After many years dealing with VCs as an employee of startups (often very early employee) when it came time to start my own company, I knew I wanted one that would not require venture capital.

Making money is not that hard (for me, anyway, I think this might be a talent, but I think it's not as rare a talent as it might seem.) I think there are a lot of startups out there who build an Instagram when they could be building a Basecamp.

Further, if you're profitable, the cost of scaling is lower.

The reason for this is that there are three major costs to VCs (and Paul touches on some of them). There's the huge distraction of dealing with them when raising money, but this also becomes and ongoing distraction of keeping them happy, and fielding their calls where they tell you some sector is hot and maybe you should pivot into it. (Much better than the bad old days when they would force bad decisions on you, or at least, I hope that is less common now.) The second major cost is not just the equity (which Paul touches on) but the terrible, terrible, lopsided deal terms. "Standard" terms are basically a ripoff that in no other sector of investing would be acceptable. (I'm talking about liquidation preferences and the manifold other ways of double dipping, stripping founders of their stock, etc.) Yes, they get away with this because they're investing in "to the moon" type businesses run by mostly young guys and this has been the culture. But the consequence of this is that the terms are bad for employees as well. (At least founders have a big chunk of stock, for employees the shrinking of the pool is more dramatic.)

But the biggest cost of a VC is starting the clock. They will put you on a track to "go big" which really means "spend more than you're taking in and keep raising more funds", which further dilutes you. You do this until you die or get aquihired or are able to raise enough rounds to have a really big business.

Everyone seems to go into it thinking they're shooting for the moon and that they'll be the next Instagram. But they won't. (almost certainly. 1/1000? 1/10,000? 1/1,000,000,000?)

I think github is the model we should be striving for. Profitable almost from day one. Reinvest the profits, grow the business. Later if you want to take money, you can get a deal like they got.

And if times are tough and you need to pivot, well, at least you have cash flow to fund it.

I'll never forget the experience of one company I worked for. I was in right after the founders. They had a profitable business doing consulting right in their line of technology, which meant that the consultants were producing code that made the product more valuable. The consultants were paying for the product team all the overhead and the company was slightly profitable.

As part of the deal to get venture capital, they had to shut down the consulting team and "focus". There was no focus being taken away by that team-- they were run by a manager and the rest of the company could ignore them... they just increased the value of the product on other people's dimes.

So the team was shut down, then the VC firm dragged it all out for 6-8 months until the company was almost out of money, and gave us a bridge loan (really choice terms too, choice for the VC that is.)

They put us over a barrel.

It turned out the company was about 3 years too early. They would have been well ahead of the competition when the market hit and things really took off... but by the time the VC had run them into the ground. (Forcing many other terrible decisions on them in the interim.) They could have made it without taking VC money and would have been a $400M business.... (what one of the competitors sold for, even though they were much worse off than we were.)

I think this story is very common.

But you don't see a lot of stories like this on HN and other "startup" hangouts. You see a lot of self aggrandizing blog posts from VCs (not talking about PG here, his article is perfectly fine and he's generally on the good side of things).

So, I think we have a culture of startup founders whose entire understanding of what it means to do a "startup" is one that lacks an undertanding of how VCs actually work and how dangerous they are.

And most importantly, what they really cost.