Reasons to NOT take VC funding

This advice is pretty much dead on from my perspective:

From angel investors to a liquidity event, he told us the way things would happen. First round, second round, common stock, preferred stock, dilution etc. etc. He said that the goal for a founder is to retain between 2% and 10% of the company (f*** that). But the really fascinating part was the end of his talk when he discussed the possible exit strategies for a successful company. There were two options. First was an acquisition. Second was an IPO. That’s it. Two options. Nothing else.

Of course. The VCs need to make at least 10x their multiple to justify taking the risk in investing millions of dollars in your startup – but that’s their problem.

Taking VC means sleeping with the devil. There are times it can pay off (Youtube for example) but I think that about 70% of the time it’s better to do things yourself.

You could build a company that brings in millions a year in profit. Enough money to allow for amazing lifestyles for all of the founders and employees. They still wouldn’t be satisfied. They’re not interested in dividends.

You mean like Craigslist or Hotornot? Yes… There’s plenty of room to justify a startup that just makes solid profits for the founders.

I still think taking an angel round or a small amount of VC might be a good strategy for a lot of companies but the truth is that most VCs aren’t very smart.

It isn’t that they aren’t clever when it comes to business but they almost certainly won’t understand your market and won’t understand your technology.

If you find a VC that you really like try dating them fro a while. Get to know them. Check their backgrounds. Call their references. Just don’t jump in bed with them on the first date.

  1. Elliott Dahan

    Simply Shrinking the VC Model will not work when dealing with Startups

    When it comes to Seed Level Funding, The Problem is:
    1) The Seed Level Funding pool is shrinking (+/- $500K)
    2) Sourcing of Seed Level Candidates is haphazard at best. 3) Seed Level Funding is not economical in terms of ROI, Time, Overhead and Personnel Costs for Traditional VC Firms 4) The Seed Level Funding process is viewed by Funding Candidates as “Cautious” at best and “Adversarial” at worst – The Candidates genuflect and the VCs pontificate
    5) After-Funding oversight of the Candidate is not consistent or effective

    The Solution is Found in The Following Assumptions:
    1) Funding a Candidate to Viability is getting less expensive – open source software, cheaper hardware, ASP-based services to handle back office processes, Web 2.0 buzz . . . 2) The Funding Candidate is the “Customer” – simply spending less per investment while still maintaining the passive VC investment model will not work. Understand the Customer. Live in the Customer’s World.
    3) Seed Organizations want their Customers to succeed – incubators, local tech organizations, tech transfers, universities There is a Solution to the Problem / Opportunity of Seed Level Investing – The START Fund

  2. ChiliPepper

    I couldn’t agree with you more! We are a late stage “start up” – we’ve raised over $4MM from just angel investors, and I don’t mean “organized” angel groups, I mean angels you meet from personal introductions from people involved with our company. We are in our last round of funding and have had several discussions with VCs and VC types, including organized angel groups whom I believe to be very similar to VCs in the exits they look for, however they are less “punitive” in their offers. The VCs we talked to basically have said to us: “you do know that your current stockholders (before this round) will get squeezed out when you do a VC round and that you, the founders, will not have control of your company when it’s all said and done, don’t you?
    Our response: see you later Mr. Volture Capitalist. We’ve managed just fine without you till now and we have ZERO plans of squeezing out those who were there for us from the beginning. It’s not easy being an entrepreneur and the price we pay is high (personal/emotional/financial), but the rewards will be great, and it will feel even better knowing we did the right thing by our stockholders and ourselves.

  3. flavian

    Being an employee it’s nice to see companies standby their core staff. Did you perhaps consider outsourcing? This not only helps reduce your financial burden, but also dramatically improve you time-to-market which is key in the product business, really!

  4. flavian

    Not forgetting the fact of having your key people work on other core areas of your business and let equally qualified resources work on the heavylifting task of coding and testing.

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