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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