Why Your Startup Shouldn’t Go To A VC For Funding
Launching a startup is a genuine challenge because it takes a great product and a proven market potential to build a successful project, but that’s not the only thing to worry about here. Funding is almost always the highest hurdle, particularly for startups in need of major resources.
Venture capital (VC) looks like a preferable option among new entrepreneurs, but it is certainly not the most promising solution for 99% of the companies. According to the report, only 0.05% of startups actually raise VC.
No one can dispute the benefits of VC funding, but we are not here to talk about that. We want to explain why your startup shouldn’t go to a VC for funding, so let’s check it out!
If you are relatively new to startup funding, then you should know what VC really represents. By definition, venture capital is a form of private equity financing that is provided by VC firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which have demonstrated high growth (in terms of the number of employees, annual revenue, or both).
Such investments are often risky projects with uncertain results, but a long-term strategy of VC firms is to capitalize on at least one of the startups and make it up for all the other investments. The story of VC is long and time-consuming, but we don’t want to delve deeper into the theory. Here are just a few stats to help you understand the current condition of VC funding:
- VC firms invested a total of $254 billion globally into around 18 thousand startups in 2018.
- Less than 1% of VC-funded startups became unicorns (i.e. were eventually valued at $1 billion or more).
- Individual VC firms receive more than a thousand proposals a year and are mostly interested in businesses that require an investment of at least $250 thousand.
Don’t forget these stats as they will help you to figure out some of the downsides of VC funding.
7 Reasons Why Startups Should Avoid VC Funding
VC funding is not the worst thing a startup owner can look for, but it definitely isn’t the right choice for the majority of new companies. This type of funding can have a wide range of negative effects on your business, but we selected seven major reasons why you should avoid working with VC firms.
1. VC firms demand rapid growth
If you want to cooperate with VC firms, be ready to suffer a lot of pressure. Venture capitalists demand rapid growth as they won’t settle for long-term projects and gradual development. Bearing in mind the sheer magnitude of funding, it is clear that VC companies expect a quick turnaround.
What does it mean to you?
You probably can’t expect a huge growth instantly but rather a steady increase over the next few years. This is never a good thing for VC investors since moderate growth is not what they are looking for.
If you want to avoid pressure and the corresponding difficulties, you better avoid VC funding.
2. They push startups to the limit
There is a very thin line between very successful startups and unicorns, but venture capitalists care about the latter exclusively. They keep pushing startups to the limit by postponing the sales because they hope to maximize the profit. VC firms expect you to scale to the point where your startup becomes a unicorn, but the truth is that only 1 in 100 startups achieve this status.
That basically means you could lose some serious money along the way. For example, a VC could force you to decline an offer worth $100 million just because they target $1 billion. But if your company begins losing momentum – and it usually does – you will end up wasting a lot of money.
3. VCs jeopardize the profitability of startups
Profitability is another common issue in VC funding. Namely, the fact that you can raise tons of cash doesn’t always correspond with a successful project. On the contrary, there is a certain point where healthy startups should stop raising even though they can do it. Venture capitalists strongly disagree with this statement simply because it doesn’t suit their business interests.
4. VCs minimize a founder’s stake in the company
Here comes another problem you should keep an eye on. If you opt for VC-powered funding, you can expect investors to minimize your stake in the company. How come? Jake Gardner, a business analyst at UK Assignment Service, explains the whole process:
- You will probably give up to 15% of shares during the first round (seed) funding.
- Your employees will likely take another 15% during the option pool.
- VC investors will often take around 25% at the Series A round.
- Series B will probably take another 30%.
After everything is said and done, you as the founder will be left with 20% of shares maximum.
5. You will lose control over your company
This problem is closely related to the previous one. As time goes by, you will start losing influence and decision-making power. It’s a genuine paradox as the founder of a startup is not able to control the business direction of his/her company.
It’s not a big deal if you and your VC supporter share the same passion for the startup, but it is almost never the case in reality. You are probably targeting moderate success, while venture capitalists settle for nothing but perfection, which then leads to professional disagreements and disputes. In such circumstances, it all comes down to who controls the biggest portion of the shares.
6. VC is not for underdeveloped startups
Although VCs search for startups in the early stages of development, this funding resource is not suitable for relatively unknown entrepreneurs with underdeveloped projects. Don’t forget that VC firms only want to cooperate with fully established organizations that already proved to be credible and trustworthy.
If your project doesn’t come with enough supporting cycles, it will look suspicious to the average VC investor. They won’t reject the funding proposal immediately, but rest assured they will be checking it thoroughly and begin imposing all sorts of control points.
As a result, your startup will slow down and lose much of its original agility. The final outcome is often devastating as your promising business may turn out to be a failure because of the overwhelming VC influence.
7. VC’s expertise is overrated
One of the privileges of working with venture capitalists is the fact that they offer you skills and expertise, but this feature is really overrated. They do follow a certain methodology and try to base their decisions on stats and facts, but it all comes down to sheer intuition and experience in most cases.
As a startup owner, you probably understand a given niche and the market conditions much better than a typical venture capitalist, so do not make a mistake of following their instructions blindly.
The Bottom Line
VC funding is by far the best solution for unicorn companies with massive market potential, but it almost always comes with a negative effect for all the other startups. In this post, we discussed seven reasons why your startup shouldn’t go to a VC for funding. We hope these tips can help you to make a better startup funding decision, but feel free to write a comment if you have other interesting insights to share with us!