Should I Raise Venture Capital?

The short answer is NOT if you can help it! Having raised $50M in angel and venture capital personally, I recommend raising venture funding only as a last resort, and only if the type of business you are building absolutely demands it. Keep in mind that most startup businesses should not need venture capital and will not have the characteristics needed to raise it. 

When initially thinking of starting a business, many people want to figure out how to make money to support themselves and their families while doing it. They have heard of venture capital, and it seems, on the surface, like a great solution to the problem of getting paid while building your startup. The trouble is that:

• Only on the order of 0.05% of new companies succeed in raising venture capital.
• Venture capital is very costly funding and you need a truly great opportunity and plan to justify the cost.
• Venture capital comes with all sorts of strings attached and effectively constrains the way your company can grow.  

What Kinds of Startups Can Raise Venture Funding?

The short answer is high potential startups. High potential startups are targeting big markets with transformative solutions to powerful unmet needs. Such startups sometimes require substantial funding to build and market their products, thus justifying the high cost of venture capital.

A critical element is that venture-backable companies have some scale element to them. The plan is for them to rapidly grow into big businesses earning millions in revenue with the potential to be highly profitable. That scale element is often, but not always, based on some sort of technology or scientific breakthrough.

The following are typical examples of businesses that do NOT have that scale element and rapid growth potential and, therefore, cannot realistically raise venture capital:

• Service businesses like consulting, graphic design, real estate, construction trades, writing, marketing, auto repair, landscaping
• Local businesses such as restaurants and retailers
• Franchise businesses

Does That Mean You Should Not Launch One of These Businesses?

No. In fact, these types of businesses may be an excellent fit for achieving your goals. Sometimes called lifestyle businesses, they are often set up and run by their founders to sustain a particular income and lifestyle. I have several friends who have built such businesses and are very happy with the liberty and freedom of serving their customers and being their own bosses.

What If You Are Building a High Potential Business?

Then venture capital may be for you.

Just be aware that venture capitalists have needs, too.  They have fund lifetimes, return goals, and control needs that will shape the path a venture-backed startup will take.  For example, once you take venture capital, you will necessarily be building your company towards a liquidity event in three to eight years. The pressure to build quickly will be enormous and you will have ceded important elements of control to your investors.

Personally, I love the challenge of creating high potential businesses and have collaborated closely with some great venture capitalists along the way. This blog will be focusing on what I have learned as a venture-backed CEO. Before continuing, I just wanted to acknowledge that there are many wonderful paths to build businesses without venture capital, and there is much to commend those alternatives from a risk and reward perspective.

Please ask questions in the comments and I will try to address them.