Wellington
The scramble that many startups make to secure venture capital funding may be detrimental to thebudding business's health.
In fact JohnMullins, writing in Havard Business Review's blogs , makes the point that the vast majority ofsuccessful entrepreneurs never take any venture capital (his italics). Mullins is anassociate professor at London Business School.
He gives examples from around the world, but the observations are almost undoubtedly true aboutNew Zealand too.
He quotes venture capital investor Fred Wilson of Union Square Ventures.
“Thefact is that the amount of money startups raise in their seed and Series A rounds is inverselycorrelated with success. Yes, I mean that. Less money raised leads to more success. That is the dataI stare at all the time.”
1. Pandering to VCs is a distraction.
Raising capital demands a lotof time and energy, when an entrepreneur is better off convincing prospective customers to buy –or perhaps learning why they won't.
2. Terms sheets and shareholder agreements can burden you.
To protecttheir own downside risk, investors will require what are often seen by entrepreneurs as onerousterms.
3. The advice that VCs give isn't always that good.
Unfortunately,entrepreneurs will be very likely obliged to follow the VC's sage 'advice'.
4. The stake you keep is small – and tends to get smaller
If moneyis raised later in the entrepreneurial journey, with customer traction in hand, the startup owner isin the driver's seat, and is much more likely to find a queue of investors outside their door.
5. The odds are against you
In the VC game the very few winners payfor the losers, so most VCs are playing a high-stakes all-or-nothing game. Such odds make itextremely questionable whether entrepreneurs should put their own business into such a play.
Mullins' take home point is that especially in the early stages, a startup business is muchbetter off being funded and grown entirely by its customers' cash.
Outside funding is not the be all and end all – though it can quite easily be the unintendedend of the startup.
The article also has some excellent comments (as you'd expect for a HBR type article which addfurther insights to Mullins' observations).