Should I raise venture capital?

This month’s blog was inspired by a student at the University of Wisconsin-Madison, who is studying Entrepreneurship and hopes to found his own startup one day.

He is a reader of this blog and offered to contribute a guest post on an important question most Founders face:  “Should I raise venture capital?”   I’ll start with his  article and conclude with my own thoughts at the end.

The emergence of several internationally successful startups has paved the way for growing interest in ideas from outside Silicon Valley, and VCs have taken notice. Although bootstrapping has become a popular way for a startup to get on its feet, it is important for a small company to assess whether venture capital funding at some point can lead them to greater success. 

In short, there comes a time in the life of a startup when Founders must decide if it is better to own a small piece of a large pie, or they are better off owning a small pastry.

Let’s first look at the positives venture capital funding can bring:

1.  Money, Mentoring, and Experience

When you sign the dotted line with a venture capital firm, you are signing up for the wealth of experience that your new co-owners bring.  It is likely your investors have ran and/or owned a startup company themselves,  sat on the board of several successful companies in your space – or both.  It is also likely they have mentored and directly understood how other startups succeeded and failed.  Your investor, and their Partners, will serve as key advisors to your business and can help you scale your startup, as long as you are willing to share ownership.

2.  Networking and Recruiting

If the money and experience were not enough of a reason to sign the dotted line, the size of their rolodexes is a critical ‘boost’ to their value proposition.  Venture capitalists maintain an extensive list of contacts with firms, funders and key executives, ideally within your space.  And they will bring this network to you, quickly and efficiently.  Nice.

3.  Shared risk, the Big Picture and the Exit strategy.

It is inevitable that things will go wrong in a growing startup. The market may go against you, deals may not always turn out as expected or key employees may leave unexpectedly.  It is the job of an investor to support you when things get tough:  financially, intellectually and emotionally.  A good VC shares the risk with you, in good times and bad.  It is easy for Founders to lose sight of the big picture and focus too much on the current market.  A good VC will know the trends in your market and help make sure you are up to speed with where it is going. 

And finally, the VC may be with you for a long time.  When the day comes to realize your (current) startup exit, your investors can help you start on your next exciting venture.

At this point you may be somewhat convinced to pursue venture capital.  So let’s look at what may be perceived as some of the negatives of raising venture capital:

1.  Exit pressure

Some Founders believe VCs are in their company just for the exit, and their only priority is to sell the company or take it public.  At the end of the day, VC firms are indeed looking to multiply their returns. And this need for high returns will outweigh personal relationships to Founders.

2.  Loss of Independence

Although your title may still be CEO, it is not only your company anymore. Venture Capital firms will want some control, but what does that mean?   One or more board seats.  The right to veto key decisions.  The right to participate in defining key priorities. And yes, the right to participate in deciding your role and future with the company (as well as the roles of your senior management team).  The company you Founded and owned nearly 100% will become a thing of the past.

The Verdict:

Although the negatives of venture capital funding may be uncomfortable, the positives often outweigh in the final run.  Being able to worry less about every dollar spent can allow a startup to focus on what really matters:  focusing your company, defining its strategy, executing quickly and maintaining high employee moral.  The experience and objectivity a venture capitalist brings can be a big factor contributing to your success, whether exit or IPO.

A good venture capitalist will help lead you in the right direction and support your vision of success.

[End]

Nicely written.  I’d like to share a few  thoughts based on my experiences as an angel investor.

First, the venture capital world is changing.  Startups today need less capital, connections and mentoring than ever before.  Products can be built with hundreds (or even tens) of thousands of dollars.   LinkedIn is rapidly becoming as efficient as a VC’s rolodex.   And social networking connects Founders to extraordinarily talented and available Advisors and Mentors faster than ever before.

Another subtle but powerful change is that the world is awash in venture capital and VCs are often falling over themselves to find you and fund you (if your idea is good…).  The playing field is quickly tilting away from the VC and toward the startup.

Nonetheless I agree that the advantages of venture capital often outweigh in the end.  Given this, how do Founders select the right VC?  I encourage Founders to insist on three things from a venture investor:

Condition 1:  The VC who will be assigned to you has relevant experience.

And I don’t mean they funded a few deals related to your space.  I mean they have a solid track record of exits in your space (read: they know who the buyers are and can contact them when your startup is ready to be acquired).  And they have access to deep network of senior executives within your sector (read: they can help your Sales team).

Condition 2:  At least one of the Partners assigned to you has founded their own startup.

If your VC is not offering a Partner who has founded, co-founded or been a very early and key employee of a startup, turn around and leave.  Seriously.

Few things are more important in a VC than real startup experience.  Have they lived through the sheer terror of nearly missing payroll?  The pain of product failure?  The agony of losing a key deal?  Survived a tongue lashing by angry (but concerned) customers?  Lived off ramen noodles and a shoestring budget?   Dealt with spouse, family, children and friends frustrated at your unwavering passion for your startup?

No large-company background or MBA degree can replace the purity and relevance of the startup journey.  Insist that any VC firm provides a Partner who has been in your shoes and launched their own startup.

Condition 3:  The VC references are solid.

Each VC firm has a certain ‘karma’ about them, based on previous experiences with startups.  In my experience Founders often focus too much on the name of the firm and too little on the Partner being assigned to them.   I think it is much more important to have the right investor assigned to you.  Do they know your space?  Do you instinctively trust and respect that person?  Do they have strong references from other startups with whom they have worked, mentored and helped create exits?  Founders will generally go out of their way to help other Founders, and their feedback (on your potential VC Partner) will be very valuable.

In conclusion:  the true value of a VC is the experience, integrity, experience, connections and commitment they bring.  The VC – and their firm – become stakeholders in your vision, and committed to your success.

One final thought:  a VC relationship is like a marriage. And like a marriage, there will be good times and bad, highs and lows, and growing pains as the relationship changes over time.  If you understand and expect this, you are ready for bringing the right VC into your startup journey.

Good summer to all.

-c

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4 Responses to “Should I raise venture capital?”


  1. 2 Andrea September 3, 2013 at 10:08 pm

    Venture Capitalists are the yuppie children of eugenics-practicing elite rich families from the U.S., Asia & Europe. They are not going to finance your project unless you look and act like a yuppie. Stanford yuppies all look like cookie-cutter clones. When you see them all at Cha-Cha or on Union Street or jammed into the University Cafe it just looks like they came out of a xerox machine because their families make them cluster together and never embrace outside the “yuppie look”. If you have something so compelling that it will screw up their current investments they will finance you, but put their people on your staff and eventually take over your company and toss you out. You need to suck-up, act like a Stanford or Yale tool, date cheerleader looking girls and have a severe/intense look on your face all the time if you are going to play the tech start-up game. End of lesson. Go get their money.

  2. 3 A Rafael dos Santos August 30, 2013 at 9:21 pm

    The text is great but I truly believe that Americans are much more up for investment than the Brits. I am developing a techi startup and I am having a really hard time finding someone to invest in an internet based biz. I am now seriously thinking of moving to S Valley to see if I can find the right VC or Angel to invest in my idea.

  3. 4 other August 1, 2013 at 11:53 pm

    I really like it whenever people come together and share views. Great website, continue the good work!


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