The Downsides of Raising Venture Capital

Why Wouldn’t you want to raise Venture Capital?

Seems silly, doesn’t it?

We’re on track for record years in terms of deal flow and dollars invested, in the midst of a bull market not seen in VC since the tech bubble.

It’s hard to imagine why founders wouldn’t cash in on the feeding frenzy.

 

 

The Downsides of Raising Venture Capital

 

Valuations are healthy, mega-deals like Juul’s $38bn gift from Big Tobacco and subsequent $4bn dividend payout to shareholders seem like regular occurrences.

The going is definitely good, but at what cost?

‘No Free Lunch’

Outside investors command authority, both in terms of financial control and personality.

It’s obvious that selling some of the equity in the company will have repercussions. What isn’t always so clear is how the personality dynamics will play out between the founder and VCs.

 

When a founder brings on an investor, she is doing principally four things:

  1. Providing capital for the Startup (Runway; R&D; Headcount; Marketing Costs; Scaling; finding product market fit; etc.)
  2. Accessing Their Value-added Services (Network; industry expertise; etc.)
  3. Selling a material portion of the company (Potential for Dilution)
  4. Bringing on outside corporate governance (board seats, advisors, consultants, etc.)

There are other benefits and costs, but one thing changes in each subsequent round of financings: the founders have more and more bosses.

For founders, their startup is their life’s work. There is no work-life balance, there is only the mission at hand. Their Slack notifications ping at all hours; their email never ignored. Whatever fuels them is driven by a mission, and for many founders it’s their first time trying to build a company.

On the other hand, when a VC takes on a new investment in a startup, while they usually have a degree of conviction whether the investment will have a positive or flat or negative return – that doesn’t necessarily mean they believe in the vision or the story of the company. In fact, statistically, VCs lose more often than they win on investments.

The nature of risk and reward in Venture Capital is governed by the sources of its capital; ultra-wealthy individuals with track records of success in business, most recently technology, institutional investors like pensions, endowments, and asset managers, all of whom have one thing in common: liquidity and long time horizons.

For a founder who wants a long time to see their vision out, they’ll need to have a group of patient investors or create other pathways to liquidity, like tender offers, buybacks, secondaries, etc.

 

What are the alternatives?

‘Bootstrapping’ is the most common alternative to raising large rounds of venture capital. Bootstrapped companies work on razor thin margins and utilize more guerilla-type tactics for hypergrowth than merely scaling up headcount.

Incubators. We’ll have a blog post on that one soon – stay tuned!

There’s also ICO’s, or Initial Coin Offerings. Read: (What is an ICO? – via: ICO Alert info.icoalert.com/what-is-an-ico)

Crowdfunding also is an alternative to traditional Venture Capital. Wefunder is the top shop in the game. (Read: What is Crowdfunding – Via Wefunder help.wefunder.com/#/glossary)

Did we miss anything? Let us know in the comments, thanks!

 

 

 

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