Is VC investment right for your startup?
Venture backed startups are cool these days. It seems like everyone wants to raise money to fund their ideas. But there is a lot more to Venture Capital financing than simply getting an investment to build a company.
Let’s just look at it from the founder’s point of view for now. Imagine that your business is already a business that VCs want to invest it. You need to take some time and think about exactly what kind of business and life you want to have over the next three to five years.
Although there are many things that you need to consider around how to fund your business, below are the three main things you will need to think about when deciding if you want to go the VC route.
When founders raise money from VCs they are giving away a piece of their company in return for investment, advice, connections etc.
Fred Wilson recently wrote a blog post about valuations that details if everything goes well with a startup and they have a $1 billion exit, how much of the company would the founders and investors own. In his example, after seven rounds, the founders own 21% and the investors own 79% of the company.
I think what is important to note here is that this is neither a positive or negative split. It really depends on the size of the pie. Meaning, how much money will you business IPO or get acquired for? The likeliness of a $1 billion outcome is low. Not impossible, though. Shoot for the stars.
You have to ask yourself, is this what I want? Do I want to share ownership of company?
Many founders realize that if they have the right timing for their product, there is a market opportunity to build a big company fast. If you were to invest your own money, money from friends and family or reinvest retained earnings, the company will grow significantly slower and may not ever have the opportunity to really compete if other companies are able to build up their business much faster.
Another challenge with sharing equity is that the larger the equity stake investors have the smaller the equity portion founders have. That means you will need to really trust the investors that you have brought onto your board. When the going gets tough and you don’t have a lot of control over the company you may be forced out.
The good news is that investors cannot take away the equity you already own. Typically even founders must vest their equity. (Vesting means that you earn your stock options over time, usually four years.)
So the question is: do you want to share equity in your company
VC backed startups have to grow fast. There really is no point in raising venture money to use for a rainy day.
Growing your startup fast does not mean that from day one you are hiring tons of people. It means that you are leveraging the investor’s money to be able to test out different products/features/market fit/sales and marketing tactics/etc.
But it does mean that once you have those pieces in place and a repeatable customer acquisition channels that are cost effective, you will need to step on the gas to start acquiring customers as fast as possible.
When you have hit this stage of repeatable customer acquisition is the typical phase where startups grow really fast. What can happen here is that you need to evaluate the business not mostly from a product perspective like before but from the business as a whole perspective.
How much do you need to spend on recruiters to get the sale and marketing team into place quickly?
How much training do these team members need?
Can you hire enough people fast enough to support onboarding your new customers?
Will you need to build out more product or features to support fast growth?
What about company culture? How can you maintain the working environment with so many new faces being added?
These are just a few of the areas that you will need to focus on. And everything will be moving very fast.
I remember a time when I was working at a Series B company and we had hit that growth stage. We did new hire orientations on Mondays. And many Mondays we had 10 new people starting on various teams. It was exciting but we were bursting at the seams.
While we were waiting for our new office to be built out we had to rent a few different coworking spaces for new employees.
It was chaotic. But there is a certain adrenaline rush you get with the excitement of building and growing.
Is hyperspeed growth for you?
Investors invest to get a return. It is just that simple. That means that you will need to build a company that can exit.
There are really only three types of exits:
IPO - This entails building a business so big that the general public will want to buy shares. This will be the most amount of work and take the longest amount of time.
Acquisition - This can be a range of outcomes depending on the business. The worst case scenario is an aquihire, where you have spent all or most of the investment but cannot go any further. Another company “buys” your employees. A moderate to great outcome is that you build out a product that a larger company wants. You go into talks with them and sell the company for an agreed upon price.
Dissolution - This is probably the worst outcome in terms of cash. Essentially, you didn’t get product market fit or you were unable to build out enough of the business to get that far on the cash you raised and you are not able to raise anymore money. Everyone walks away.
Do you want to build a company that you will eventually have to exit? Or will the business be your baby that you could never give up?
Prospective investors will always ask about an exit. It is not because they are thinking about investing and then cashing out right away but because investing is their business. They need to make sure that an exit is in the cards.
Building a business with the intentions of selling it is not a bad thing. That is why there are serial entrepreneurs. They create, build, sell and move on.
If you have think that you are ready to start looking to raise from investors for your early stage tech startup check out my Masterclass: The Only 10 Slides You Need In Your VC Pitch Deck + Financial Model Template.