The Pros and Cons of Accepting VC Funds
One glance at popular business or tech news stories might lead you to believe that venture capital is handed out like candy and that it’s essential to entrepreneurial success. But the truth is, fewer than one percent of U.S. companies have raised money from venture capital funds.
And while the venture-backed giants might dominate the news cycle, there are plenty of scrappy hustlers who have also made their way to the top, sans VC.
While we found plenty of men who successfully bootstrapped — Markus Frind of PlentyOfFish and the guys behind Tough Mudder— we were unable to find a single woman who didn’t accept VC funds and still made it to the top. Does that say more about the VC world or the gender disparity in the workplace? You be the judge.
But here’s my point: Venture money is not the only path to entrepreneurial success — and it may not even be the right one. That’s because venture capital funds really only make sense for a small segment of businesses.
While an initial financial boost may seem like a perk, there are just as many arguments against raising money. Perhaps most appealingly, you are far more likely to keep a large percentage of your company when you don’t accept outside capital. Not only do you keep more equity, but you also retain the freedom to call the shots.
That said, giving up some entrepreneurial freedom and aligning yourself with a VC can have benefits — but only if you get the right VC. You could end up with powerful, connected executives who create essential business development and executive coaching that can make growing the business easier and far more fun than doing it alone.
And for some, keeping full ownership of one’s company might not be the most lucrative path. Think about it this way: Owning 100 percent of a company worth $2 million is worth far less than owning 50 percent of a company worth $200 million. In that case, less really is more.
But most businesses don’t really warrant the kind of capital VC provides — or expects. That’s because they’re in a market sector that isn’t likely to deliver the hundreds of millions of dollars that investors seek out. A new online dating app might, but your cousin’s cake decorating business won’t. In short, it’s not that it’s a bad idea to sell a percentage of your business. It’s that most businesses don’t have venture scale potential.
But there are more than a few strings attached to venture capital, and most investors like to weigh in on how you’re spending their money. In some cases, their expertise can be helpful, but they don’t always know your business as well as you do, and it can also result in too many cooks in the kitchen — at the expense of your company. So just keep in mind: there is such a thing as bad money.
Jonathan Shieber, a senior editor at TechCrunch, offers a reasoned approach: “Do as much as you can without outside capital and see how far it can take you. If you do take outside money, make sure that you know who you’re getting it from and that the investors can add value beyond the money.”
Shieber also cautions against just accepting any funds that come your way.
“Look at their networks, what companies they’ve sold their portfolio companies to, whom they tend to invest with, what sectors they like,” he explains. “Make sure it’s the right fit. The wrong one can be the difference between keeping the lights on and shutting them off.”
As an entrepreneur, I believe one of the most compelling reasons to avoid venture money is a difference in how you define success. Investors thrive on an “exit” — but what if a huge cash out is not part of your vision? It’s possible the company you’re creating and the work you’re doing is satisfying. Chances are, the company you’re building doesn’t need to scale to a ten-fold return to be profitable and thrive. But good luck convincing investors of that.
Shieber recommends reflection and due diligence before pursuing venture money.
“Think about how big you want your business to be,” he says. “Not every company is a billion-dollar business, but that’s what you should be aiming for if you’re going to take VC money. The other issue is time to scale. Venture capital is an accelerant, it can turbocharge a business, but it comes at a high cost. If you can do it yourself, you should.”
So, what’s the alternative? Bootstrapping — or building your business without VC funds — may be the better option for you, at least at first.
There’s no one way to do it. Some lean on what’s called a “friends and family” round — basically a way of making financial requests to your network sound more formal and less offensive (these individuals know that investment is high-risk and possibly less of a loan than a gift).
Other entrepreneurs start in finance or some other lucrative field, create a nest egg, then finally take the plunge into entrepreneurship and launch their own venture.
But for those without a deep-pocketed network or a fat savings account, bootstrapping can still work. To be clear, bootstrapping isn’t really about doing without. It’s about being smart about how you allocate your resources. Operating “lean” doesn’t mean clinging to every penny. Even when finances are tight, you don’t need to live in deprivation. But you do need to actively experiment, get feedback, and iterate repeatedly to avoid wasted time and resources — a valuable approach that will give you an edge regardless of your financial circumstances.
Besides, companies need more than cash infusions to succeed. Instead of seeking funding, you can identify and connect with what I call “life VCs.” Rather than just writing checks, these supporters offer sound strategic advice and mentorship. They invest their time by sharing life lessons and doling out advice. They counsel us when we’re down. They give us honest answers, even when it isn’t what we want to hear.
Developing these relationships involves more than just networking. It requires mutual relationship building that goes far beyond a business card exchange or a LinkedIn request. And for the relationship to really work, you should occasionally enrich the “investor’s” life, as well.
Chances are, you already have a few life VCs, but you may not be maximizing the return on those relationships and how they can contribute to your success. To be clear: This isn’t advice to exploit or manipulate the people in your life. Rather, it is a thoughtful strategy to make the most of and contribute to the human capital that surrounds you.
And if there’s one thing money can’t buy, it’s the x-factor that comes from hustling. It’s the human element that money alone can’t account for and that often edges out competitors. You may not be able to compete with larger companies based on your cash on hand, but you can make up for that with savvy agility, scrappy resourcefulness, and indefatigable drive.
Whatever you’re launching or building, don’t underestimate the power of down-and-dirty, don’t-cost-nothin’ hustling.