In the startup world, venture capital funding from a big firm has become the Holy Grail. But, of course, there are other ways to launch a successful business. Bootstrapping, borrowing money from friends and family, using funds from an existing business or leveraging personal assets are all certainly options.
Below are five reasons you may want to seek another way to start your business without big VC money.
Very Few Companies Receive Venture Capital Funding
Believe it or not, for all the talk, venture capital funding is actually a rare thing. In fact, Forbes.com reports that currently VCs fund only about one to two startups out of every 100 business plans they see. And only about 300 of the 600,000 businesses started in the U.S. every year receive venture capital. Simply put, 99.5% of entrepreneurs will not get VC funding, at least not at the startup level.
So, if venture capital funding is so rare, isn’t it practical to seek an alternative for your business? Here are five reasons venture capital funding may not be right for your business.
Your Idea May Not Be Big Enough
You’ve heard how successful small businesses or startups should look to small niche markets. However, VC investors are generally looking for an idea that can pay off in the billions. Venture capitalists are in the business of making money, of course. But just how much money may surprise you.
Even medium-sized VCs will look only at businesses targeting a market in the $1 billion range, says Mark Peter Davis, founder of Interplay Ventures and a venture partner at High Peaks Venture Partners. Larger VCs will want businesses with a potential $5 to $10 billion market. Unless you’re launching a startup with this kind of potential, venture capital funding probably isn’t for you.
You Won’t Get the Deal You Want
In a post based on a talk he once gave to perspective entrepreneurs, Paul Graham, co-founder of the Y-Combinator, explained the venture capital ecosystem this way:
VCs and corporate development guys are professional negotiators. They’re trained to take advantage of weakness. So while they’re often nice guys, they just can’t help it. And as pros they do this more than you. So don’t even try to bluff them. The only way a startup can have any leverage in a deal is genuinely not to need it. And if you don’t believe in a deal, you’ll be less likely to depend on it.
So one of the best reasons not too seek venture capital from the beginning in your startup is that needing the funds puts you in a vulnerable negotiating position. Instead, try to figure out how to get your business running on your own and when you prove your product or service, funding may pursue you on more favorable terms.
You’ll No Longer be Focused on the Customer
In the beginning, an entrepreneur’s focus is on problem solving, creating value for customers, and delivering an incredible product or service. While, in theory, the same goal remains after beginning to pursue funding, the realities can be quite different. Entrepreneurs can instead become preoccupied with raising money and focusing on the demands or needs of VC firms and other big potential investors before the needs of their clients or customers. Assuming they receive the investment they seek, they will potentially end up loosing control of their companies as well. Satisfying those investors can begin to take priority over satisfying the customer bases their business models were built upon in the first place.
Your Success May Not Be a Priority
After all the time spent chasing that elusive venture capital funding, it still doesn’t guarantee your success. Part of the reason is that to VC firms you are only one investment among many. It may be hard to believe anyone would put so much money in your startup without a firm commitment to its success. But as entrepreneur and author Erika Hal explains:
To be blunt: Many VCs don’t care whether any one particular investment enjoys long-term success. They only care that a percentage of companies in their portfolio nets them a high return.
Compare this to the dedication you have to your startup. It’s a dedication to your customers, to your employees and to your own and your family’s financial future. Still think you need venture capital to launch your next business?
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You have raised some really good points back there. The problem with venture capital funding is that you are giving up control for your business in exchange for capital. This means that you’re almost giving another company the freedom to direct where your business will go. Worst, they may even do it without your input.
I always thought that getting VC funding is the ultimate way to get a startup launched. But reading articles which voice concerns and opinions similar to yours, I do think VC funding is not always a good idea.
When you are funded by a VC, you will somehow shift your focus from customers to pleasing your VC funder, boosting the KPI important to them. Not good.
My 2 cents.
The real plus points about venture capital funding –
i) It forces you to deliver shareholder value, hence a leaner, fitter business
ii) It offers you a structured exit.
Can’t fault it for the serious entrepreneur.
Pratik: What is the difference between venture capital funding and angel investing?
I used to work for a VC company. Maybe it was just the one that I worked for but there was no encouraging the entrepreneur or hoping for a good exit strategy. The VC’s just wanted to grind the company down and get more percentage so they would own more and sell it off by the piece. It just disgusted me.