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Venture capital is only right for a small percentage of businesses

VC isn’t good for every company. I feel like I’ve said that a thousand times now but it is a really important point. Just today I was with a company where the most likely exit value is £25m, that could be a great result for the founders and employees, but wouldn’t be a great result for a VC, and hence raising venture capital is not the right idea for them, and they probably shouldn’t have been wasting cycles talking with us.

I’m writing about this again today because I just read Chris Dixon’s excellent post Shoehorning startups into the VC model and it gives me a chance to really hammer this point home. He makes three great points:

  1. For some entrepreneurs, raising venture capital becomes a goal unto itself, instead of what it should be: a heavy burden that only makes sense in certain cases.
  2. A startup should raise venture capital (or “venture-style” angel/seed funding) only if: 1) the goal is to build a billion-dollar (valuation) company, and 2) raising millions of dollars is absolutely necessary or will significantly accelerate growth. – I would say $100m rather than $1bn
  3. There are lots of tech companies that are very successful but don’t fit the VC model. If they don’t raise VC, the founders can make money, create jobs, and work on something they love. If they raise VC, a wide range of outcomes that would otherwise be good become bad.

(Emphasis mine.)

The temptation to raise venture capital is very understandable – it’s sexy, nearly all the high profile startups do it, having $ms in the bank would feel great, stories of entrepreneurs finding it easy to raise VC abound, and the alternatives (selling stuff, forgoing salary) are hard. For the reasons Chris sets out the hard route is often the best route. The irony is that for companies that shouldn’t be raising venture the process often turns out to be no easier than the alternatives.

  • http://wildirishguy.com Damon Oldcorn

    Yes and you will lose your independence….. that great feeling you have of being your own man/woman which is probably why you took the start up route in the first place.

  • Chris

    Couldn’t agree more. Pleased you clarified the $100m valuation though.

  • neil_lewis

    Hi Nic – l love your courage for putting this out loud and clear.

    Quick question – for all the startups that are exchanging a few points of equity for a startup accelerator or taking Seed EIS funding, are they wasting their time?

    I realise that 6 or 8% of equity for an accelerator may not sound like a lot, but it is only the first step to raising funding at the Seed level and then onto second and third (VC) round funding. So, these companies are setting out in the expectation of raising a lot money later on.

    Br
    Neil

  • http://www.theequitykicker.com brisbourne

    Definitely not. Accelerators have helped large numbers of companies get to the next level, and similarly seed funding can help (EIS or not). The question to ask is whether the incubator is high quality or whether the investment is enough to give you a meaningful step forward.

  • neil_lewis

    Thanks Nic – so would it be right to assume that many startups that take seed funding or join quality accelerators, don’t necessarily need a second or third VC funding round? Hence, startups would be wise to raise enough – to make a meaningful step – which in some cases means they won’t raise funds again?

  • http://www.theequitykicker.com brisbourne

    For most a meaningful step gets them to a place where they can raise another round at a higher valuation.