Is Venture Funding Right for Your Company?
Before you pitch anyone, decide whether venture capital fits your business. A clear look at venture and its alternatives.
Many first-time founders assume that a serious startup raises venture capital. That is not true, and starting from that assumption leads to wasted months. The first question is not "how do I raise?" but "should I?"
What venture capital is built for
Venture investors fund a small number of companies hoping that a few become very large. Their business model needs outsized outcomes, which is why they look for companies that can grow quickly into big markets. A healthy, profitable business that grows steadily can be a great company and still not be a fit. (For the reasoning behind this, see why power laws shape venture capital.)
The alternatives
- Bootstrapping: funding growth from customer revenue and personal savings. You keep ownership and control, but growth may be slower.
- Friends and family: small amounts from people who know you. Put terms in writing; money from relatives can damage relationships if expectations are unclear.
- Debt and revenue-based financing: borrowing against revenue or assets. It does not cost ownership, but it has to be repaid, and it suits businesses with predictable income.
- Grants and competitions: non-dilutive money, mainly for certain sectors and research-driven companies.
- Angel and venture investors: equity investment for companies with large growth potential.
A simple test
Ask yourself three questions. Could this company plausibly become very large? Does it need outside money to reach the next major milestone? Am I willing to share ownership and some decisions with investors, and to aim for an exit in a number of years? If the honest answer to any of these is no, a different path may suit you better.
Your task for this module
Write one paragraph that explains why your company needs outside equity capital, and what you would do with it. If you cannot write it clearly, you are not ready to raise, and that is useful to know.