VC vs revenue: Which path should your startup take?

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During his talk at Tech in Asia Singapore 2018, Pebble founder Eric Migicovsky said that the first thing people should think about when starting a business is if they’re building a VC-backed or revenue-backed company. But how should founders make this decision? What are the implications if they get it wrong?

Here’s an excerpt from Migicovsky’s talk and the views of two other founders.

Editor’s note: Answers have been edited for clarity.

Eric Migicovsky, founder at Pebble and partner at Y Combinator

In some ways, it’s easier to build a non-VC version of the company. In hardware, people are going to buy gadgets and cool stuff. But the pitfall is when a founder starts down the revenue path, generates cash, reinvests into products, and gets lured to the VC path. Someone says, “I want to invest in your company,” then you veer off and get stuck in between the VC path and the revenue path. Then, you start spending more without maintaining profitability. So, I encourage founders to think about this right from the get-go.

On the other side, if you are taking the VC path, you’re likely building a multibillion-dollar company. You have to think about capital requirements, how the business model will work, your average sales, profit per sale, subscriptions, and all those metrics. There’s also a tendency to run into conflict with the big boys.

You have to think about those metrics too for a revenue-backed business. But if you’re building a fantastic product for a subset of people, you might not have to target growing a multibillion-dollar company and fall into the sights of Apple, Google, and the like.

One of our big problems in our company was being stuck between the VC path and the revenue path. We didn’t raise any money until we were doing US$30 million in revenue, which happened a year after our Kickstarter campaign.

We raised about US$50 million at that point without knowing we were going into the VC path. That kind of threw us off. We started spending more money, building a team faster than we were growing our revenue base. We didn’t think about the long-term funding requirements. We didn’t realize we would have to be raising hundreds of millions of dollars to compete in the market we were in. We were also faced with some big competitors.

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