Funding a startup I: VC funding
This week I’ve been thinking a lot about funding your startup. This is a really tricky one for me, so I’m going to dedicate a few posts to exploring the pros and cons of the different routes.
Being a tech company, there is often an assumption that VC funding is the way to go. Of course there are definite benefits to this route: if you are VC-friendly, you are likely to be able to raise a lot of money, and this is probably the most lucrative route of all. For a tech company, this can be critical in supporting high growth, as it will allow you to develop your software quickly and scale up at speed.
But… of course there’s a catch. VC firms are operating on behalf of the investors in their funds, so their primary motivation is driving to a high return on their investment. The big bucks come with big pressure to succeed — which isn’t necessarily a bad thing, but it’s worth bearing in mind.
For me, though, there are some issues around going down the VC route. Firstly, my business is an ethical one, and it would be hard for a solo entrepreneur to really do the due diligence to find out exactly how a VC firm invests its money. There is a risk that you would be associating your brand with a firm whose values may not match your own.
Secondly, there is a benefit in not having huge sums in the bank, as it forces you to think creatively and spend money wisely. For a solo entrepreneur, or even a small team, it is hard to spend big sums well given all the other things you have going on. Managing this money may prove to be a distraction from customer development and making sales.
Thirdly, of course, there is also the issue that the VC world itself is not very diverse. Analysis by Richard Kerby, a partner at Equal Ventures, concluded that “with 82% of the industry being male, nearly 60% of the industry being white male, and 40% of the industry coming from just two academic institutions, it is no wonder that this industry feels so insular and less of meritocracy but more of a mirrortocracy.” For a female founder, this mirrortocracy is a big challenge: only 2% of VC dollars went to female founded startups in 2017 — and, of course, my business is designed precisely to call out these issues and to push for greater diversity. Which makes it a hard sell in this context.
So, much to consider. I’d love to hear your thoughts on taking VC funding, the highs and the lows!
Nancy is the founder of Umbrella, a tech startup using data analytics and AI to improve corporate diversity and inclusion.