Thanks to shows like Shark Tank, America has a front row seat to entrepreneurs’ quest for venture capital.
We love to watch winners emerge jubilantly after their deals, looking a little stunned as they make their way back through the notorious glowing hallway.
Once they win their funding, it’s easy to imagine them riding off into the sunset. In reality, it’s more like they’re boarding a roller coaster.
There’s no hit TV show to broadcast the potential regrets, headaches and risks that come along with trying to sell a piece of your company to a venture capitalist.
We all know the success stories: Facebook, Twitter, Pinterest, and so on. Being well-funded can catapult you ahead of competitors and speed up execution to previously impossible levels. For some companies, any downsides to venture capital are well worth the benefits.
However, for others, fundraising turns out to be a costly waste.
Could venture capital be right for your business? If you’ve ever considered it, there are a few things you should know first.
VC Myth 1 – It’s readily available to startups
Former venture capitalist Dileep Rao pointed out on Forbes.com that VCs reject 98 to 99 percent of pitches they hear. Overall, he says, less than .05 percent of all new businesses get venture capital.
One reason it may seem otherwise, he notes, is because funded companies receive a disproportionate amount of press — partially due to their big investment in PR.
Venture capitalists have plenty of reasons to pass on funding your company. Firms often specialize in investing in specific types of businesses, for example. And because the fight for funding is so competitive, VCs can be as selective as they like.
VC Myth 2 – You might as well try to get it
No one who starts the process of trying to get venture capital expects it to be easy.
However, few realize it’s so grueling.
Founders must spend hours on pitches, preparation and meetings — all of which will likely be unsuccessful.
This was a big reason that Perry Tam, founder of gaming company Storm8, wrote in TechCrunch that he chose not to fundraise in his company’s early years:
“We saw it firsthand in our operating metrics when we contemplated raising outside funding years ago: Every single meeting meant time away from the product. Devoting time to investor discussions hurt our growth rate, and when we focused back on execution, we achieved explosive growth again.”
Before you consider fundraising, you need to make sure it will be worth the effort — which brings us to the next myth about getting venture capital:
VC Myth 3 – Accepting it is a no-brainer
Why would you turn down cash to run your business? Actually, there are a few great reasons. They generally fall into three categories:
1. You could end up losing lots of money.
This one is the most obvious, but it bears mentioning. The late, famed publisher and entrepreneur Felix Dennis summed it up perfectly:
“Getting rich all comes down to ownership. Every single percentage point counts. You don’t need to start handing out shares like sweeties, because it will come back to haunt you. In the end, you’re going to get your money from the sale of an asset. The less of that asset you own, the less money you will get. It is as brutal and as simple as that.”
You’ve worked hard to build your company, and you should think hard before you give away any piece of it.
2. You lose some control of your business.
When people give you money, they’ll want you to spend it the way they like.
That’s understandable, of course, and it can even be a good thing. After all, your investors often have valuable expertise to share.
However, being beholden to investors — even ones who don’t own a majority of your company — can add more stress to a founder’s plate.
For a real life example of this playing out, listen to the podcast StartUp, which includes an awkward conversation between Gimlet founder Alex Blumberg and Chris Sacca, one of his company’s venture capitalist investors. Chris felt out of the loop in the company’s early days, while Alex felt like Chris was all over him needing updates. (Here’s a helpful recap of what went down.)
Bottom line: Every new investor is someone you have to keep happy and check in with regularly.
3. You can get sloppy.
It makes sense that you’d be a bit less careful when you’re using someone else’s money.
Bootstrapping, on the other hand, requires scrappiness and discipline that will be helpful to company culture for the long-term.
Jason Fried is one successful software founder who has long advocated for companies staying small and profitable. He notes in his blog why he prefers bootstrapping:
“Bootstrapping puts you in the right mindset as an entrepreneur. You think of money more as something you make than something you spend. That’s the right lesson, that’s the right habit, the right imprint on your business brain. You’re better off as an entrepreneur if you have more practice making money than spending money. Bootstrapping gives you a head start.”
When Venture Capital Works
OK, so venture capital has some downsides. But it can also be a great option for the right kind of company.
Some entrepreneurs start businesses because they want to create something valuable, be their own bosses, and earn a healthy salary in the process.
Others, however, also have a primary goal of super-quick growth, massive scale, and an epic payout. Those are the types of businesses who typically have the best luck with venture capitalists.
Other factors that make venture capital a good fit for a business:
– you’re trying to break into and dominate a competitive market quickly
– you’re OK with working insane hours in the hope of a big win
– you’re in an industry that tends to be suited for scalability (like software — although some “disruptive” physical products and services — think Uber — can also be attractive)
Alternatives to Venture Capital
Venture capital may be the best known (and perhaps most celebrated) source of business funding these days, but it’s just one way you can get the cash your company needs — especially if your goal isn’t quick, intense growth.
If the first option is to increase and re-invest your company’s revenue or use your own personal money (aka bootstrapping), the next option is usually to approach friends and family to invest.
Founder Laurie Peterson wrote in Fast Company that she used to get annoyed at the suggestion that friends and family fund her business. Where, she mused, were all these wealthy relatives she was supposed to ask?
However, she was surprised how many people she knew were willing to take a risk and invest in her new toy company. (There are restrictions on accepting investments from non-accredited lenders, however, and she suggests taking a fundraising break for six months after accepting any unaccredited funds.)
Another way companies like Laurie’s are getting funded is through crowdsourcing with programs like Kickstarter. Crowdsourcing can make it even easier for your friends and network to support you.
Other possible non-venture-capital funding sources include:
– Individual angel investors
– Local business incubators and accelerators
– Small business organizations
– Governments and nonprofits
Any of those options may include grants or loans with better terms than what you’d get from a venture capitalist.
So, do you think a round of fundraising could be in your future? Tweet us at @TKOfficeSpace and let us know.