Oct
24
Every person involved in consumer tech startups that I’ve spoken to over the last two years has regretted getting venture capital financing. That includes CEO’s of companies who have received $10’s of millions in venture funding and folks who have been involved in the pitch and been a part of the company post funding. Some of these people I know have started new businesses with the explicit goal of not taking any venture money and doing it themselves. Taking action like this speaks volumes about their previous experience.
I don’t know anyone who is happy about taking VC money.
My personal aversion to VC financing focuses on a few specific things:
- The liquidation preferences. Even though a VC owns 20% of your stock, there are usually terms in the deal that say that if you sell for say $20 million, the VC’s take the first X million before you get paid. That could be $19.9 million. Or it could be more which blocks any potential exit.
- The “knock it out of the park or go home” problem. When a VC invests, they invest in 20 companies and 19 of those are expected to fail. The 20th is expected to be the next Google or MySpace i.e. to sell for over $500 million or to IPO and generate similar amounts of cash for investors. When you take money from a VC, you are put under enormous pressure to “knock it out of the park” and you may be pushed into taking risks you wouldn’t normally take. These risks will see your business either succeeding bigtime or failing bigtime.
- The loss of control. No matter how the deal is structured (and this is from a friend who’s taken money), it’s tough to say no to someone who has just written you a check for $6 million.
- The reporting burden. Running a company is time intensive already. Now you have to provide regular reports that may be largely academic when it comes to your long term growth.
- The loss of being nimble. When you sell a business plan to an investor, and they invest, you have committed to a specific path. If the competitive landscape changes or a new opportunity presents itself, you may not have the ability to radically change your business quickly to respond to this new threat or opportunity.
Depending on the terms of the deal you cut, you may be very surprised at how little you walk away with after a liquidity event. The MySpace founders made around $5 million each from a $550 million sale of their company.
I’ve started No VC Required in the hope of starting a conversation about the benefits of not taking money from VC’s and how you might not actually need to take VC money.
Mark Maunder
