Some friends in college invented a beer tap. It poured beer faster with less foam. If your business involves pouring beer, you'd make more money using this device. They won $10,000 in an inventor contest, started a business and a few years later this tap was in a major sports stadiums across the country. Beer-drinking and stadium-going Cubs and White Sox fans have seen it in action at Wrigley and US Cellular. This should have been a booming business.
The company all but collapsed five years ago. How could that happen?
Their failure can be summarized in a post by venture capitalist Fred Wilson about reacting to a crisis. I read his blog and respect his writings, but this sentence infuriated me:
"Maybe you are in the midst of a financial crisis brought on by a tough fundraising environment."
If you have a business (or are thinking of starting one) that can only achieve financial security through investor fundraising, you do not have a good business. Worse than that is a good product/service idea that relies on investor funding to make it work. That's a bad business model.
That's what happened at my friends' company. They started the business thinking they had to raise money to succeed. Then they built the business to raise money instead of to make profits from happy customers. That mindset and business model is doomed because, in the end, you need a product that customers are willing to pay for -- not one that investors are willing to put their money in.
Investor money should be used to rapidly grow an already successful business. Not to sustain a business.
Technology startups are even worse than beer pouring startups. You've heard there is a major shortage of programmers right now. I disagree. Instead, there is a glut of lousy startup ideas consuming great engineering talent (or bad startup projects in big companies essentially doing the same thing).
Add huge amounts of VC money to encourage and enable these bad businesses and you have the perfect formula to waste good human capital.
To the entrepreneur I say: Build a business for paying customers. Don't build it to raise money or simply sell to a bigger company.
To investors: Save your money for the business that has proven it can convince people to pay for its product and is actually making money. That is, after all, the point of a business.
Matt McCormick is founder and co-owner of JCD Repair -- a smartphone and tablet repair company operating in Chicago as well as three other cities. Prior to starting JCD Repair, he was a freelance web developer, a programmer at Microsoft, lectured on operating systems at the University of Wisconsin-Madison, and spent three years selling robotics equipment. He has a Bachelor's in Mechanical Engineering and a Master's in Computer Science.