my weekly newsletter for entrepreneurs, innovators, and investors.