Chasing Venture Capital will Kill 99.78%* of Games Companies and App Startups

When starting a new app business, chasing investor capital can be life threatening for your startup.

Delusions of business grandeur can include signing up to incubators, looking for Angel investment and spending months chasing venture capital.

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At a minimum you are likely to waste your time and potential VC companies time, and miss out on opportunities to grow your games business. At worst this strategy is likely to kill your app business - dead.

"Lets build a cool random social app, raise millions of dollars, get tons of users, and sell within 3 years for a bunch of money!"

Does this sound familiar?

For every Facebook, Instagram & Pinterest they are millions of dead zombie startups, dying and dead, strewn by a roadside littered with corpses of failed hopes and dreams.

And despite the hype in startup circles and the press - Venture Capital is the exception not the norm for companies looking to raise funds. And there are good reasons why this is.

Here are some things VCs are looking for in high potential companies:

  • Great street cred - are you from Harvard, MIT or have you worked at Google or Facebook?
  • Co-founders with incredible backgrounds, skills and insights to make this company happen yesterday.
  • Have you put together a killer team including developers so good at least 10 companies in the Valley want to hire them right now?
  • Do you inspire, and blow people's minds when you talk to them about your product?
  • Have you got potential 1 billion dollar international market you want to slay, in a hot & growing niche? VCs are NOT interested in a 10 million dollar exit.
  • VCs want to invest in businesses that have some unique advantage. This could be patented IP, trade secrets or team members with unique abilities and knowledge that no one else can easily replicate. They always ask what are the barriers to entry.
  • Have you got experienced mobile focused team members with successful exits and companies under their belt already?
  • Are you hungry and ambitious enough to slave away for a few years, with no sleep and no family time, and sell your soul to create the next killer company and world level IPO?
  • Has your business got traction?
  • Have you already got great connections with Angel investors and VCs in the major tech hubs, including San Francisco & London?
  • Are you the ultimate co-founder - a die hard, never give up, 'I'll do it if it kills me' passionate gutsy entrepreneur?

Incubators usually take a % of your games company and will also focus your attention towards the VC route.

But less than 1 percent of U.S. companies have raised capital from VCs, and the VC industry is contracting.

There are successful app business and there are the very rare app businesses with billion dollar potential.

Right from the beginning one of the most important things you need to do for your games startup is to figure out what category you fall into.

One of the worst mistakes you can make - for your time, your business, your money and your health, is to chase the VA dream or incubator lifestyle with a startup that has no chance of the success required for VC funding.

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LIFESTYLE BUSINESS Vs HIGH POTENTIAL STARTUP

Lifestyle business

A lifestyle business is generally a business with a turnover of approx. $100,000 to $500,000 per annum. Depending on your costs, your take home pay can be far higher that the average salary in most countries.

A lifestyle business is the startup equivalent of instant gratification.

You sell something people want (apps or games in this case), profitably (with mobile ads or IAPs) and you try to start earn money as soon as you can. It's lean startup 101. Get the first few paying customers on the app store, learn what they want and make your product better. Hustle, and focus on satisfying the people who are going to make your company profitable - your customers. You're the boss. You have complete freedom to do as you wish - sink or swim.

I know many lifestyle app business owners, growing six figure businesses, and are on track or have already hit seven figure turnovers.

All are bootstrapped, and all worked really hard to understand their customers and the market demand, without a term sheet in sight.

You can bootstrap your games business and grow organically - slowly or quite quickly, that's up to you. But self funded businesses don't have to stay small...

  • Sara Blakely, inventor of Spanx, invested her life-savings of5,000 to create "body shaping" undergarments and bodysuit shapewear - intended to give the wearer a slim and shapely appearance. She came up with the name, designed the logo on a friends computer and taught herself how to file a trademark to save on lawyers fees. The Spanx company and brand are now valued at more than1 billion and Sarah owns 100%.

  • Github is used by nearly a million people to store over two million code repositories. Instead of chasing VCs, they focused on growing their business. Tom worked both at GitHub and at a full time job, while Chris and PJ consulted on the side.
  • WooThemes sells premium wordpress themes. With sales starting nearly immediately, money from their customers meant the founders could leave their jobs and focus on WooThemes fulltime. "We've been making money from the very first minute we released our first themes, which means that we didn't need to pay back loans or really invest in any infrastructure when we started out," said Pienaar.

  • No venture capital

    Not chasing VC money and not taking part in incubators, can be the best thing you can do if your business is not one of these rare hyper-potential startups.

    1. Having no money is a bonus. It means you have less money to lose. It also will force you to innovate, keep your costs really low, hustle, and get your hands dirty and educate yourself on how to do some of the tasks required in your business.

  • You have 4.5* times more time. You can spend 18 hours every day - if you want - working on figuring out how your startup can earn more money. If you are chasing VC money, you'll probably be spending 18 hours trying to put together pitches, proposals, networking, doing business plans, etc. None of these things will earn you a penny from your potential customers. Time is money.
  • You will have a profitable business much sooner. Having money in the bank and knowing your bills will be pay on time gives you peace of mind that nothing can buy. VC backed startups are different - and are usually focused on one large payout at the end when the business is sold, which may be years later. VCs want you to grow your company aggressively, and then exit for big bucks when the time is right. Monitisting what customers you have today is not the top priority.
  • You do stuff instead of talking about stuff. Business plans are mostly bullsh*t. Last time I checked no one could predict the future.
  • Don't give away your equity. 100% of a lifestyle business is much better than 20% of a soon to be doomed, VC backed, team mutunity, co-founder battling, sleep deprived, sold my soul company you hate and can't escape from due to the amount of debt you owe.
  • The VC industry is also under going huge change at this time. With the advent of public fundraising the whole industry is going to get a lot of favorable for the startups in the next few months. Think what happened when amazon launched the Kindle and book authors were able to publish ebooks without having a literary agent.
  • *Approximately