Earlier this week I was on a panel at the excellent 36|86 Entrepreneurs Festival in Tennessee talking about bootstrapping vs venture capital. Reflecting on the panel discussion, and other conversations at the event, it’s clear that raising venture capital is still viewed as too much of a default path for tech entrepreneurs. In reality 99% of entrepreneurs, tech or otherwise, shouldn’t raise venture capital.
Here are some of the common reasons raising venture capital isn’t right for most entrepreneurs:
- It limits exit opportunities
- It puts a timeline on the business
- It requires a 5x greater exit for the founder to make the same money
- Most markets aren’t winner take all
Beyond the common reasons, the reality is that most entrepreneurs can’t raise venture capital because they don’t have enough traction (revenue!), growth (much be growing super fast), unit economics (strong gross margins and profit possibility), and market opportunity (must be a huge market). Too many entrepreneurs spend time trying to raise institutional money when that time is better spent building the core business.
The solution: find a trusted advisor or mentor in the community to help think through financing options. Most of the time venture capital isn’t the right path, and isn’t even an option due to the business characteristics.
Entrepreneurs would do well to better understand venture capital and know that most of the time it doesn’t make sense.
David Cummings on Startups 