Raising VC funding takes an enormous amount of time. Before you head down that path, think twice.
Global venture capital funding reached a decade-high of $155 billion in 2017, according to auditing firm KPMG. That’s a whole lot of funding. Yet, it might surprise you to learn that only 0.62 percent of startups raise VC funding.
It’s tempting to try and raise VC money as soon as possible. But, raising VC money isn’t always a good idea. It’s often a huge distraction, and ultimately unnecessary. Before you go out and try to raise a VC round, take a minute to ask yourself if you really need it.
These four questions can help guide you:
1. Do I aim to have a “hockey stick growth curve” that ends in an exit?
A “hockey stick growth curve” is what you’d picture if you imagine a hockey stick as your revenue growth curve: straight up and to the right. If you’re just beginning your startup journey, you might not yet know what your growth curve will be, or what your exit strategies are.
VCs want you to exit, and they want you to exit in as big a way as possible. Unless you are ready for being held accountable for breakneck speed growth, don’t seek VC funding.
2. Do I want to retain as much ownership of my company as possible?
Let’s say for example, that you aim to grow your business to a $100 million valuation. If you and your co-founders own 100 percent of that business, the owner piece of the pie is valued at $100 million.
If you seek VC funding, the ownership equation changes to:
- Lead VC: 20 to 25 percent.
- Co-investor: 20 to 25 percent.
- Option pool: 15 to 20 percent.
- Owners: 30–45 percent.
In order to own the equivalent valuation, you’d need to scale your business to a $333 million valuation. In many cases, reaching that higher valuation is challenging.
However, with VC funding comes VC support and advice. VCs have seen many companies succeed, and many fail. Becoming a portfolio company for a venture fund brings with it a support community that may help you increase your ability to scale.
All VCs are different in this regard. Some are more hands-on than others. So, if you are considering VC funding, it’s wise to vet potential investors for the business support and advice they are capable of providing.
3. Do I want to have the autonomy to work as much or as little as I’d like?
If you team up with VCs who want you to scale fast, the VC team is almost certainly going to require from you a lot of hard work and a lot of hours. It’s true that most startups require a lot of work. Yet, as the owner of a bootstrapped startup, you have the autonomy to choose how fast to scale your business.
This means that you can change your mind if and when your lifestyle or priorities change. When the rate of your startup’s growth is tied to VC money, the VC is going to want you to go all out until you either exit or crash and burn.
In my career, I’ve run five businesses. Some had funding. Others were bootstrapped. Over the past 20 years of running these businesses, I’ve had two kids and dealt with cancer.
The infant years and the cancer years required a work-life balance shift. Running self-funded startups during these years afforded me a level of flexibility that would have been extremely challenging to achieve if I were VC-funded.
4. Do I want full control or am I OK answering to others?
Many entrepreneurs don’t like the idea of answering to others. VCs regularly require data, reports, forecasting, and all sorts of information. I mentor and advise teams and individuals who have raised funding, and I’ve seen how easy it is for leadership teams to get wrapped up in the quarterly board or VC reporting requirements.
Once, I witnessed a leadership team actually lie to the CEO about the progress they had made on the product. The team knew the CEO had metrics to hit for the board and funders, and the team feared repercussions. So, instead of being honest about the product’s progress, the team put together a demo for the board that looked like a working product but was actually just a shell.
Answering to others means giving up control. It also means being honest about both your company’s successes and failures. Think about your comfort level in answering to others both in good times and in bad.
Seeking funding is a complex decision. If you embrace risk and are energized by fast-paced growth — and you have data showing your startup has a chance at achieving a VC’s goals — go for it. If you’re seeking capital only because you think it’s “what startups do,” VC funding likely isn’t for you.
Originally posted on Inc.
Debbie Madden
