While there’s a certain cachet that comes with being able to say you raised a round of funding for your startup, realize that it’s a lot of hard work to actually secure venture capital (VC) funding, and there are reasons you might not want to.
To know which businesses might be a good fit for VC funding or not, venture capitalist Josh Linkner provides this guideline: 10 times minimum return within 10 years. If your market is big enough that you can generate a ten-fold increase in investment within a decade, then you are a good candidate for VC funding. Otherwise, start looking for funding elsewhere.
If your market is big enough that you can generate a ten-fold increase in investment within a decade, then you are a good candidate for VC funding. Otherwise, start looking for funding elsewhere.
Here are 4 reasons why you might not want to be VC funded:
1. You give up some control of your company
What a lot of startup founders don’t realize is that when you take on VC funding, you also take on business partners. Venture capitalists essentially buy equity in your brand, which means they now have a say in how you operate.
While ideally those investors have deep experience and contacts in your industry, they also come with their own opinions about how you do things. You might want to run your startup until you retire; a VC probably is trying to position you to sell so he can get his return on investment quickly and move on to the next startup.
Think twice: If you’re looking for money, get a loan. If you’re looking to bring on a partner and money, venture capital might be the right fit.
Spend plenty of time doing your research before you agree to be funded by a particular company and make sure you clearly understand how involved the investor will want to be, as well as what their vision is for your company moving forward.
Look for a VC with experience helping businesses like yours grow, and who have contacts to help you secure new business deals in your industry.
2. You don’t need funding
Your startup might be chugging along nicely, and then one day an investor comes to you and offers to give you a round of funding (this fairy tale scenario is unlikely, but still possible, especially as your success increases).
You’ve heard that it’s good to get financing even when times are good because one day you’ll need it, so you consider the offer.
Here’s the thing: Because venture capital comes with so many strings attached, it’s really not to your advantage to take funding, especially if you don’t need it. The VC firm could dictate where and how you spend the money, pressure you to take your business in a direction you don’t want to go, or even disagree with you to the point of killing your business.
In 2005, Claus Moseholm co-founded GoViral, a Danish company which specializes in harnessing the internet to promote advertisers’ videos and make them go viral. Moseholm and his team never considered taking investment capital. Instead, they launched successful advertising campaigns and used the profits to sustain the business. The strategy funded GoViral until 2011 when they sold.
Moseholm and his partners never took outside investment because they didn’t have to. As a result, they ran GoViral without interference and retained their stakes in the business until it was bought for $97 million.
Think twice: If you can continue to operate successfully without taking funding, do it. If you really want financing, consider taking out a business loan instead.
3. Your business may become unrecognizable
The thing about having too many cooks in the kitchen, as the adage goes, is that your recipe becomes unrecognizable. A venture capitalist is in the business to generate more revenue streams, but as an owner, you may have other agendas. Your company, which you raised from a fledgling in your garage, may grow faster than you’re comfortable with if you have someone primarily concerned with making money off of it. You may be urged to expand your team, your office space, or your product line before you’re ready to do so.
Groove founder Alex Turnbull had this in mind when he turned down a multi-million-dollar investment. Turnbull said that the investment would have forced him to focus on getting as many customers as possible. At the time, he was aware that Groove wasn’t ready to offer real value. Turnbull writes, “Had we tried to scale, we would’ve almost certainly been left with a ton of angry customers, even more ex-customers, and an app that couldn’t keep up with any of it.”
Plus, a venture capitalist may want you to be acquired by a mega corporation who could completely change your startup, boot you off the team, or dissolve it completely. If you’re lucky, you’ll be fairly compensated for this inconvenience, but at what price?
There are too many cautionary tales of startup founders who feel they sold their souls to the devil in exchange for venture capital, only to regret it later when the business they lovingly built was destroyed as it morphed into the VC’s new vision for the future.
Think twice: If you’re in the startup game to make money and can let go of your initial vision, by all means, venture capital (and the strong-arming that comes with it) may be for you. But if you want to continue to move it completely in the direction of your choosing, run the opposite way.
4. You give up precious time and energy
Getting your startup off the ground is like raising an infant—the first 24 months are usually the most brutal. Aside from perfecting your product or service, you have to tend to other equally important tasks such as marketing, hiring, forecasting, and so on. If you pander to VCs at the same time, an endeavor arguably as demanding as starting a business, you may be biting off more than you can chew.
Instead of pursuing VC funding, you might be better off finding the right customers. That’s how Michael Dell funded his business; many people know that Dell sold assembled PCs from his dorm room, but what most don’t realize is the brilliant strategy he employed to secure capital. Dell asked his customers to pay in advance, enabling him to hire affordable labor in the form of his college buddies and purchase hardware that met customers’ requirements. Why focus on acquiring VC money when you can build your customer base and generate revenues at the same time?
Think twice: If your business can rely on customers and profits for funding, then go for it. A solid customer base puts you in the driver’s seat. Should you need more funding to scale your business later on, you will be in a great position to acquire a loan.
Venture capital, while it provides an opportunity to significantly boost your bank account and invest in things that will grow your company rapidly, comes with certain caveats that you need to be aware of. Think through any financing decision you make, and ensure that it’s the right one for your startup.