Venture Capital: A Few Things to Remember

We’ve written a few things recently about funding and venture capital (here and here). It often seems you can’t talk about startups without discussing how company X raised Y in round Z. Sometimes, this is a good way to gauge the future or current success of a startup – sometimes it is not. If you’re an entrepreneur this can be a crucial topic. Here are a few important things to consider when considering the issue of venture capital:

• VC is actually a small way entrepreneurs fund their companies. From 1981-2005 .11% of new companies received VC. In the hay day of VC investing, 1996-2000, this number was double that…at .22%.

• Not all VC-backed projects go public or become highly profitable. The nature of venture capital, and entrepreneurship to a degree, is that you are more likely to fail than to win big. One study found three out of four VC-backed entrepreneurs get no return while one in four receives an average of $5.8 million upon exit.

• Many companies do well without it. This follows logically from the fact that the 99.89% of companies who don’t receive VC funding aren’t drowning in failure and mediocrity but moreover we know that while VC-backed firms do have slightly lower failure rates and tend to grow more rapidly than non-VC-backed firms they aren’t more profitable at the time of exit. Anecdotally, all these companies made over $1 million in revenue and never took VC.

• VC funding can take control away from the entrepreneur and may or may not make your company more successful than other types of funding, depending on a variety of factors like the amount of funding needed. Noam Wasserman has more on this in his book.

While $70 million rounds are sexy and exciting, they’re not reality for most startups. Entrepreneurs should be carefully consider the amount, source, and timing of their fundraising. There isn’t a magic formula so entrepreneurs, as busy as they are, should invest some time into learning about funding options—the payoff is potentially very, very large.

Comments

[A Facebook User]

Ug! It's heyday, not hay day!