Is VC Right for Me?
Entrepreneurs who are at the beginning stages of developing their business often seek funding from outside sources, including venture capitalist groups that choose investments in hopes of big, fast returns. Although venture capital is a great funding option for some companies, it is not necessarily a one-size-fits-all funding option.
For some companies, it may be just as beneficial to begin building a strong customer base and to establish a slow and steady movement rather than depend on outside resources to get the ball rolling at a speed that may cause things to spin out of owner control.
Rather than seeking venture capital, owners could benefit from:
- Creating a solid product or reliable service
- Networking and establishing clear sales by a reliable client base
- Gaining referrals from new clients
- Reinvesting early profits back into the company for growth and expansion
Potential Downsides to VC Funding
The goal of venture capitalists is to sell your company to the highest bidder, and therefore, they keep their focus on shortcuts to profits. Venture capitalists fund about one out of 1,000 business plans they come across, and they aim to earn 100-to-one payoffs on about 2 out of 10 businesses in their portfolio.
This means that the remaining 8 of 10 companies in their portfolio are expected to likely never succeed at this level, and companies that are not performing are often easier to close down completely rather than fix.
Another dilemma to adding venture capital funding is that you have now created a situation where there are multiple hands in the pot. As a business owner, you will now have to answer to various forces outside yourself, and these forces will voice their opinions strongly when their investment is at stake.
- When funding is done in successive rounds, the equity in the company may be continuously split into smaller and smaller percentages, until you have little control remaining over your business.
- The process of seeking and acquiring venture capital funding is often a lengthy one, and the time spent on this process could often more appropriately be allocated to building a solid client base.
- Building a strong client base depends on the quality of your product or service, so it is equally as important to focus time and energy on product development.
Build And Refine Your Business For Lasting Success
Creating a strong business is a slow and steady process for most business owners. Rather than rushing towards the money, owners should ensure that their product is brought to the market in a fine-tuned fashion, and that the product is ready to sell itself in the marketplace. A so-so product with venture capital funding is a risk to everyone involved, and getting tied up with investors is not always the best-case scenario for a new venture.
For more information about the stipulations of venture capital funding, check out this Wheel Media blog on the Top Metrics that Venture Capitalists Look For in a Startup.
Image Credit: [Patrick Nouhailler, TaxCredits]