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Hey Andrew,
I agree with the vast majority of your posts, but on this one, I have to disagree... or rather, I have to make the points that:
1) this is really a question of risk profile, and is a personal decision. I don't believe it's possible to give advice on this topic in a one size fits all regard. Actually, I think you make this point, but i think it is worth pointing out again because you mention this caveat at the top of the essay, but give the advice at the end. I think what you are saying is don't delay doing something venture-backed IF YOU REALLY WANT TO SOMEDAY DO SOMETHING VENTURE-BACKED. This leads to the question of why people presume they want to do something venture backed.
2) in the same way that you believe many skills are not transferable from lifestyle company to venture company, I think that runs in reverse too.
3) In reality, my experiences running a lifestyle company have taught me that the biggest constraint from a lifestyle company ever getting "big" is the founders themselves getting too comfortable with the cashflow and not taking larger risk. There are, however, many examples of technology companies that were bootstrapped and grew into massively successful venture-sized businesses. To name a few, both SAS and Candle are/were S-corporations! The challenge for someone who has built a lifestyle business turning into a "big play" is primarily their willingness to reinvest the cashflow rather than pocket it. If someone goes into things with the discipline and resolve to reinvest all profits of their business, I don't see why their small, profitable company has to remain small.
The big reason why many would be advised to go for the lifestyle business rather than venture funded is because it is lower on the risk/reward curve than something venture-funded, and that is in fact where most first entrepreneurs lie on the risk reward curve. (Most people would rather take a guaranteed 5MM than a 10% chance of getting 100MM). There are countless people who took funding but regretted it later, saying "man, i ended up with nothing, but if i had never raised, i would have made $X".. where of course $X is smaller than what they ended up shooting for, but they got it.
It's nice to shoot for the moon if that is what you want to do. I just think not enough people consider that reaching orbit might be good enough to satisfy what they want. (And in reality it is a better situation for the VC's when the entrepreneur is aligned with them.. and often a headache for them when the entrepreneur SAYS s/he wants to shoot for the moon, but in fact wants to exit earlier)
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Another nuance that didn't come through in the article is the idea of VC-backed versus VC-backable. I think whether or not you take venture money, putting yourself in high-growth, competitive markets is a recipe that's different than doing something targeted at profitability as early as possible. And you learn different lessons, and yes, the skills may not be transferable either way.
The worst case scenario, as you mention, is a person who takes VC money and then regrets it. There is a lot to regret in that situation :-)
BTW, i hit post without finishing my thought in the last paragraph. The point is once the lifestyle entrepreneur has reached orbit, s/he can choose to go to the moon from there. In many ways, once you've already broken through the atmosphere, going from there can be a lot easier.
It's also interesting to consider the product constraints that apply to a bootstrappable company – there's some useful vectors articulated by Evan Williams here: http://evhead.com/2007/12/how-to-evaluate-new-p... (I don't think all of these need apply to a 'bootstrappable' idea simultaneously)
It would be cools to see a home grown start-up come out of a entrepreneur who ejected after rocket fuel set his previous start-up ablaze. i have seen a case or two of VC's just not able to deal with slow or negative growth in hopes of a mediocre outcome after a long while.
What really interests me is how entrepreneurs who get a big payday, go back to the nipple and get their new company in bed with a VC. Shouldn't your exit go back to risking a certain percentage towards staying independent? theirs stress on both sides of the cash v. control equation.
in any case. this is a topic you could write a whole book on.
kthxbai
companes who took venture funding happen to look like.
The causation and correllation are mixed up. Plenty of VC companies take money, don't have defensible technology and don't grow fast or at all over the first few years.
As much as I feel Jason Fried's tone does his point of view a disfavour he asks an excellent question when he says WTF do people mean by a "lifestyle company"? Making mllions of dollars a year, having total board control and taking holidays when you want them. That's not a "lifestyle" that's easily denigrated.
VC is far more often about ego and validation than it is genuine need or opportunity. Who wouldn't want the stamp of approval from Sequoia or Ron Conway. It's institutional recognition which is something that through exams, school and jobs we are taught correlates with success and recgnition. We're trained to crave it.
The interesting question is not what startups who take VC and succeed look like it's what type of startup can actually leverage that capital. In a capital efficient industry like software, what type of startup really does need that much cash?
A VC scale "big win" is a pure ego play for an entrepreneur. Utility is an integral over time so not only does increasing amounts of cash have diminishing returns but 5-10 years is a long time to wait for it whilst the "lifestyle entrepreneur" is living in a great house with another place in Tahoe and with his kids in good schools.
There's lots of steps, and it's not clear to me that any amount of "practice" in adjacent models really substitutes for just doing it.
And I'm not trying to make a judgement for why one way is better than the other - they are just different models, but the VC-backable model happens to be obscure enough for the entrepreneurs that would like to be doing it, they should just go for it and not set their sights on something lower in the near-term, for "practice."
For people who just want to start great businesses, that's awesome. But for the ones who want to have weird constraints on their business like promising crazy returns in a high growth, competitive industry to their investors, they will want to start practicing that asap :-)
I was just reading Steve Blank's latest article (http://steveblank.com/2009/11/02/lean-startups-...) and realised the distinction that important distinction that I don't feel you illustrated is the point at which you start the VC process proper.
Steve makes the observation that you don't pump the cash in until you show that you have a scalable model. This was the same approach that you actually described to me that you took - you didn't raise until you could prove your customer acquisition model.
The huge danger when you're "thinking big" is throw away "lower near-term goals" altogether and say that you're going for a long-term moon-shot rather than systematically proving (or more likely disproving) the different parts of your moonshot hypothesis. Too many entrepreneurs will say "it's not worth achieving low-earth orbit because we want to get to the moon" and as a result they never get off the launch pad.
Your point about the two being fundamentally different can be completely true but for the less rigorous it's also an excuse for just working on what they want to work on (code, money) rather than what they need to work on (customer validation) (Songbird?).
Most of my objections with this article were clarified in James' and your comments. I believe what matters is that you start a company that solves a problem and can generate a profit by selling its product to its customers and continue to do that in a sustainable fashion, VC-backed or not. Greg of RightNow took his company public with the bootstrapped approach and I think James explains the reason why most bootstrapped profitable startups don't go big really well.
I think if you changed the VC-backed to VC-backable in the article, all of us (fans of your posts) will clearly agree with it. And I DO THINK that its a good thing to try to build something that is VC-backable, but be sure to not always think that that will make you money. Most likely, it won't based on the stats. But it will make you VC-fundable :-) (which I think is another interesting topic!)
I think starting a lifestyle business may be the best way for recent college graduates to understand full life cycle of product development and get some business experience. This is what I did and I am learning a ton being a System Admin, "Front-end guy", "Back-end guy", Product Manager, DBA, Marketer, Book keeper, etc. I haven't co-founded a funded start-up, but I would imagine that this experience could be very useful as a co-founder with tech role. In fact, I think most of this knowledge would be transferable.
A lifestyle company in an interesting space might teach you something, because you might end up a VC-backed co in disguise :-)
Similarly, another good option is a VC-backed startup in any stage. Probably the earlier the better.
Again, I'm just talking about people who are looking to learn and practice before starting their own VC-backed gig.