In the world of entrepreneurship, raising venture capital money is often looked at as a success in and of itself. It’s the glitziest form of investment that gets the most attention and most play in the press because many VCs have become mini celebrities and the dollar amounts invested can be quite large.
However, venture investment isn’t right for the vast majority of companies and many brand new entrepreneurs have a lot of misconceptions that will hold them back as they attempt to build their new businesses.
The first misconception is that an unknown entrepreneur with no track-record of building successful businesses, no traction – or sometimes not even a product yet, and no VC connections is going to be able to easily get funding if their idea is good enough. Has this ever happened? Of course. Is it likely to happen? Definitely not. Venture capitalists don’t hand out cash – or often even take a meeting with you – if there is no reason to believe you’ll succeed because they don’t know you, you don’t have a track record, and you can’t prove demand for your product because most new businesses fail.
Another common misconception is that you will still be in control of your business after taking on a VC investment. When you take an equity investment from a VC you’ve given up ownership and you’ve usually also given up board seats. This means you’re no longer in complete control. Additionally, you’ve committed to striving for a quick exit, whether or not that would have been your management strategy if you didn’t take on the money. You’re now beholden to your investors instead of a freedom-filled entrepreneur.
The third misconception is that VCs will be interested in anything less than exponential growth. You may have a great idea for a business that will experience modest growth and make great money for you, but that’s not a business a VC will be interested. VCs invest in bunches of companies and most of them fail, so they need their winners to carry the returns for their whole fund. That means that if your business doesn’t present the possibility for insanely rapid growth and 100x returns, you’re not looking in the right place if you’re looking for VC money.
Finally, the misconception I find most frustrating, is the idea that you can start looking for investment today and have a check by the end of the month. Raising venture capital is a long process that takes a lot of time and a lot of effort. You’re typically looking at an absolute minimum of 4 to 6 months to get an investment, usually longer. If you’re going to seek out venture capital you need to do so far in advance of when you need the cash. You can’t wait until the last minute and expect a VC to swoop in and save you without any time for evaluation and due diligence on his end.
Don’t be discouraged though. Just because VC might not be the right source of capital for your startup does not mean your business dreams are dead in the water. There are a number of other sources of capital that can get you going. Take a look back at my old funding sources video to get an idea of what might be a better fit for you and your business.
Now I want to hear from you. What other common misconceptions about raising venture capital have you heard? How did you fund your business? What was the toughest part of raising capital for you and how did you overcome it? Share your stories with us in the comments section below.
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