5 Reasons Not To Take VC Money

moneyI had an interesting conversation with a brilliant, hugely entrepreneurial guy who owns a technology company that is so hot right now that, with absolutely zero PR or fundraising activity, he is getting pursued by Venture Capitalists who want to invest.

Major VC firms are calling him; clamoring to invest in and/or acquire his business. They are desperate to get a piece of what he’s building.

But he’s not interested.

He wants to build something big – huge. And he wants to own all of it. Here is what I learned about his strategy:

You should only take on investment if your growth is constrained by funding.

There are many reasons why your business might not be growing, and money is only one aspect. Take a careful look at what is holding you back, and make sure you address those issues (if possible) before considering VC money. For example, you might need to get more creative in finding customer prospects, or you made the wrong hire in marketing. Maximize every dollar you already have before taking in outside money.

You should only grow as fast as you are able to learn.

You are the heart and soul of your company. Take an honest look at where you are in terms of your leadership. Chances are, you still have a lot to learn about the basic fundamentals of your business and the market in which you work. Don’t try to move forward so quickly that you exceed your own capacity to keep up with your own business. Sure, your business will always stretch you and make you uncomfortable, but you don’t want to break!

You should only grow as fast as you can build the infrastructure to support growth.

Just as a building requires a solid foundation, framing, plumbing and electrical, your business requires a basic infrastructure to grow. Build an organizational chart for today, 12 months from now, and 5 years from now. Build out each critical department: product, marketing, sales, support, and administration. This is the basic architecture of your company. Now you have to build the human resources to frame the company. As you grow, don’t forget to add critical support roles in human resources, accounting, and marketing. These are the areas that many entrepreneurs fail to sufficiently support.

It takes time to build a great company.

It might not seem like it, but every great company took time to build. Sure, some were faster than others, but they all had an early stage before they started showing up on the cover of business magazines around the world. Behind every “overnight success” is an entrepreneur who took the time to build a viable company model. She hired a team to support her, sometimes accelerating growth through the years her team brought to the table. But the fact is that most companies need 5-10 years to hit their stride in terms of identifying the right market, product, and marketing strategy. If you’re past that point and have not been experiencing significant growth for more than 12 months, then you are most likely flat-lining, and it’s time to take a long, hard look at your business model.

You gain more in the long term by maintaining full ownership.

There are some differing opinions on this. For example, many entrepreneurs pursue VC funding because 2% of a $100 million company valuation is more than 100% of a $200,000 company valuation. That is true, but you also have to know that the vast majority of companies that are funded by VC firms never get close to the million-dollar paydays. Built correctly, a powerful entrepreneurship can average much higher returns for the self-funded entrepreneur than all but a very few VC-backed entrepreneurs.

I have so much respect for this thinking. In a time when it seems like every technology start-up out there is trying to figure out how to attract venture capital, this guy just goes out and builds a company that is so solid that he can ignore the VC community. His business is completely self-funded, and it’s not because he’s some kind of millionaire, he built it strong and slow. And he intends to keep doing that.

Of course, there is nothing wrong with taking on investment capital from venture capitalists or angel investors, but I do think it’s worth considering the alternative if you have the means to do so.

Virginia Ginsburg is founder and chief consultant at Swell Strategies. She is passionate about supporting small business owners and entrepreneurs in starting and running successful enterprises. She has worked with more than 100 entrepreneurs over the last 10 years from start-ups to more than 30 year old businesses.

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1 Comment

  1. The entrepreneurs I have encountered in my day-to-day operation hail getting VC funding as the holy grail of startup goals. I have always wondered about that – since to really build a business, you have to channel enormous amounts of your human potential through it. This post has more logically helped me justify this feeling of skepticism I always get when VC funding is mentioned! Thank you kindly for delivering this value to me as a growing small business owner.

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