The Funding Myth
“What happens if you guys shut down?”
This question I’ve heard probably around 300 times over the last few years. It's a valid question, and one I’d like to address.
This question comes up for us at Tadabase more often than for some other startups, due to the fact that we haven’t raised any mega funding rounds. We haven’t been featured on TechCrunch with outrageous valuations and growth. This is often taken as a strike against us.
For years, I’ve argued that this mindset is, in fact, the complete opposite way to approach this question. Having too much VC funding is a much stronger indicator of being shut down. I’ll explain below.
One disclaimer before I go hating on VC funding. I want to make a simple, obvious point: proper VC funding is smart (example). Bloated VC funding is terminal.
My goal with this post is that it hopefully serves as a resource for prospective customers who pose this question. I also hope it’s helpful to all those founders out there hustling who never raised VC funds. Like us, you’re lucky and have dodged a bullet.
How We Started
To explain my perspective, let me preface by explaining how Tadabase began.
We started Tadabase by building web applications for very large businesses that needed custom software. This opportunity funded the development of Tadabase. Whatever our clients needed, we integrated as a Tadabase feature. For instance, one of our clients required a way to upload files directly to Dropbox, so we added that as a configuration feature. If another customer needed a new type of field, we'd add that, and so on. Our clients knew we were using this opportunity to build Tadabase (then called Appifany), and we did this for 18 months. This approach set us on a unique path, uncommon in startup development – we were making a profit and building a product simultaneously.
Although we always envisioned building something incredible, the idea of going the VC route wasn’t on our radar. A few friends wanted to join our adventure and invested, mostly to be part of what they believed would be a success. These folks likely still can’t describe what Tadabase is or what it does. Their investment was based on our relationship. This funding from friends was significant enough to boost our launch, but modest enough to keep us grounded and focused.
The Launch
When we launched our product, the traction was extraordinary. We had 4,000 active weekly users on the platform and 50,000 beta sign-ups within six months. Clearly, we were onto something. (I’ll delve into the details of what forced us out of beta and into charging another time.)
Suddenly, I started receiving emails from various venture capitalists (some of whom still use Tadabase) inquiring about our work. This was my introduction to the VC world. After engaging in some intriguing conversations and conducting my research, none of the offers felt right for various reasons. As someone who’s never easily satisfied, I challenged everyone in this space to answer my VC-related concerns. Eventually, I realized my concerns were valid; this path wasn't for us. VCs were suggesting avenues I strongly disagreed with, such as strictly targeting enterprise clients, open-sourcing, and other ideas that didn’t align with our vision.
A CEO of a billion-dollar company advised me that pursuing VC funding would be beneficial for me, offering both value and resources. However, as I'm not your typical CEO (I will elaborate on this another time ) and would likely be the first person to be fired after the funding round closed, I had my reservations. Coupled with my disagreements with most VCs I spoke to and my immense love for my job, I firmly decided against it: I valued my position too much to risk losing it. In a twist of fate, this CEO, who had disagreed with me, was fired eight months later. (Hi A. 👋 lol) Fortunately, he left with enough money to boldly express his farewell - not just with one, but with both middle fingers and toes.
What Happened to Common Sense?
Anyone involved in the startup ecosystem can attest to the turbulent times we've experienced over the last 18-24 months. This turmoil can be largely attributed to the ease with which cash was available, leading to a loss of common sense. To demystify the VC funding myth, it's crucial to understand how the VC world operates.
Here’s an oversimplified explanation: A Limited Partner (LP), typically an entity or individual with significant capital such as pension funds, endowments, or wealthy individuals, entrusts money to a venture capitalist in hopes of investing in the next big success story like Uber or Airbnb. In the venture capital model, it's not uncommon for one successful investment to offset the risks of nine others, though this varies across portfolios. This represents the high-risk, high-reward nature of VC investments.
A key factor in early-stage investments is the anticipated valuation at the next funding round. Early-stage valuations, often speculative, aim for a significant increase over the previous round, marking success for investors.
When market trends are favorable, this investment model can be highly successful, making everyone involved appear as genius investors. However, these times are often short-lived. Factors such as changes in interest rates, economic downturns, and tightening financial conditions can trigger a cycle of challenges for the VC industry. Such investments are long-term and may experience several market cycles, including both prosperous and challenging times.
In 2023, an estimated $27 billion (source), in venture capital and Limited Partner (LP) funds were lost due to company shutdowns. Surprisingly, some of these were companies that seemed less likely to face existential challenges, raising questions about their risk assessment and planning. How could they possibly fail after securing $100 million in funding?
To better understand why some of these companies are more prone to shutdowns despite significant funding, it's critical to examine real-world data. For illustrative purposes, consider a company like Airtable, which many may be familiar with. This is not to cast Airtable in a negative light – it serves purely as an example to discuss broader industry trends. Again, it's important to clarify that this discussion is not a reflection on Airtable's actual performance or prospects as it is recognized as an excellent company with a fantastic product.
Facts:
- Airtable raised a total of $1.4 Billion.
- Their peak valuation was $11.7 Billion
I'm not certain about Airtable's Annual Recurring Revenue (ARR), but to justify a valuation close to $12 billion, their financial performance would likely need to surpass that of Monday.com. To put this into perspective, Monday.com, valued at $8.5 billion, reportedly generates around $60 million per month of recurring revenue. Based on my estimations and research, Airtable might be bringing in approximately $12 million monthly. This figure is considerably lower by comparison. However, the actual worth of a company like Airtable depends on various factors, including their growth rate and investor confidence. Given these variables, it’s possible that Airtable's valuation could be less than the $1.4 billion they have raised, although this is speculative and based on available data and estimations.
In the case of a successful company like Airtable, the prospect of shutting down might seem remote. However, should such a scenario ever occur, it could put the company in a challenging position. For employees, particularly those with stock options, the impact can be significant. Their shares could become nearly worthless, potentially leading to dissatisfaction and even an exodus of talent. Employees who might have anticipated a substantial financial gain from an IPO or other liquidity event could find themselves facing a reality where their expected returns are drastically reduced or nonexistent. This situation could affect everyone in the company, including the founding team, and underscores the inherent risks in startup equity compensation.
Again, this isn't about criticizing Airtable, but it raises an important question: what's next? In some cases, the answer is layoffs, more layoffs, and unfortunately, it's often the smaller customers who suffer the most. While I don't believe Airtable is at risk of shutting down, this scenario underscores that VC funding doesn't automatically mean stability.
Consider some recent examples in the industry.
- Internal.io, a competitor of Tadabase, raised $16 million and then shut down.
- Airplane.dev, after raising $40 million, was acquired by Airtable and subsequently shut down.
- Even AWS Honeycode, backed by the giant AWS, ceased operations.
These instances are part of a broader trend. 2024 could be challenging for overvalued companies. As I’m about to post this, I see pitch.com is doing the right move, throwing in the towel by switching from the VC model, to the bootstrap model. This is going to be the first of many more to come.
One method I use for evaluation: how much has a company raised and what’s their last reported revenue. As a general rule of thumb, most early investments in companies equate to a valuation of 3-4x the round. Not necessarily true with late stage companies or overly hyped companies like Clubhouse, which has only one direction to go.
Tadabase has weathered its own challenges, especially in the last 18 months with customers tightening their budgets. Despite this, we've remained cash flow positive, continued to grow, and didn't rely on outsized results to survive. These trying times have been different from the relatively easy period of 2019-2021, which often masked underlying weaknesses in some companies. We've managed to thrive without the pressure of investor expectations or the need to dramatically change our business model.
It's important to note that the risk of shutdown isn't exclusive to VC-funded companies. However, identifying such risks in non-VC companies is often more straightforward. Key indicators include a simple look at the development, responsiveness, even a simple chat with the team, and speaking to other customers.
Feel free to email me with any comments or thoughts.
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