There's two axes. One axis of the matrix is what the founder wants. The other axis is what the business needs.
The business needs axis is continuous:
- Some businesses obviously don't require outside capital (e.g. founder is equipped to get a sellable product built by themselves).
- Some businesses require tons of outside capital and cannot be bootstrapped; self-driving cars is an obvious example.
- Some are in between; e.g. many b2b products require a baseline level of features / complexity with active competitors that's hard to achieve by bootstrapping.
If a business requires a significant amount of capital AND the maximum outcome is e.g. $500K a year, then it shouldn't exist. This is why VCs ask what the market size is.
Some founders think raising outside capital is a "win". They want that external validation and then convince themselves and/or VCs that there's a big outcome on the other side (or, in the ZIRP 2021 era, get convinced by VCs). This is a mistake -- the only external validation that matters is market validation.
Instead, founders should think of outside capital as a necessary evil, and make a clear-headed decision as to whether the benefits of capital for their businesses is worth the cost (in the form of preference and control -- or at least influence). And it should be worth the cost by some significant margin, because outside capital is often optimizing arithmetic mean outcome whereas the founder is often optimizing something closer to geometric mean outcome.
I'm fairly certain most independently run american crop farms require many multiples of that in capital for around that much revenue if not less and NEED to exist. Of course they aren't good candidates for venture investment capital. But saying they shouldn't exist is probably a bit too far.
You're right, and there's other things like restaurants that require capital and have a cap on earnings.
I should have phrased it as venture capital, which is structured to look for unicorns.
There are other forms of capital that are appropriate for businesses with a high chance of returning a moderate gains instead of a low chance of extraordinary gains.
There's two axes. One axis of the matrix is what the founder wants. The other axis is what the business needs.
The business needs axis is continuous:
- Some businesses obviously don't require outside capital (e.g. founder is equipped to get a sellable product built by themselves).
- Some businesses require tons of outside capital and cannot be bootstrapped; self-driving cars is an obvious example.
- Some are in between; e.g. many b2b products require a baseline level of features / complexity with active competitors that's hard to achieve by bootstrapping.
If a business requires a significant amount of capital AND the maximum outcome is e.g. $500K a year, then it shouldn't exist. This is why VCs ask what the market size is.
Some founders think raising outside capital is a "win". They want that external validation and then convince themselves and/or VCs that there's a big outcome on the other side (or, in the ZIRP 2021 era, get convinced by VCs). This is a mistake -- the only external validation that matters is market validation.
Instead, founders should think of outside capital as a necessary evil, and make a clear-headed decision as to whether the benefits of capital for their businesses is worth the cost (in the form of preference and control -- or at least influence). And it should be worth the cost by some significant margin, because outside capital is often optimizing arithmetic mean outcome whereas the founder is often optimizing something closer to geometric mean outcome.