Alex Rampell on When Not to Raise Venture Capital: Distribution, Data and Seed Prices

Key points

1. 1

   Venture capital is the wrong drug for most businesses

   Rampell says venture capital is bad medicine for nearly every business. His example is an accountant who served 10 clients and, with AI tools, can now serve 25. That is a real business and not a venture deal, he says, and there is nothing wrong with that. AI lets someone with ideas but no technical training turn them into products. He expects the same in film and music.

   “Raise venture capital, terrible idea. Like turn it into like real profitable business where you control your own destiny, like absolutely.”

2. 2

   Get distribution before the incumbent gets the innovation

   Rampell treats a startup against a big company as a race. The startup wins if it gets customers before the incumbent copies the product. Second-time founders learn that the product almost does not matter next to getting customers. His example is Propel, an app for people on food stamps. It reached about half a million users with almost no marketing, and the head of Coupons.com offered to buy it right after Rampell introduced them.

   “the battle between the startup and the incumbent is whether the startup gets the distribution before the incumbent gets the innovation.”

3. 3

   Some businesses fail even when the plan works

   Seed rounds now close at billion-dollar prices, Rampell says. Nobody knows what these companies are worth, only that they are worth more than yesterday. He holds that a company is worth the present value of its future profits. Some startups hit every target in their plan and still fail, because the economics catch up with them. Hitting every target is rare in the first place.

   “There's some businesses even if it works, it doesn't work. They're like they hit every single thing that they say they're going to do,”

4. 4

   Three signs a founder is bluffing

   Asked for the biggest sign that a founder is not straight with him, Rampell names three. They cite credentials, such as an MBA, in place of data. Their charts have no labels on the axes. They annualize their last hour of revenue to claim a large run rate, which he says happens all the time.

   “It's it's like the appeal to authority as a fallacy versus here's the data. Or if they don't if they don't label their axes”