As I’ve spoken to many in the Consumer 3D Printing industry, I’ve heard an increasing amount of talk about raising money from professional investors. While an angel round could bring stability and some financial certainty, raising institutional money is very big risk in such an early market. Venture Capital can bring validation, a comfortable bank account and open a few doors thanks to partner networks, but at this point, I believe the risks far outweigh the gains for Consumer 3D Printing. Here’s why:
Why consumer 3D Printing companies should not raise Venture Capital now
1) We haven’t crossed the chasm yet.
If we had crossed the chasm, people wouldn’t still be asking why you would ever want a 3D Printer. Zeepro would have already well exceeded their Kickstarter funding given how nice looking and feature-rich their printer is (instead, they have sold 300 printers and barely exceeded their funding goal). We would also have a robust set of applications to leverage 3D printers, which excluding design tools (the 3D Printing era’s BASIC imho), is fledgling or non-existent today.
Spreadsheets and word processing programs were largely responsible for early majority users buying computers in the early 1980s. Specifically, VisiCalc has been credited with catapulting sales of the Apple II when it came out in 1979 (2 years after the first edition of the computer). Of course, those programs weren’t even possible until early computers advanced their hardware in key areas like memory, hard drive space, and displays as well as overall product reliability.
Today, we have many hardware improvements still needed for 3D printers to enable new use cases. Breakthroughs in multi-extrusion, print speed, materials and huge improvements to the kluge software experience are all needed to create a “Whole Product” as described in the classic, Crossing the Chasm. Until then, sales will continue to be measured in the hundreds or thousands, which does not align with the mass market growth investors crave.
2) Fundraising is an accelerant for your business.
If you raise venture funding, you may be able to relax a bit from the stress of bootstrapping (i.e.- making payroll), but it comes at a high cost. Venture Capitalists invest with the expectation of the funds being spent aggressively and creating significant growth. If you haven’t had explosive growth, the next set of dollars will be even more expensive, if they’ll fund you at all.
Once you hire people ahead of revenue, it’s hard to stop and even more painful to do layoffs. But don’t take my word for it. Ben Horowitz put it best last week:
“We should first decide how much we like laying people off, because if we love it then lets stay cash flow negative, because when we don’t generate cash, the capital markets decide when we have to lay people off. In fact, we will have to listen very carefully to investors on everything because as soon as they stop liking us, we will start dying. I don’t know about you, but I do not want to live my life that way. I do not want to have to tell all of our employees that we will do what we think is right until investors tell us we have to do otherwise. I want to control my destiny.”
If you absolutely need to raise money, sticking to Angel investment is the only way to go; prudent angels will understand the need for financial stability without aggressively outspending your revenue. You could sell them on plans to turtle up and survive the chasm crossing while placing a few intelligent bets.
Larger investors will neither understand this strategy nor support it as they have funds to return over a time frame that may be shorter than the path to massive growth for your business. You should expect a volatile, painful 2 to 3 year chasm crossing period before we really hit the early majority years. If you raise capital during this time, you will require multiple, highly-dilutive rounds of capital before you can really return value as investors usually expect a round of funding to last just 12-18 months when deployed properly.
3) VCs don’t just talk to you because they want to give you money.
So you’re getting repeat meetings with a VC. They seem friendly and interested in the data you’re sharing and the plans for your business. While it’s true it could be that they’re serious about investing, it’s also quite common for meetings to be free research for them on up and coming industries (Note: I’ve specifically heard from some 3D printing companies they “wasted a lot of time” doing this). Walking in their shoes, a few pitches from different 3D Printing companies would give a great view of the market to gauge when they may be ready to invest years down the road.
Of course, most VCs are also great at the “soft no”; they’re happy to continue to have you or one of your cofounders make more pitches and exchange more information without actually committing to funding or outright saying no to you. And as a worst case scenario, they can use your information to fund a competitor or steal your idea. I’m not advocating for you to completely ignore VCs, but choose wisely who you invest time in speaking with. Ask yourself if you could better spend that time growing your business.
4) The early PC industry succeeded without it.
In the early days of the PC industry, Venture Capital was just emerging and largely was not involved in funding companies. Microsoft only raised $1 Million in its history and at a time when it really did not need it. While Apple did raise money, the majority of the funds came in the 1980s, long after the market was established and Apple was selling millions of computers. The rapid growth of the market as it hit the mainstream allowed profits to easily fund additional growth and made many founders and their employees very rich thanks to their non-diluted stock options.
Early markets require new marketing channels and use cases. By Clayton Christensen’s definition in the Innovator’s Dilemma, truly disruptive innovations have to find their own way beyond what the existing industry does with a technology. As PCs were before, consumer 3D Printers are just that kind of disruption, which means there is going to be a lot of experimentation and exploring to find the best opportunities and develop new ones. There are very few venture investors that have the patience and interest in letting companies do this kind of exploring, since their capital and experience is better leveraged for scaling.
5) Your best investors are your customers.
No one said it would be easy. To really meet where the market is going (because honestly, we don’t know), finding the first few people who will pay for something you’re doing is huge. They’ll help you build the product others will need, find others like them and keep your business afloat financially in the meantime. There’s a reason these businesses started in garages, motel rooms in Albuquerque, and the like; they couldn’t afford anything else.
To survive the chasm means finding a beachhead and expanding. The focus and controlled desperation of bootstrapping can be a powerful tool to develop such a market. If you’re sitting comfortably with venture capital, the hunger to find this will be less and you may even find yourself building a bunch of features that no real customer wants until it’s too late.
We’re in an exciting, but challenging time in the 3D Printing industry. There are many more players currently than there will be winners, which is the tragic, harsh truth of entrepreneurship. Raising money may seem like the obvious way to get a leg up, but it could also be a major waste of time or drive you and your business right off a cliff.