Note to Venture Capitalists: I Don't Need Your Money

By Vincent Cheung, CEO, Shape Collage, Toronto
I created a software program called Shape Collage that automatically generates photo collages of any size and shape. It started out as just a fun side project.

Now I have three employees and annual revenues of $750,000. Since building Shape Collage, I've presented the company at several business plan and entrepreneur competitions and won awards for my ideas.

The awards, in turn, have generated interest among investors who want to buy a stake in the company. Now, I have no doubt that that money could fast-track our growth, but it also would mean giving up significant control over the company's future and taking bigger risks.

So I've reached a crossroads at which I have to pick a growth plan for the business. Right now I'm inclined to turn down the investors and develop the company on my own terms, even if that means moving at a slower pace, because I think that it will ultimately lead to a higher chance of success. Here's why I think it's the right thing to do.

Not just a hobby
From the start, Shape Collage's success has been based on a frugal, steady organic growth model. I was inspired to create the product after completing a summer internship at Google's Silicon Valley headquarters in 2006. I had hundreds of photos with my fellow interns of our wine tasting and surfing adventures that I wanted to share with my friends back home. I figured nobody would want to pick through the hundreds of files individually, so I used Photoshop to make a photo collage that combined multiple photos into one image in an interesting and fun way. A year later in December 2007, I realized that I could automate this laborious process and wrote a software program that could do it in just seconds instead of hours.

I put up the software as a free download on my website in April 2008. Word started spreading, and soon I was getting 50 downloads a day.

Nearly a year later, I decided to notify the press, and my site got a link from a huge blog, Lifehacker, in February 2009. Traffic shot up and downloads went from 1,000 a month to 90,000. Moreover, people who downloaded the software started voluntarily offering me money, so I set up a donation button on the site, and soon I was collecting between $200 and $300 a month.

That's when I saw that this little side project had the potential to become a legitimate business.

Careful growth
I figured I could immediately generate more income if I switched to a freemium model. So I made the software free to use, but users would have to upgrade to create collages without a watermark on them and access some of the more advanced features. In the first few months, only one in 300 users paid for an upgrade. I focused on optimizing the conversion rate through marketing on the website and in the program, and now the conversion rate is one in 90, which helped me push the annual revenue to $750,000.

I could expand the team quite a bit with those funds, but I am very careful with money. Rather than spending recklessly and growing too fast, I have decided to plot a potentially slower growth path, filling only positions for which there is an immediate need, and which have a high probability for a positive return on investment: a mobile developer, a graphic designer, and a PR agency.

I'll probably hire a couple more employees in the next few months, but I'm only going to add staff that I'm confident will improve the bottom line. And I'm certainly not going to make any additions that will require me to take money from investors.

Saying no to Silicon Valley
Silicon Valley is obsessed with venture capitalist funding and several investors have tried to arrange meetings with me, but I haven't seriously considered giving up any equity in Shape Collage. One-third of venture capitalist-funded companies go belly up. I trace these high failure rates to two causes: 1) Venture capitalists often place pressure to immediately pursue a loftier, higher-risk goal instead of taking a more scenic route with smaller wins along the way; and 2) excess of money tends to encourage reckless spending and removes the urgency of achieving profitability.

I prefer to follow a more predictable, lower-risk growth strategy, spending only when there is a high probability for success. As there are more profits, I take larger risks, but the difference is that I am taking risks using profits, not debt, and I am spending more carefully because it's my hard-earned money. Of, course, as an added bonus I get to pocket any excess profits.

In addition to running Shape Collage, Vincent Cheung is studying for a PhD at the University of Toronto, specializing in Machine Learning and Computer Vision.
-- As told to Kathryn Hawkins

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