Okay. You know I'm biased. I'm a big proponent of bootstrapping a startup and don't have significant problems with going for Angel Funding if you really need it. We'll talk about that in my next post. But what about Venture Capital? Why am I so against it?
Well, philosophically, I like the idea of building a sustainable business. I think you win the game more often by going for base-hits or short yardage most of the time and only taking that big swing or long bomb when you can afford to do so - not at every at-bat or down. Sorry for the sports analogies, but if you're looking at Venture Capital, you have to be ready to 'swing for the fences' or to 'throw the long bomb'. A Venture Capitalist (VC) is not looking at a sustained effort to win the game. They're looking for you to take big chances so that if you do win, you (and they) win big.
I know this sounds cynical, and I do see need for Venture Funding at some stages of a company; e.g. funding a major expansion or preparing to go public. But I'm skeptical of early stage investments unless you are willing to risk it all.
I have some experience with VCs. For several years, I consulted to multiple VC firms doing technology evaluations. I also took one Series A round of investment in one of my first companies. There are some excellent VCs out there.
I don't think they're shy about their objectives or methods. As one VC told me early in my career, if he invests in ten companies, he expects one to hit that home run. Three to four will fail outright, and the others will amble along, potentially growing, but not fast enough to be of continued interest to the VC. Most of these good companies will be sold off with no significant upside to the founders, or closed down by being denied additional funding after over-extending themselves with VC money.
We all like to think we're going to be the one in ten. Realistically, if we're good business people, we'll likely end up in the five or six who are reasonably successful, but not setting the world on fire in the VC's three to five year timeframe. If we swing for the fences, there's a very good chance we'll be among the three or four companies that fail outright.
Even if you're confident you have the next great idea and can beat others to the market to succeed and hit that home run, I encourage you to hold off on VC investment until at least a Series A round. Get your business started, prove the model, show the customers and then take your big swing.
Since this series of posts is about starting up a company, except in unusual circumstances, I would discourage you from taking seed money from a VC.
While I'm sure there are some well-intentioned VCs offering seed money and actually helping entrepreneurs get started, I can't help but think that a VC who sets aside a small part of his fund for seed funding is taking unfair advantage.
Rather than actually committing to fund a company via a Series A round, seed funding allows a VC to gain control of a number of ideas and people with very little commitment. There's no commitment to additional monies, no commitment not to take the ideas generated and fund another company with them, no commitment not to hire people away from you.
Worse, if you develop a dependency on the VC's money, when it comes time to raise more, you're at a disadvantage. If your VC decides to pass, your chances of raising money elsewhere diminish dramatically. After all, if the VC who provided the seed funding isn't investing again, what does that say? Why would anyone else invest?
Even if they do decide to participate in a Series A round, you're going to be battling valuation. If your seed money was convertible debt, you could be in a very difficult place when negotiating.
I could tell you horror stories and I invite those who've gone the VC route to share theirs. I also invite VCs to tell us their feelings about seed funding. Perhaps they can change my mind.
In the meantime, consider bootstrapping or Angel Funding. We'll discuss that in my next post before moving on to more operational issues in startups.
Well, philosophically, I like the idea of building a sustainable business. I think you win the game more often by going for base-hits or short yardage most of the time and only taking that big swing or long bomb when you can afford to do so - not at every at-bat or down. Sorry for the sports analogies, but if you're looking at Venture Capital, you have to be ready to 'swing for the fences' or to 'throw the long bomb'. A Venture Capitalist (VC) is not looking at a sustained effort to win the game. They're looking for you to take big chances so that if you do win, you (and they) win big.
I know this sounds cynical, and I do see need for Venture Funding at some stages of a company; e.g. funding a major expansion or preparing to go public. But I'm skeptical of early stage investments unless you are willing to risk it all.
I have some experience with VCs. For several years, I consulted to multiple VC firms doing technology evaluations. I also took one Series A round of investment in one of my first companies. There are some excellent VCs out there.
I don't think they're shy about their objectives or methods. As one VC told me early in my career, if he invests in ten companies, he expects one to hit that home run. Three to four will fail outright, and the others will amble along, potentially growing, but not fast enough to be of continued interest to the VC. Most of these good companies will be sold off with no significant upside to the founders, or closed down by being denied additional funding after over-extending themselves with VC money.
We all like to think we're going to be the one in ten. Realistically, if we're good business people, we'll likely end up in the five or six who are reasonably successful, but not setting the world on fire in the VC's three to five year timeframe. If we swing for the fences, there's a very good chance we'll be among the three or four companies that fail outright.
Even if you're confident you have the next great idea and can beat others to the market to succeed and hit that home run, I encourage you to hold off on VC investment until at least a Series A round. Get your business started, prove the model, show the customers and then take your big swing.
Since this series of posts is about starting up a company, except in unusual circumstances, I would discourage you from taking seed money from a VC.
While I'm sure there are some well-intentioned VCs offering seed money and actually helping entrepreneurs get started, I can't help but think that a VC who sets aside a small part of his fund for seed funding is taking unfair advantage.
Rather than actually committing to fund a company via a Series A round, seed funding allows a VC to gain control of a number of ideas and people with very little commitment. There's no commitment to additional monies, no commitment not to take the ideas generated and fund another company with them, no commitment not to hire people away from you.
Worse, if you develop a dependency on the VC's money, when it comes time to raise more, you're at a disadvantage. If your VC decides to pass, your chances of raising money elsewhere diminish dramatically. After all, if the VC who provided the seed funding isn't investing again, what does that say? Why would anyone else invest?
Even if they do decide to participate in a Series A round, you're going to be battling valuation. If your seed money was convertible debt, you could be in a very difficult place when negotiating.
I could tell you horror stories and I invite those who've gone the VC route to share theirs. I also invite VCs to tell us their feelings about seed funding. Perhaps they can change my mind.
In the meantime, consider bootstrapping or Angel Funding. We'll discuss that in my next post before moving on to more operational issues in startups.
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