Double Take: Business Insider — Australia: This is why you should keep venture capital away from your startup as long as possible

In “This is why you should keep venture capital away from your startup as long as possible”, the author, Jack Goodman, offers some very practical & sobering advice:

We all love reading about unicorns — the Googles, Facebooks, Ubers, and, more locally, the Atlassians of the world. But remember, these are extreme outliers. They are lottery winners, and the worst thing you can do is model your business plan on a winning lottery ticket.

In the U.S. the statistics tell the story. In the NVCA 2017 Yearbook, with data provided by PitchBook, the following list is of those companies receiving venture capital investment for the first time:

• 2016: 2,340
• 2015: 3,333
• 2014: 3,739
• 2013: 3,586
• 2012: 3,340

Take a look at the list. Conventional wisdom says that Vcs only invest in 1%-2% of the deals that they see. Even taking into account some overlap in counting, I think it’s safe to say that at least 100,000 companies seek venture capital each year and more than 95,000 of them are unsuccessful.

Taking it one step further, the SBA estimates that there are 28.8 million small businesses in the U.S. It further estimates that roughly 1.0 million businesses are started each year and a like number cease operations.

Let’s recap what we’ve got:

• 28.8 million small businesses
• 100,000 small businesses seeking first-time venture capital investment
• 3,500 receive first-time venture capital investment
• about 0.01215277778% of all small businesses receive first-time venture capital investment in a given year
• the comparison of receiving venture capital to a lottery ticket is apt

Am I saying that you shouldn’t pursue venture capital? Not at all. Many businesses can deploy a venture capital investment to great benefit. Some businesses require the magnitude of a venture capital investment to have any chance of succeeding.

BUT as the article says, venture capital is not right for every entrepreneur, and yet many entrepreneurs for which it is not appropriate will go after it. As Jack Goodman points out, the popular press likes to write about the unicorns that have received venture capital leading a first-time entrepreneur to the belief that venture capital is the way to go.

Think about the consequences of that game plan. Time, not money, is an entrepreneur’s dearest resource. As almost every entrepreneur who has raised money will tell you, raising money is one of the most time-consuming, emotionally draining, and ego-deflating exercises that one can untertake. People will tell you that raising money is a full time job, and it is, and then some. And, oh-by-the-way, you’ve got a fragile enterprise fighting a survival and pursuit of growth battle every day. It needs over 100% of your attention as well.

The pursuit of venture capital over 6–9–12 months without success could doom your company. Think hard and long before you pursue that avenue of funding. If you haven’t already, build a mentor network with other entrepreneurs that are 12–24 months ahead of you. They’ve got the recent battle scars. They will share advice with you. Take it.

There is nothing wrong with a “crawl-walk-run” business strategy. With each step, you are removing risk that will make you more attractive to some investors. You are shielding your company from the risk of “VC-or-bust” mentality.

The typical push back I get when I discuss this topic with entrepreneurs is that “the window of opportunity” is closing. In my over-30 years of investing in this space and working with thousands of companies, I’d guess that less than ten were actually exposed to that risk.

If your company provides a compelling value to your customers, you have the start of a real business. Most customers could care less about technology as long as your solution solves a real problem better than anyone else.