I'll take an example from my own career: One of my first startups was a vanity domain hosted e-mail service. We bought about 60.000 domain names. Originally this came out of the realization that myself and one of my co-founders were in effect both "blocking" a surname for everyone else with our own domains - him for a fairly common one. We figured we'd add some services and value and create the opportunity for effectively sharing domains. We figured since we, and quite a few other people) as we found out by checking which common last names where available on .com) were willing to pay for a domain, chances were a decent number of people would be willing to pay for a service like this as well - particularly non-technical users. And anyway, it was possible to buy ourselves artificial scarcity fairly cheaply.
Then came the discussion of bringing in VC's, and as this was '99, once the discussion turned to what a VC might be interested in, switching to a free, ad supported model to boost user numbers came up early on the basis of the ridiculous per-user valuations of the time. And the VC's took that bait hook line and sinker.
So it's not just obligations: Deciding to targeting the VC's when you're starting from a weak position (not existing, profitable product) has the potential of warping your thinking as you try to make your idea into something that is attractive to them. I'm not going to blame the VC's here - we did this entirely voluntarily, and of course were also seduced by the potential for a much larger exit (but didn't think through the increased risks that came with growing the company so rapidly)
The problem is that since the VC's want out fast and have diversified their risks significantly, they are willing to 1) take significant risks on building businesses where there's no known long term prospect if there's decent shots at exits. In this case, there was a steady stream of acquisitions based largely on per-user valuations without much revenue. In this case it was openly acknowledged that while everything thought it was possible to break even, the hope for a big exit lay in this. 2) they're willing to make some really high risk bets if the potential payout is a large enough multiple.
These makes sense for them, but much less so for founders that has a much lower limit on how many shots we effectively have at a successful startup through our careers. And so it is important to keep that in mind when considering what changes are acceptable to make in order to get VC funding - some changes might get you lots of money, but might severely impact your odds of getting an exit that you might be perfectly happy with.
In the end we acquired a decent number of users (1.5 million or so) in very little time, didn't see a way of getting the money, the bubble had burst and the investors got skittish, and so we pivoted. Twice. In the end the company survived, at least. But the assets of the e-mail service was sold off, and the new owner made a profit on that acquisition in no-time by returning to our original idea (and were later acquired - I don't know what valuation they got, but I'm willing to bet their ROI was substantially better than ours...).
I'm all for taking VC cash for the right opportunity, but anyone going that route should think long and hard about if and how changing the business to "fit".
Comments
It's not just obligations.
I'll take an example from my own career: One of my first startups was a vanity domain hosted e-mail service. We bought about 60.000 domain names. Originally this came out of the realization that myself and one of my co-founders were in effect both "blocking" a surname for everyone else with our own domains - him for a fairly common one. We figured we'd add some services and value and create the opportunity for effectively sharing domains. We figured since we, and quite a few other people) as we found out by checking which common last names where available on .com) were willing to pay for a domain, chances were a decent number of people would be willing to pay for a service like this as well - particularly non-technical users. And anyway, it was possible to buy ourselves artificial scarcity fairly cheaply.
Then came the discussion of bringing in VC's, and as this was '99, once the discussion turned to what a VC might be interested in, switching to a free, ad supported model to boost user numbers came up early on the basis of the ridiculous per-user valuations of the time. And the VC's took that bait hook line and sinker.
So it's not just obligations: Deciding to targeting the VC's when you're starting from a weak position (not existing, profitable product) has the potential of warping your thinking as you try to make your idea into something that is attractive to them. I'm not going to blame the VC's here - we did this entirely voluntarily, and of course were also seduced by the potential for a much larger exit (but didn't think through the increased risks that came with growing the company so rapidly)
The problem is that since the VC's want out fast and have diversified their risks significantly, they are willing to 1) take significant risks on building businesses where there's no known long term prospect if there's decent shots at exits. In this case, there was a steady stream of acquisitions based largely on per-user valuations without much revenue. In this case it was openly acknowledged that while everything thought it was possible to break even, the hope for a big exit lay in this. 2) they're willing to make some really high risk bets if the potential payout is a large enough multiple.
These makes sense for them, but much less so for founders that has a much lower limit on how many shots we effectively have at a successful startup through our careers. And so it is important to keep that in mind when considering what changes are acceptable to make in order to get VC funding - some changes might get you lots of money, but might severely impact your odds of getting an exit that you might be perfectly happy with.
In the end we acquired a decent number of users (1.5 million or so) in very little time, didn't see a way of getting the money, the bubble had burst and the investors got skittish, and so we pivoted. Twice. In the end the company survived, at least. But the assets of the e-mail service was sold off, and the new owner made a profit on that acquisition in no-time by returning to our original idea (and were later acquired - I don't know what valuation they got, but I'm willing to bet their ROI was substantially better than ours...).
I'm all for taking VC cash for the right opportunity, but anyone going that route should think long and hard about if and how changing the business to "fit".