Which is more likely to happen? You come up with a great business concept, secure Venture Capital funding and your startup goes IPO, making you millions – or you get struck by lightning? Unfortunately the answer is that you’re more likely to get struck by lightning which, according to the National Weather Service has odds of 5,000 to 1. Should you ever consider venture capital? Companies requiring a significant infusion of cash to get started may require this type of funding, and could thus consider it as long as the founders are aware of the long shot odds. If you’re starting up a truly capital intensive company, perhaps a biotech, medical device, or energy related company, you might be forced to consider Venture Capital. But if you plan on creating a small startup service company, a new accounting firm, consulting practice, training firm, video production company, cleaning services firm, boutique software company, or any of the thousands of opportunities that aren’t truly capital intensive, I’d suggest you stay as far away from the vulture capitalists as possible. There are far better financing alternatives which offer greater control over your destiny.
Are you thinking of creating a software company which expects to hit $10 Million in sales in three years – don’t bother. Either you’ll miss your targets and get booted and diluted or the resulting flip will yield you a fraction of what you would receive on your own. That’s why Venture Capital is a ludicrous bet for most entrepreneurs. But worse than that, it’s also a pressure cooker and you’re almost guaranteed that you will lose control. Not only will you have the dubious honor of giving away a huge portion of your company, you’ll also have a VC backed board breathing down your neck. They will be watching where and how you spend your money while they fly first class and wine and dine in four star establishments at your expense. When they visit you, chances are they will be flying first class and staying at a top notch hotel. Don’t be surprised if your VC backers drop $10,000 or $15,000 of your money to attend one of your board meetings. Then again, is it your money or their money? And pragmatically which scenario would be better for the VC’s – exceeding the proposed massive sales targets or having you miss your early targets and then taking control of your company – dirt cheap – then exceeding the sales targets?
Here is some great advice from Peter Ireland from his Smart Startup Guide (www.antiventurecapital.com):
• First, chasing outside capital is by far the most unpleasant and drawn-out ordeal experienced by entrepreneurs. It always seems to take “forever”. (For this reason, veteran entrepreneurs try to avoid raising outside capital at all costs.)
• Second, based on the fact that your typical early stage Venture Capital firm invests in only one company out of every 500 business plans it reviews, your odds of succeeding are only 1:500.
• Third, in about 50% of instances where an early stage company actually succeeds in raising Venture Capital, the founder is fired within the first year and kisses his or her stock good-bye.
Perhaps this is merely a buyer beware blog entry. I can’t say that every VC has an agenda, other than massive financial returns, just that their money is extremely expensive and comes with great risk. Bootstrapping is a far better alternative for most startup companies, and perhaps, if you’re thinking of a startup that requires a large capital infusion and must then consider venture capital, you should think of a different business venture or a better funding alternative. Are there any circumstances when venture capital is clearly a better alternative? Certainly – they are clearly better than a loan shark and possibly better than a pawn shop which might charge 10% interest per month!
