In my effort to provide useful information to entrepreneurs and aspiring entrepreneurs, I share tons of interesting and helpful articles that I find around the web and think can help answer questions for my followers and help you all move your businesses forward. Often, people write asking me to elaborate on those articles or pieces of those articles so I am starting a series that will do just that. I may combine a few or leave a few out here and there, but I will cover the topics that people most often asked me to elaborate on.
I recently posted an article from RockthePost about common misconceptions people have about launching a new company. The next of those misconceptions that I want to tackle here is the idea that raising funding means you’re a success.
As it’s portrayed in the media, venture capital, startups, and entrepreneurship are all about glitz, glamour, and overnight riches. Because of this, and because of the size of some of the checks that venture capitalists might turn over to entrepreneurs, many new entrepreneurs operate under the misguided idea that raising venture capital money is the goal and that doing so means you’ve succeeded.
The reality, however, is that venture capital investment is not the end goal. By its very definition, it is an investment in the future success of the business. That means that when a VC writes you a check, she’s is saying that she sees success in your company’s future, not that you’re a success right now. If you’d already arrived, how would the investor make money by realizing gains on the increased value of your company?
When viewed in this light, it’s clear that raising venture investment is just one stepping stone on the road to success, and it’s a stepping stone that costs the entrepreneur power, ownership, and control.
Clearly, successfully raising venture capital is an accomplishment and I am not saying that it’s not. It’s great to get the validation of seasoned investors, to know that others believe in your vision and in your ability to achieve it, and to have enough money in the bank to keep the lights on for another month. If you’ve just recently gotten funding, congratulations! You absolutely deserve to celebrate. However, the party shouldn’t last too long because you haven’t succeeded yet. You have to get back to work. Your investors are going to hold you accountable for hitting your milestones and you’ve given up ownership, so you need to increase the value of your company by at least as much as the value of that cash infusion before running through that cash just to get back to where you were. The VC’s check being deposited into your business account does not mean it’s time to kick up your feet.
If you haven’t yet raised venture capital, take the time to step back and honestly evaluate why you’re pursuing the investment and whether or not it’s the best course of action for your business. This isn’t rocket science but BAD reasons to pursue venture capital funding are:
- You think it will make you look cool
- You want to be able to pay yourself a 6-figure salary for the same work you’re doing right now
- You think all startups are supposed to raise VC money
On the other hand, GOOD reasons to raise venture capital funding might include:
- You’re building your business in an industry with high startup costs and venture funding is the only way to get the necessary amount of money
- You’re experiencing very rapid growth and in order to maintain that momentum, you will need a quick infusion of a lot of cash
If you’re not sure what type of funding is best for your business, don’t chase venture capital just because it’s the most talked about. Less than 1% of all new businesses in the U.S. are funded by angel investors or venture capitalists and if it’s not the right type of investment for your company you’re going to regret chasing it. For a quick overview of the different types of funding available to new businesses, check out my previous post on just that.
The right type of funding is critical to the success of your business, so make sure you’re making a strategic decision about whether to pursue outside investment and what type of investment to pursue as opposed to making a vanity decision based on the perceived “street cred” of a venture investment. And, if you do raise venture capital, be sure to remember that raising that money means you just won a battle, not that you’ve already won the war. Congratulate yourself and then get back to work!
Once you’ve assessed what type of investment would be best for your business, let me know in the comments section below what your strategy is for attaining it.
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