Five Reasons You Shouldn’t Raise Venture Capital — And One Reason You Should

Five Reasons You Shouldn’t Raise Venture Capital — And One Reason You Should


There seems to be a pervasive myth that venture capital is the pinnacle of building a company. The conventional “wisdom” is that young entrepreneurs should come up with an idea, write a business plan, go out and raise venture capital, and voila, they will strike it rich! Many young entrepreneurs think that if you can raise money through venture capital, you can make millions with no downside. Get a high valuation, pop some champagne, and then go home a success. But I can’t think of a worse way to start a business than with other people’s money.

Before you raise money from a stranger—whether it be an individual angel or a venture firm—you should heed some solemn advice. If any of these traits ring true to you, please stay far away from venture capital.

1. You Haven’t Put Your Own Money In

Building a new company should be about putting in absolutely everything. And by that, I mean not just sweat, not just blood, not just tears. I mean your own money, to the point that you are dangerously uncomfortable. You shouldn’t take a penny of someone else’s money until you have put every penny you can of your own money into your business. Do this not because it’s hard to raise venture capital, as is often heard, but because using your own resources first is the right thing to do; it aligns you with the risks of the business and the risks others are going to take to help you make your business a success.

2. You Haven’t Asked Your Friends And Family For Money

After you’ve put in everything you have, then go to your mom and dad, then your grandmother, then your friends. After that, ask anyone else to whom you will feel personally responsible for returning the money. Feel that weight on your shoulders. For me, there is nothing more frightening than losing my grandmother’s money. If her money is in my business, everyone else’s will be safe or I will be having regular night sweats. Only once you feel that kind of responsibility to the people nearest and dearest to you should you even consider going after venture capital.

3. You Don’t Like The Idea Of Sharing The Wealth

One of my first company’s was called Simpli, which I started while still in graduate school. We had some success with it right from the beginning, and we explored raising venture capital. At the same time, we considered a sale to a public company named NetZero. Ultimately, we decided that the sale was the right choice. But we had already courted venture capitalists—we hadn’t done a deal with them yet, but they had spent significant time investigating us, had given us a term sheet and final legal documents, and they were ready to invest. We didn’t take their money and sold the company instead. But rather than be disingenuous or greedy, we decided to give them shares in our company without investing. The venture capitalists made money without ever spending a dime. It was the right thing to do, and my team and I didn’t give it a second thought. Was it costly? Sure. But when we try to raise money for new ventures, it’s as easy as it was for the venture capitalists to make money in my first company.

4. You Desperately Need Capital

If your company is in desperate need of a capital infusion, you are far too late to be raising money. Desperate times call for ingenuity, not capital. If you have dug a cost hole, don’t fill it with cash. Instead, find a way out first, take a deep breath, and then figure out the next step and who to partner with to build your company. The best (and only) time to raise venture capital is when you aren’t desperate. Better yet, raise it when you don’t need it at all. eBay is a great example: They took about $5 million from Benchmark Capital when they were profitable. They didn’t have any need or use for the money; they just wanted to build value with the company and add some smart people to their team. So they took that $5 million, put it in the bank, and never used a penny of it. For Benchmark, that $5 million became worth over $2.5 billion. I guarantee you that if anyone from eBay wants to raise money now, they don’t have to work very hard. And it’s not just because they had a huge success story; it’s because they had the right mindset and cared about adding value.

5. You Aren’t Planning Big Returns For Your Investors

It’s a mistake to go out and raise venture capital until you know with certainty that you have a sustainable business and that you can build value for your investors. I personally don’t ever raise a penny until I understand the return profile of my investors. If they need a 3x, I make sure the company can deliver three cents for every penny invested; if it is a 10x, I make sure that I can give back at least 10 cents. You must think about returning money, not taking money. If your investors expect a 10-to-1 return, you must return 10-to-1, period, without exception. If you don’t think you can do it, get out of the startup game or don’t raise venture money. Plenty of companies have become successful without venture capital; it’s a mistake to think that you need it.

The Only Reason To Accept Venture Capital

Before the recession, leveraging yourself to the hilt seemed like the right thing to do. After all, it was easy to get cheap money. Now, we’ve seen the nasty side effects of this kind of financial nonsense. But the best reason to follow my advice isn’t financial at all.

Ultimately, building a company is about solving a problem, meeting a need, and creating lasting value. Businesses are all about people. The people you bring in to help your business thrive should be people who are on board with your mission, and with whom you can establish lasting relationships. Bringing an investor on board is the same thing as finding a CFO, or a spouse, for that matter. Ultimately, you are looking for a long-term partner. Find investors whose principles are aligned with yours, and with whom you can imagine working with again and again. If you have the right partner, and you know your company can return substantial value, then by all means, accept their money.



April 21, 2016 / by / in , , ,

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