Last week I was talking to an entrepreneur that was dead set on raising venture capital. Naturally, I wanted to understand more and asked a number of questions. Turns out, this entrepreneur just thought it was the next step to being successful. Venture capital shouldn’t be viewed as just another step in the startup journey — raising venture capital is a serious decision that shouldn’t be taken lightly.
Here are several implications of raising venture capital:
- Growth – Startups are growth-oriented organizations. Raising venture capital takes the emphasis on growth and raises it to max — everything is focused on growth. If growth stalls, more money needs to be raised or the company needs to be merged with someone else that is growing faster. Grow, grow, grow.
- Timeline – As soon as you raise institutional capital (as different from angel capital, family office capital, etc.) the business is now on a timeline to sell in as little as 3-5 years and as long as 7-10 years. No matter how you feel, the business has to be sold (or go public) in an effort to generate returns for the limited partners (the people and institutions that provide capital to the venture capitalists).
- Partnership – Selling a piece of equity is signing up for a long-term partnership with the investor. The relationship should be viewed as a partnership and not merely as an investment. Only raise money from investors you want to work with indefinitely.
Raising venture capital puts the startup on a path to grow at all costs, and has serious implications. Most startups fail and most startups that raise venture capital don’t make any money for the founders. Entrepreneurs should deeply study the pros and cons of this type of capital and know that most of the time it doesn’t make sense. Yet, when everyone is aligned and the startup does well, it’s a beautiful thing.
David Cummings on Startups 