VCs not welcome here

On May 24, 1985, Apple’s board of directors headed by then-CEO John Sculley announced something that shook the world of technology. The board had decided to fire Apple’s founder Steve Jobs from the company he had co-founded. This ousting and the tumultuous period that followed by far still remains the most important turning point for the tech world. Jobs had let in so much venture capital and investor influence on the board, that he had no control over any managerial decision anymore. Jobs’ vision regarding new Apple products did not coincide with the investors’ ideas and he was publicly ‘let go’ by the board.

Venture Capitalists or VCs are the institutions who invest money, often very large amounts, in smaller companies or start-ups. This investment is called Venture Capital or VC funding. A typical venture capital firm invests several millions of dollars in a large portfolio of companies thereby benefiting from averages. According to a 2013 report by Ernst & Young, between 2006 and 2013, there were 49,395 rounds of venture capital funding globally. Out of these, only a meager 853 companies were able to offer IPOs. The main hope here is that a few big wins will overshadow the losses on the majority of invested companies that will statistically fail. This is precisely how venture capital investment works.

For fund-starved startups and their ambitious founders, a lump-sum funding of millions of dollars may seem like a financial blessing. Taking someone else’s money for your personal business investments and virtually promising to return a higher amount definitely builds pressure on an entrepreneur. Sometimes, such pressure curbs the scope of cultivating something unusual which can take some years to materialize. Apart from the increased financial liability, there are a host of other problems with venture capital funding that are driving newer tech companies to ditch venture capitalists for other financing options. Some of these issues may actually lead the companies to failure in the long run rather than help them grow.

Having your company infused with strong financial muscle may seem like a good idea but extreme caution and smartness is warranted while dealing with seasoned venture capitalists. One of the major factors that upcoming tech company founders consider is the loss of equity in the company. When startup founders agree for venture capital investment, they give a percentage of their share in the company to the financing firm. As Terry Blum, the founding director at Georgia Tech’s Institute for Leadership and Entrepreneurship (ILE) puts it ‘If you want a small piece of a big pie, go VC’.

It is hard to say no to someone who pays your bills. When a venture capital firm bets millions of dollars of funding into a company, it is not uncommon for them to demand a place in the boardroom. This is as good as seceding strategic and managerial control over the company. The venture capital firm can then not only monitor daily operations but also interfere in major strategy decisions like the appointment of senior leaders and mergers & acquisitions. A recent fiasco involving an online real estate discovery portal can be cited as an apt example. The CEO of the company resigned citing excessive interference from a leading venture capital firm in India. The CEO retracted his statements and rejoined but the whole incident hurt investor sentiments and the brand image of the company.

Focus is critical for a tech company trying to establish its culture and market positions. Committing to a large venture capital funding at an early stage may deviate the company’s focus from its core competencies. This managerial and organizational distraction can spell doom for companies working on razor thin financial margins. “Raising money is a full-time job and bulking up too quickly can steal time from actually building your business,” says Rohit Arora, CEO of Biz2Credit, an online matchmaking site for lenders and entrepreneurs. Strategies and decisions are made faster when there are fewer people to explain to and fewer people to please. When a company is leaner, it is more efficient. It can fail, learn and move on immediately. Too much initial stage venture capital funding and too many board members may induce a sluggish bureaucratic system in the company operations.

Over-funding also has a history of pushing amateur company founders overboard. This often results in extravagant marketing campaigns, unwarranted hiring, acquiring expensive inventory and strategic decisions blinded by the availability of excess funds. Angelo Santinelli, a former venture capitalist, rightly puts “Abundance of capital tends to dull the mind.” Silicon Valley history is littered with examples of companies with more than $10 million venture capital funding filing bankruptcy in less than a year after incorporation. However, venture capital funding does give opportunities for rapid scale-up, a robust marketing budget and relevant industry connections. Clearly, a thorough research is required while dealing with venture capital companies and their investments.

Analyzing some recent trends, we can see that today’s tech companies are increasingly taking the plunge without waiting for external funding. As per the aforementioned E&Y report, the number of venture capital funding rounds took a slight dip from 3,837 in 2013 to 3,682 in 2014 in US and from 1,636 in 2013 to 1,460 in 2014 in Europe. This changing trend in the more matured tech hotbeds of Silicon Valley and Europe might spell an impending shift in Indian and Chinese tech company landscapes as well. Many tech companies today, who see external funding as a liability, fund their companies themselves or even resort to crowd-funding. Newer generations of internet-savvy entrepreneurs seem to be confident enough to scale-up their companies without any external borrowings.

Trends of raising capital will definitely witness a paradigm shift with the help of more innovative funding methods available now. It will be interesting to see how the new-age technopreneurs are dealing with venture capitalists and their seemingly lucrative business model.

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