For many entrepreneurs raising venture capital (VC) is what brings reality to the dream. With more money available, you can spend on sales & marketing people to get your product into the market as well as developing your product to the next level. In addition, raising VC marks you out as a leader in your category and this attracts other business opportunities such as distribution deals with large traditional businesses.
Raising venture capital at the right time can transform your business from a niche player to the perceived leader in a global market. This can turn your business into a “unicorn” in a few years. Peloton is a notable example. Funded in 2012, Peloton has raised a whopping total of $994.7M in funding over 8 rounds. The company went public in 2019 with a valuation of $8.1B.
VC funds are created by professional investors who manage money from pension funds, family offices and other source of long term finance. VC funds subscribe for shares in your business in exchange for enhanced financial rights, board representation and a right to be consulted about major business decisions.
VC drives risk taking
One of the key points about raising money from VC funds is that it doesn’t guarantee your success. The VC business model requires the partners who join your board to take risks, by driving an extremely high growth rate for example. This may or may not be what your business needs. Another important point to consider is that VC investors will insist that your company is sold or becomes a public company within a definite period, often seven years. If you are extremely confident that you will be able to sell your business at high value in the future, then VC is for you.
It makes sense to start the business by bootstrapping to create your MVP when uncertainty is very high. You can raise VC finance when you have good sales and marketing metrics and need to raise capital to go global like Peloton. Peloton raised only $400,000 of seed capital to develop the initial product and then raised $307,000 from about 300 backers on Kickstarter to pay for production tooling.
The only way is up
Once you have raised VC it is impossible to return to bootstrapping because the new VC investors will try to set the terms for any new money coming in to the business. When VCs invest they typically insist on “preference”, the right to the return of their capital before any other shareholder. This makes it unattractive for anyone else to invest in ordinary shares without the protection of “preference” rights.
VC firms are very experienced and sophisticated investors bringing strategic ideas to your board table. The best VCs will provide you with leadership, inspiration and experience to nurture your ambition. Their funding and contacts can open doors to growth and development that wouldn’t otherwise be possible. One of the most important factors in building your start-up is maintaining your own motivation. If you raise VC you will sometimes feel as though you work for the investors but you will have the resources to pursue your dream. Entrepreneurs raising VC want to commit 100%.
The late, great Kobe Bryant, as well as being an outstanding basketball player, was also a venture capitalist. His philosophy was always “Dedication sees dreams come true.”