Incblog for Entrepreneurs

Covering entrepreneurship and business start up questions for non-residents and US citizens.


Jan 24 2012

Why Should You NOT Seek Venture Capital?

by John Gordon | 14:01 GMT

Venture capitalists come with expectations that most small businesses cannot possibly meet. They expect that the company will be sold off within about five years, and that one in ten of their companies will score ten times their original investment, a few others will do ok, and most will fail outright. It is the companies that appear to the meet this lofty goal that is called a “startup.”


In a blog posting entitled “Companies that would do Best Without Venture Capital,” serial entrepreneur Dan Shapiro highlights the kinds of companies that should NOT seek venture capital, either because they will be rejected out of hand, or because the founder’s lives will become a living hell if they actually received VC investment.

VCs can be difficult people to find and to deal with. Like the general population, there are nice guys, mean guys, smart guys, not-so-smart guys, listeners, talkers and everything in between. If you take their money, they will be part of your business, and bring their expectations for you, your company and their level of involvement with them.

Venture capital is a source of funding that fuels rapid growth for startups. However, most new small businesses aren’t actually “startups,” and for these small businesses, seeking venture capital could end up being worse than going it alone or just getting investment money from bank loans, friends and family or even using credit cards.

If you decide to seek VC, you can expect it to take 6 to 12 months to get funding, assuming that you get a “yes” answer. During this time, the company’s management will be spending most of its time preparing for, or engaged in, pitches and presentations instead of actually producing product or managing the business. The rejection rate at a typical VC firm is over 99%, so it’s good not to let one’s hopes get too high at a presentation – it’s a tough racket to get into, and there is a lot of competition. On the VC’s side, there are plans flooding in all the time, most of which are not appropriate for any particular firm.

So, what are Dan’s reasons NOT to seek VC?

  1. If you think your new company will quickly be profitable. Well, if you can build a profitable business you probably don’t need VC money, and a VC already knows that you have a lot of leverage over him. With a lower rate of return on the investment, why bother?
  2. If your business expects “reasonable” margins and could double your investors’ money. A reasonable margin of 5% to 15% is not bad for a small business, especially in a tough economy, but for a startup it is not impressive at all. In order for the startup to cash out for 10 times the original investment (10x), the margins have to be fabulously high, like 50% t 90%. A great new disruptive product, or one that fills in a gap that the market previously didn’t know existed but now everyone wants, THIS produces the 10x that the VCs crave. Can your small business deliver this? Most likely no. If yes, then get your presentation ready and start dialing for dollars among the VCs. You must be a startup.
  3. VC’s are prejudiced against you, so you are wasting everyone’s time. Most everyone prefers people like themselves: after all, strangers are scary and unpredictable. VCs feel like this; they most of all prefer to invest in entrepreneurs that they have already funded. Much like any other exclusive club, once you are in it’s easy to stay in, even if it didn’t work out so well the first time. If you are an outsider, then the gates are closed to you unless you can either find a champion on the inside or you can prove beyond a shadow of a doubt that you belong inside.
  4. Odds, are, it is not the best use of your time. As discussed earlier, seeking funding takes 6 to 12 months, with no guarantee of success. In a small business environment, this is not only forever, the time can be better used to push the margin up over 10% and keep all the equity.
  5. Can you tolerate having a boss again? A startup with outside investors will have a board of directors overlooking the company’s management, and asking a lot of questions about how you are spending their money. Taking money out of the business for yourself is taking the investors’ money away, and you will have to justify it. You may also find yourself getting pushed to try things that you didn’t want to do, but when it is a big shareholder doing the pushing you may have no choice. Shareholders and board members also will put a lot of stress on you to perform, and to attend meetings that you may not like. They also have the power to fire you if they don’t like how you run things, or feel that someone they know can do a better job. In a small business you can be king, in a startup you can be rich.

If you are thinking of getting involved in a startup, it’s great to really be sure you can get past these issues. In fact, it is a rare person who can. If you are ready to make the jump, then it’s time to learn about your options and what your next step should be. Hint: you might want to check out our page on “Why Incorporate in Delaware?”



Leave a Comment