I'd argue that the 'consultingish' part is as hard as the startup's main business itself, if you add the human factor.
On one hand, you have your ideas, your product or whatever you're working on – which, by definition, isn't working all that great. On the other hand, you have a client (or more than one), who's willing to pay right now (usually you can negotiate something upfront) or at least just one invoice away. Plus you are able to charge a nice amount, certainly better than you'd make as an employee and better than going broke.
Somewhere down the line, you'll get more work. Maybe from the same client, maybe it's a referral. Do you turn them down now, that you've achieved the required runway? It's hard if you are a sole founder, it is much harder if you have more than one. Harder still if they are married, or with children or, god forbid, have a mortgage.
The consulting (there's no ish unless it is a somewhat minor customisation of an existing product or parts of it) path is a very slippery slope. It should not be taken unless the other option is death. And only after all founders are on the same page.
It's easier to set a goal when everyone is going broke, than when the money has started rolling in. There's nothing in the world that's more blinding than a bank deposit.
Yes, that is what you do when you've cleared the runway: you start saying no to consulting clients. That is, for example, what 37signals did. I'm not sure I see the problem here.
But 37signals bootstrapped. The problem is once the founders take VC money they are taking on what the VC expect them to do which is play a very high risk, potentially high reward game with a very low chance of success. This strategy is almost certainly not optimal for the founders.
So what? At this point in the story we're talking about a company on life support. That's why they're consulting and not continuing to put all their time into product. There's not a whole lot VC can do about it at this point.
>There's not a whole lot VC can do about it at this point.
Except ask for their money back :)
If you think you can get away with running a sane growth company (100% Y/Y) and don't have to worry about the VCs asking for their money back, then the most rational thing to do is take the seed money and run the business as a "slow growth" business with an enormous runway. Unfortunately most VC's are aware of this and will not be too happy if you try :(
VCs can't ask for their money back. It belongs to the company and is in the company bank account. They can refuse to give you more, and if they control the board they can try to put in a new management team, but except for cases of fraud or other malfeasance, they cannot get their money back.
Most seed fund investment is in the form of a convertible note these days ... it's a loan with the option to convert to equity later. Consequently VCs can ask for the debt to be repaid (within the terms of the note). Obviously they'll only get back what's left in the bank and assets but the idea that they can't ask for it back isn't really true.
Right, and that would kill the company, but a VC is probably more likely to kill a company that's slowly running out of its runway than a company that's doing something out of the ordinary to survive and get back on track.
What about redemption rights? These are a pretty big stick to bang over the head of any founders who think it might be better to run the business in a way the VC doesn't like.
Redemption rights are relatively rare, and even if such a clause were in the funding, it would be after a longish period after close (5-7 years). Usually it's for older funds.
Thus they're not much of a stick. The only stick is the board voting to fire (or strongly encourage resignation of) the all or part of the founding management team, which if you're already on life support, can be a win/win: founders keep their shares, and someone potentially takes the company to profitability and exit. I can think of at least one major software IPO in the past 15 years where this made everyone (including the ousted founder) a lot of money.
Are they rare or just rarely enforced? I can't say that my experience is up to date, but back in the day when I was actively looking for VC funding they were in all the agreements pushed my way.
If they are rare in agreements then more founders should "pivot" to a lifestyle business after raising a whole lot of cash. With a couple of million dollars in the bank you can certainly build a very nice low risk business that will provide a great income :)
Not investing in founders that aren't going for the home run.
Ultimately many of the good VCs would rather not "keep control" of founders. They'd rather just pass on the investments that look like they will become a big drain on VC partner time & attention in the future. A startup where there's a big power struggle over company directions and the board has to kick out the founders is far worse than not making the investment in the first place: it consumes a scarce resource (partner bandwidth) that could be much better spent searching for new opportunities. Much better to seek out founders where your goals are aligned to begin with and then trust them.
The difference in your experience and parasubvert's could be explained if the VCs you dealt with believed that your startup has a trajectory that would make it likely that it would become a lifestyle business, contrary to their interests. Then they'd want a way to claw back their capital if it looked like they would never see an exit.
Yes but how do they know this in advance? Up until quite late in the process the founder control the majority of the company. I am amazed that more founders have not gone feral.
My experience is from sometime ago (long before YC). Interestingly my business did pivot to being a lifestyle businesss, not out of choice, but because I could not get VC funding. My only regret is that it took my customers longer to learn about our products than they would have if I had not had to bootstrap.
That's the path we took. The consultingware products we had really slowed us down, but in the end our subscription revenues gradually built up to a point where it simply didn't make sense to continue doing consulting. So, this path can have a happy ending.
Just want to say it is not too bad to have a mortgage as it may seem. It is very situational, though, depending on how you're paying off mortgage. There is definitely risk there but it can be offset. For example, you could generate some income from rent that can help you pay all your bills in addition to filling in monthly mortgage payments.
Again, it depends.
My product company turned full-time consulting when our 1st products failed to find enough market. We consulted for two years until we got a contract making somebody else's product. Now we're all that company's employees with equity, and have revenue and traction. So it can work pretty well.
On one hand, you have your ideas, your product or whatever you're working on – which, by definition, isn't working all that great. On the other hand, you have a client (or more than one), who's willing to pay right now (usually you can negotiate something upfront) or at least just one invoice away. Plus you are able to charge a nice amount, certainly better than you'd make as an employee and better than going broke.
Somewhere down the line, you'll get more work. Maybe from the same client, maybe it's a referral. Do you turn them down now, that you've achieved the required runway? It's hard if you are a sole founder, it is much harder if you have more than one. Harder still if they are married, or with children or, god forbid, have a mortgage.
The consulting (there's no ish unless it is a somewhat minor customisation of an existing product or parts of it) path is a very slippery slope. It should not be taken unless the other option is death. And only after all founders are on the same page.
It's easier to set a goal when everyone is going broke, than when the money has started rolling in. There's nothing in the world that's more blinding than a bank deposit.