The Pros And Cons Of Venture Capital

Are you in the fundraising process and wondering what are the pros and cons of venture capital? Can there really be any downsides of raising large amounts of venture capital?

Landing big-name VCs and their tens of millions of dollars in funding for your startup is the holy grail for many entrepreneurs. There are clearly significant advantages of going this route. Yet, for every pro, there can be a con. What’s important is knowing what they are, and balancing that in your business. 

Should you bootstrap? Self-fund? Stick with angel investors and friends and family? Or is VC money for you? Let’s find out…

The Pros Of Accepting Venture Capital Money

1. The Ability To Go Fast

One of the best benefits and reasons to go after venture capital is the ability to go fast. Timing is incredibly important as a startup.

If you are on the crest of the wave you need to make the most of it. Go too slow and there will be plenty of other better-funded giants trying to steal the space you created or soak up the market with similar technology and their position.

If speed is important, and it usually is, then raising VC money can be for you.

2. Buy Up The Market

When wondering about the pros and cons of venture capital one of the great tools that have enabled recent startups to get so big, so fast.

It’s even enabled them to go beyond disrupting markets to force new regulations and ways of doing things. Just look at Uber and Airbnb. 

Having the capital means you can go broad and tackle multiple markets faster than the competition. It also means that at least temporarily you can afford to undercut everyone else with a loss leader. Just make sure you have a plan for closing this gap. One that doesn’t mean turning off all of the customers you’ve gained. 

At this stage in your business, you may also buy up and acquire the competition and perhaps include that in your roadmap or business plan. Assimilate their talent and infrastructure and eliminate competitors. Build an even larger company by consolidating.

3. You Don’t Have To Die Right Before You Make It

The greatest risk of startup failure is normally right when things are really taking off. Your best month in orders can also be the most deadly in surviving financially. You have to have the capital to fill orders and provide an excellent user experience while waiting to get paid.

Having substantial capital in your accounts can ensure you can cover these gaps comfortably and enjoy your success.

4. Attract & Hire A Great Team

Always remember as part of the pros and cons of venture capital that winning in business is all about your team. The company with the best team wins. This can be a challenge for lean startups. You can have a hard time selling experienced startup talent to come work with you. You can struggle to make payroll. 

In contrast, VC funded startups give the best talent the confidence that they can come on board and do their best work. You’ll be around long enough to complete the mission, and they can count on getting paid for their work.

5. Gaining Elite Backers & Shareholders

When you give equity to investors they automatically become invested in your success. They had to love you and your business idea to invest in the first place. Now their fortunes are tied to yours. They’ll be brand ambassadors, key connections, and influencers who help you succeed.

If you want a wealthy all-star team working to make your startup be a big hit every day, raise money from VCs.

Remember that storytelling plays a key role in fundraising. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

The Cons Of Raising Venture Capital Money

1. Distraction

Keep in mind when thinking about the pros and cons of venture capital that fundraising is incredibly mind and time-consuming. 50% of your time or more can get caught up in fundraising efforts.

From gathering data and designing pitch decks to flying to meetings, and fielding due diligence, you may have very little energy and time left to actually work on the business itself.

The percentage of your time and brain spent on this may decrease after several fundraising rounds, but it will never go away. Once you start raising you never stop.

You will always be needing to learn new things just for this part of your venture. Check out this fundraising training for what you need to know to raise successfully.

2. You’re Committing To An Exit

Many entrepreneurs don’t ever plan on selling their businesses when they start. Most think it is still too early to sell when they start fielding inbound M&A offers.

However, when you take VC money, you are committing to an exit. You are committing to either sell your company or go public. Be very aware of this.

I talk about this more in detail in the video below which is all about the pros and cons of venture capital.

3. Losing Control

When you exchange equity ownership for money, you are changing the DNA of your company. This might not sound like a big deal yet.

However, it means you are fundamentally shifting the company to a different mission. The problem you are solving has now changed.

It’s not what’s best for customers. It’s what’s best for the shareholders. That means an exit. One that will give them a big payout. Their timeline for achieving that can be much different from yours.

4. Attracting The Wrong People

When you are raising and securing venture capital you can also attract the wrong people around your business. Just like when you win the lottery or become famous and all of those mystery relatives come crawling out of every crack.

When you raise big money some people will want to piggyback on that as investors. Others will want to work for you. Or they’ll want to become advisors for a slice of equity.

Make sure these people are really aligned with where you want to go, or they can really derail you.

5. A Much Smaller Piece Of A Big Pie

Venture capital can set your startup on the trajectory to being worth billions of dollars. That’s a fantastic achievement. Just remember you are now only going to own a very small slice of that.

If everything goes south on you, you could still walk away with nothing in an exit. Even if your company is valued at $100M or $1B dollars. 

FULL TRANSCRIPTION OF THE VIDEO:

This is Alejandro Cremades, and today we’re going to be talking about the pros and cons of raising venture capital. With that being said, today, we’re going to discuss why should you except venture capital money or why should you not accept venture capital money? There’s always going to be an upside and a downside. So, with that being said, let’s get into it.

In terms of the pros, the most important one, obviously, is going to be that you are going to be able to go much faster. Rather than bootstrapping and then risking it and maybe you’re going to make it or maybe not, with venture capital, you and just get that money, give yourself 18 to 24 months of runway, and you can go really fast and really do all the different things you would not do normally if you’re bootstrapping, meaning that you’re using money that you’re generating from sales in order to continue pushing the business. So, definitely, going faster is one of the pros.

The next pro is being able to buy up the market. For example, if you’re operating a platform or a marketplace where you have the supply and the demand, you’re able to go out and spend a lot in marketing; you’re able to get mindshare and market share from the other competitors that perhaps don’t have as much fuel in order to do advertising and get the word out there. 

Marketplaces where there’s a winners-take-all, for example, an Uber or maybe like another one like Airbnb, having that mindshare and that real big market share is going to give you an edge toward any of your competitors. This is one of the other pros of having venture capital behind you.

The next is that you don’t have to die before you make it. This is one of the critical pieces to understand when we’re talking about the pros of getting venture capital money. Rather than just going like month-to-month, paycheck-to-paycheck, or whatever you want to call it. When you have venture capital, you can go super-fast. You’re not going to be relying on certain customers to come through on the account receivables, to make sense. You’re just going to go out there with whatever money you have, and you’re going to go and execute on the roadmap that you have presented to your investors. That’s another one of the pros. 

The next advantage here is that you are going to be able to attract and potentially retain great talent. When you’re able to get venture capital money from talking to your firms, essentially, you’re sending a signal to the market that you’re in a position of strength, that things are working out, and that’s why sophisticated investors are backing your business. 

One of the things about the top-tier venture capital firms is that they have platforms. They have platforms where they literally plant those platforms into your business and help you to speed things up in a way that you didn’t know was there. 

Basically, those platforms have support on the HR side, so you need to recruit. Let’s say you need a CMO, or you need a CFO. Essentially, those firms can go into their networks and introduce you to the right candidates. I think that not only having the money at your disposal to be able to go and hire people is a great thing. But then also, the networks that you’re going to be able to get from those VCs are also going to be fantastic.

The next is that you’re going to be able to have great, great networks. When you’re raising money from venture capitals, and perhaps, you’re sending them the pitch deck, you’re getting them aligned, and by the way, you have a great pitch deck template below, which I recommend that you download. 

Essentially, you’ve got to turn it around when you’re raising money. Don’t look at the money itself, but look at who is giving you the money. What kind of networks do they have behind them, and how can you leverage those networks in order to unlock certain milestones to get you faster to where you want to be in the next 18 to 24 months of execution?

With that being said, I find that, again, having certain investors that have those networks can help you unlock those milestones, getting the top-tier talent as we discussed before, and giving you access to additional distribution to business development deals, and then great partnerships. 

Then, of course, to subsequent rounds of financing where they can introduce you to other investors, and then to potential acquirers that they know, that they can just lift up the phone, tell them how exciting your business is, and then you get enough on the table to acquire your business.

Now, in terms of the disadvantages or the cons when it comes to raising money. The first one is, obviously, distraction. A distraction is going to be a really key thing when you’re raising money. It’s funny because investors still are expecting you to continue to execute, to continue to have great traction. 

But when you are putting your attention away and putting it on fundraising, which is an emotional rollercoaster, it’s like doing sales but in a whole other level. Essentially, you’re going to get your eyes off the ball, and you’re going to put them on trying to get that money to get to the next level.

But, I think that if you do a good job, for example, like creating a CRM and making sure that you have the strategy on how you’re going to be following up with people, how you’re going to get them excited. Maybe there’s a way for you to balance that distraction and getting out there and pitching your business is really going to bring to the table.

The next con or disadvantage is that you are committing to an exit. The minute that you’re taking venture capital money in, you’re making them a promise that eventually, you’re going to give them returns, whether it’s in the form of an acquisition, doing an IPO, or whatever that is, you’re essentially telling them that you’re going to go really fast and you’re going to go very fast, and then one day you’re going to give them returns on the investment that they’re giving you. 

Typically, when a venture capital firm invests in your business, what they’re really looking to obtain in return is at least 10x on the investment that they’re putting on you because their rule of thumb is that one-third of the investments of that venture capital firm is going to go out of business. Another third is going to potentially break even and maybe make some money. Then, the last third is going to provide their returns to cover all the losses and provide the returns to their own investors, which are the limited partners.

The next disadvantage at the end of the day is losing control. So rather than having 100% of your business, now you’re going to be giving away equity, you’re going to be giving away seats on your board, so they’re going to be making votes, and they’re going to have a say on the execution and on the strategy of your business. The problem with that is that the more that you raise, the less control that you have, the less equity that you hold, and they can eventually kick you out of the business if you’re not performing well.

So, be very careful with that, and also, don’t overdilute yourself, meaning don’t give too much equity on each financing round because the rule of thumb is that you do not dilute yourself by more than 20% per round of financing. 

The next disadvantage is attracting the wrong people. Let’s face it; there’s the good, the bad, and the ugly. It’s not about the firm that you’re working with; it’s about the partner that you’re working with. At the end of the day, if you’re attracting the wrong candidate to sit on your board or perhaps to make an investment in your business, not only can they get you out of that company, they can also destroy financial rounds. They can also destroy potential acquisitions. 

I’ve seen the real ugly part of it, and what I can tell you is, one question that you should always ask the venture capital firm that is going to be investing or looking at making an investment in your business is, ask them a very simple question: “Would you be open to making an introduction to a portfolio company founder that has failed?” 

Essentially, what you’re going to do then is, you’re going to speak with that other entrepreneur that failed, that received an investment from that investor that you’re speaking with and ask them, “How did that investor behave during the tough times?” 

Because, at the end of the day, let’s face it, building and scaling a business is not a straight line. You’re going to have the ups and the downs. Whenever you are on the downs, you want to make sure that investor that you’re onboarding is going to step it up and help you to continue executing along the way.

The next disadvantage or the next con is that you are going to have a smaller piece of the pie. When you’re taking money in, you are telling that investor that rather than maybe being at a $50 million valuation, in which they’re making the investment today, you’re promising them that potentially you’re going to get to a $500 million acquisition. So, you are increasing your chances of risk; you’re making it much riskier for you.

Then, also, you are giving those expectations to the VC, and at the end of the day, you never know the outcome. In many, many cases and most cases, venture-backed companies founders don’t end up making any returns, so for that reason, you’ve got to be super careful and make sure that you’ve got the numbers right, and that you understand what you’re getting into and what is going to be your own potential exit. Not just the exit of the company itself, but you need to do your own numbers so that you know if you’re taking that money in if it’s going to justify for you and your outcome whenever there is an acquisition on the business itself.

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