VC Isn’t the Only Option
The Dynamo team thinks a lot about fundraising. While we are venture investors, we are acutely aware that venture isn’t right for every business. Nor is every founder predisposed to being good at leading a venture-backed company.
When considering venture capital, founders need to pause and answer two questions in the below order:
- Is my business best served by raising venture capital?
- Are my cofounders and I prepared for what comes with leading and running a venture-backed company?
Is my business best served by raising venture capital?
Relatively speaking, I think this is a fairly easy question to answer. It requires “honestly inputting three variables”:
- The TAM. The billion dollar cliche — is there enough money to made and furthermore, is the target market able and willing to adopt your solution? A big mistake most make early-on is to introduce more customer types if the primary one is still largely unpenetrated.
- Pricing. Pricing Introductory deals aside, it is important to get investors comfortable around pricing in a run-rate environment. Often times pricing is so low, it is difficult for investors to see a path where it will improve. Not to mention, pricing is quite hard to increase once a large number of customers are used to it being lower.
- Business model. In the early-innings, many unscalable things happen — but once the investment has been made, can we economically attack the TAM at a fast pace? This is where “X”aaS business models are attractive — make investments early on and assuming product/market fit, in year 5, a company has a large series of cash flows that exceed the upfront investment.
Tying these three points together is the bow we call “traction.” Nothing can prove that a business is venture worthy more than a lot of customers quickly adopting a product at an un-discounted price. Traction is looked at in context to one’s TAM and the amount of time you’ve been in business. Speed does matter. After all, venture investors are after returns derived from fast-growth.
Are my cofounders and I prepared for what comes with leading and running a venture-backed company?
This is a big question that requires honest self reflection. Founders need to understand what happens when they sell a portion of their company to VCs. Below are just a few considerations:
- The company is no longer just “yours.” You answer to a board.
- Growth needs to occur at an exponential rate — no longer set by the founding team.
- Once you go down the VC route, it is hard (if not impossible) to get off.
- Dilution will ultimately result in founding ownership of 10–20% at exit.
- Founders can be replaced by seasoned operators.
- Cofounders who have waited to ID their CEO will be allowing a new party to opine on the decision — dynamics might not end up as friendly.
This is a question that a good mentor who has been there/done that can help with. It’s more important to answer and also significantly more difficult to answer relative to the first. Understand the demands of VC, reflect on it, discuss it with cofounders and mentors before making an ultimate decision.
Away from VC, there are many ways to fund a business: bootstrapping, reinvesting cash flow, bank financing, non-VC private investors (think those ok with slow growth and dividends), etc. None of the aforementioned capital sources detract from a founder’s success when they exit their business. Choose your funding wisely.