Venture Capital - To Have and To Hold

Too many founders look at venture capital as the Holy Grail. As the validation they are desperately seeking. A belief that you if you get venture funding you will be taken seriously, a narrative amped up by the media.  

It may also be a misguided belief that you need venture funding to be a “high-growth” company vs what many refer to as a “lifestyle business”. Yes, I am throwing quote marks all over the place. All too often, lifestyle businesses, generally associated with women, are ridiculed or belittled. Poo-poo’d.

The Reality

Well, here is one example of female founders that killed it. Laundress, founded by Gwen Whiting and Lindsey Boyd, was sold to Unilever for reportedly $100m, without taking VC dollars. Tough Mudder makes over 100million in annual revenue and has not raised venture capital. And the list goes on.

If that doesn’t move you, well then, let’s just be real. Somewhere between .05% – 1% of companies receive venture funding. Only 42% go on to be able to raise Series A.

Is it all smooth sailing from there? Uh no, the WSJ previously reported that 3 out of 4 VC-backed companies fail. According to Tomasz Tunguz, Partner at Red Point Ventures, typical portfolio failure rates are 40-50% (“failure” is defined as a shutdown or return of capital).

Given those statistics, before you go off chasing the money, which by the way can take up to 80% of a founder’s time, ask yourself is the venture route for you?

 Is Your Business Venture Backable?

A few reference points out of the gate. VCs are looking for 10-30x return in 10 years – is the timing right? That means an exit whether it’s a sale to a strategic or private equity, or an IPO (which are rare). They are looking for companies that can reach $1bn valuations and + 100mm in revenues. 

Here are a few questions to ask yourself about your business:

-       Is your market big enough to provide a 10x return? For example, do you have a + $10bn addressable market so you can get to scale without significant market penetration?

-       Is it scalable? Tech scales. People don’t. Is growth dependent on adding people or automation and network effects?

-       Is there a competitive moat that will help you reach market domination?

-       Does adding new clients increase the complexity of the business significantly? Is it relatively cheap to deliver to new clients?

-       Do you have a product that is pretty much plug & play?

-       Are your unit economics highly dependent on getting to the right scale?

-       Do you need lots of cash upfront to build your product with the promise of scale later?

-       Do you have a stellar team?

These are just a few questions.

Not every business is venture backable and that’s ok. 84% of “high-growth” companies are not VC-backed.

Really A Personal Question

And…before you get swept up in the hype, stop and ask yourself is this what YOU want?

What’s your endgame? Do you want to exit the business in 10 years? Maybe this is something you see yourself doing for the rest of your career or passing down. Maybe you don’t want to run a public company, if you even make it that long as CEO. 1 in 5 founders are replaced with a professional-CEO by VCs. 

Do you mind having little control over the exit decision? Maybe you get sold to a competitor (you dislike immensely)! Maybe you think it is worth more than it was sold for or was sold too early. If things start heading south and an acquirer appears, the VC may push through a sale just to recoup their investment capital even if you get nothing.

Maybe you just want to work as long as you want and have enough wealth to have the option to quit when you want. Do your personal goals and dreams require a big payout? Again, you don’t need VC money to make money. Ok, without VC dollars you may only get to making 10s of millions in revenue. Sounds ok to me!

Do you want to give up some control? Giving away equity means diluting your percentage ownership. As owners who need to see big returns, VCs will want a say in important business decisions (some even less important!). VCs may push you in a direction you don’t want to go that is not aligned with your vision. All is well and good when your visions align, but when they don’t – that’s a problem! You answer to a Board and the VC sits on that Board. The Board answers to investors. Different incentives, different risk/reward profiles.

Maybe you got into entrepreneurship to be your own BOSS! The venture route is more like a marriage you cannot get out of even if it goes south.

Do you want to walk down the aisle?