Before you seek Venture Capital, ask if you should, and from whom
Demystifying venture funding readiness
In my experience there are three kinds of startup businesses:
- those that are not viable businesses for any VC investor,
- those that are not viable investments for a particular set of investors, and
- those that are doing so well that VCs are beating down their doors to give them money.
Let us focus on (1) or (2), since if your business qualifies as (3), then your top challenge is limited to rejecting VC offers without burning bridges or in extreme instances returning unsolicited funds that show up in your bank accounts (VC lore?).
Type (1): A vast majority of seed stage businesses are not viable for institutional investors at all and should stick with personal resources or private investors.
The challenge here is that entrepreneurs do not recognize the portfolio approach to VC investing. VCs need every business to project a 10x return knowing fully well that several will fail just trying. I have seen many situations where the entrepreneur says:
“there is no way you are losing money on this proposition, so why won’t you invest?”
The answer to that is that the VCs are not in the business of “not losing money” — they would rather lose it than invest in a business that has no hopes of generating a large return (in their opinion).
The secondary challenge here is that VCs opinion about the potential market and your execution ability or the capital intensity of the startup may vary materially from yours. That said, it does not mean you are not a good entrepreneur and are not running a good business. It could still be a good business for you if you can grow it and sell it for $10M all for yourself — but that does not make it right for a VC investor who puts in $3M into your business. So the sooner you stop knocking on VC doors the more time you will have to build your “better business.” Interestingly if you are right and if the market is indeed as large as you think it is, then you transform into a Type (3) startup and can focus on “first world problems” in entrepreneurship.
Type (2): There are a lot of good business plans out there that still struggle to raise capital because they are knocking on the wrong doors.
VC funds are living structures. They go through phases of being born, early learning, adolescent experimentation, maturity and heady success, periods of sickness and, too often, death. There are human beings on the team that drive this complex structure and they have their own plans, strategies, and failings. You need to find investors that are thematically aligned and interested in what you offer. It is not easy finding the right VC fund that is at the right stage of life for looking at you, and then perhaps even more importantly, identifying the partner on the team that is perfectly aligned with the world views and the culture of the founding team.
Realize that once a partner is sold (somewhat) on your business, he has to convince his colleagues whose primary responsibility is to be sceptical. You need to make your champion’s job easier in terms of addressing the opportunity, the execution risks and the returns potential. Most importantly you have to project the “je ne sais quoi” that winning teams have. Most teams do not — and hence a VC partner has to meet hundreds of companies before he finds one worth running the gauntlet for.
Adapted from an answer originally published at www.quora.com.
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