Venture capital: Is it right for me?
In today’s tech startup world, it’s all about fundraising, not rightly so. Good for the founders, it’s indeed raining money particularly in US and Asia. PricewaterhouseCoopers and CB Insights’ Q2 2018 MoneyTree report highlights that VC Dollars hit a record peak as they were up 2% in Q2’18 and $23B was invested across 1,416 deals. For Asia, total quarterly funding to Asia-based companies increased a whooping 10% in Q2’18 as $21.2B was invested across 1,300 deals.
It is important to make a conscious decision about whether VC is the right fundraising method for your startup. It depends on a ton of factors like industry experience, size of investment needed, profitability of the idea, time to returns, competitor landscape, control required, etc. When VC is indeed the right choice for you, make sure you are able to reap all the benefits of that relationship, and it’s much more than just money. A good VC brings you a rich network of talent and strategic partnerships owing to their credibility and reputation in the market. Each VC firm is typically interested in a few verticals or fields, and they use this experience to gradually expand into new areas building upon their network. Carl Eschenbach alluded to how VC funding differs from other investment types like Angel, Private Equity etc. It is interesting to note that VCs fund only a small number of startups, but the companies they fund have a disproportionate impact on the economy. The fact that less than 5% of startup funding comes from VCs, yet VC-backed companies make up 37% of IPOs and 6.5% percent of the high-growth companies is impressive.
Other types of funding include borrowing from friends and family, loans, angel money, crowdfunding and credit. These are better when you have a lot of experience in the industry or already have customers for your product. Most importantly, you need to nail the product market fit. Raising too early can be more detrimental to the growth of your startup than good if you haven’t spent sufficient time validating your product. It is often seen that VC backed startups lack the prudence of spending wisely and end up burning cash on things they don’t need. Be brave and bootstrap in the early stages if you can! VC investment is best once you are ready to scale and have achieved product market fit.
Some interesting reads and references –
1. https://thinkgrowth.org/startup-fundraising-101-the-pros-and-cons-of-angels-vcs-angel-groups-and-syndicates-1226fdcec828
2. https://www.startupgrind.com/blog/a-startups-relationship-with-venture-capitalists-much-more-than-money/
3. https://www.cbinsights.com/research/report/venture-capital-q2-2018/
4. http://basseyblogs.blogspot.com/2017/04/not-only-venture-capital-startup-capital.html
5. https://www.kauffman.org/blogs/currents/2016/05/three-facts-you-probably-didnt-know-about-and-venture-capital-and-entrepreneurship
6. https://www.rareseedcapital.com/blog-1/2017/5/10/the-case-for-launching-your-tech-startup-without-venture-capital
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3 comments on “Venture capital: Is it right for me?”
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Very well written post, it summarizes correctly the challenges that a start up face when it comes to funding. The time that a start up will cooperate with a VC it has always been a question for me. There are a lot of times where a start up gains a lot from addressing its problem to a big financial company and puts value in its products and ideas. In other incidents I have seen that the VC is the one that benefit the most since a start up might sell itself without receiving all the necessary consulting and financial tools to grow further or at least the the owner of the start up have the idea that the good have improved their products further and sell the company at a higher price.
This post brings to mind an article from the Stanford Graduate School of Business website which I just read. It is about how the CEO of Spanx started with $5,000 and made a profit from the beginning. Sara Blakely advises to start small, think big, and scale fast. She did not take any outside funding or venture capital to start her company and that was a part of the success of Spanx.
Sara Blakely says: “A lot of people want to start big and think big and oftentimes get ahead of themselves. That can end wildly successful, but it can also cause a lot of problems. You dilute yourself down and you have people you’re answering to.”
I think it is very important to reflect on if getting VC funds is vital to growing, or it would be better to get a loan from family, friends, etc.
I believe a good reason for including Venture Capitalists (VC) in a venture is the viewpoint and angle they bring in. A lot of startups are built around a technology and founders are often the smartest people in these technologies. They are the ones who see what is possible by applying their new tech. The build the products and services that have not been there before. But when it comes to business models and monetization it is often the VC that sees how to monetize the product, what the business model could be and how to apply it in which market.