Is pursing venture capital a good or bad idea?
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Today’s question comes from Kristin. When should you pursue venture capital and when should you avoid it?
I’ve seen a lot of articles recently on this very topic and startups are fighting against the tide of having any type of investment in their business. There are two sides: one side believes that you should never take capital because if you can’t fund the business through sales then you shouldn’t be building it and one side believes you can’t build a successful business without outside funding.
And they are both right. However, just because you can raise funding doesn’t mean you should.
Startup progression
- Idea validation. Most successful startups begin with a validated idea.
- MVP. The next step is to build a small MVP where you spend very little money to show people how you are solving the main problem your business is addressing.
- Launch. Once you launch, it’s about gathering user feedback and ensuring there’s a market for your product.
- Fundraising decision. Post-launch, your next step is to figure out how you are going to continue to build and iterate on your product, which comes down to figure out where the money will come from.
Factors in making the fundraising decision
Is there a revenue model built into the business yet? If you are building a startup that doesn’t have a realistic revenue model built into it, then you will likely need to take outside capital (for example, social media startups). If you don’t have money coming in out of the gate then you will need to raise capital otherwise your business will not go anywhere.
You have revenue coming in — enough to work on it full-time. This is a gray area. If this company wants to grow faster and the revenue is not enough for exponential growth, then they may want to raise capital to hire a bigger team. They can choose to grow at a slower rate by reinvesting the revenue in the business or they can grow faster by taking outside investments.
“If you have a revenue model built in to your business from the beginning, then raising outside capital is a choice, not a requirement.”
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