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10 Reasons Why Taking VC Money Might Be A Bad Idea For Your Startup

What is one reason why taking VC money to build your startup might be a bad idea for your business?

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1. Fatal DistractionsSETH TALBOTT

“Pursuing VC money takes a huge amount of time and can be a fatal distraction for startups that are already pressed for time and resources. Find a couple of people who live in the VC space and get their feedback about how ready you are, what it will take and if it’s even worth your time before you put a ton of time into getting your pitch materials ready.”

– SETH TALBOTTCEO and Startup Advisor

 

2. Unnecessary DilutionDAVID EHRENBERG

“There are a lot of downsides to raising investment capital. At the top of the list — dilution. The sooner you sell equity, the more it will cost you in the long run through the loss of dilution and leverage. Don’t just think about how current terms would affect your equity position; calculate how much you will get diluted in future rounds. If your company performs well, dilution will be offset by your valuation increase. But to protect yourself, you always want to try to negotiate your best dilution terms. If raising VC funds is the best option for you at this time, focus on milestone raises — raising only as much as you need to get to the next milestone. Doing this will at least prevent unnecessary dilution and allow you to get the highest possible value for each round.”

– DAVID EHRENBERGEarly Growth Financial Services

 

3. Lifestyle BusinessMatt Mickiewicz

“If you’re building a lifestyle business, rather than something you truly and genuinely plan to grow into a massive business, then you should not raise VC money. Investors want to see a massive vision for your company and huge year-over-year growth for sustained periods of time. If you’re building a company for personal income rather than a big capital gain, don’t raise money.”

– MATT MICKIEWICZHired

 

4. Bad TimingKAYVON OLOMI

“If you are in a position to where you need to take on venture capital, be sure that the timing is right. Many times, you see young startups taking on venture capital too early and it ends up hurting their vision and direction more than helping them. Be sure to have a solid foundation, strategy and model that is executable prior to taking on venture capital. Venture capital should be purely used as rocket fuel, not as a way to build the rocket. Build your product first, then power it with venture capital.”

– KAYVON OLOMIAppTank

 

5. Less ControlANDREW SCHRAGE

“You may lose a portion of the control over the direction of your business when you take VC money. Venture capitalists are typically not silent partners by nature. They often want to have a say in how your business expands and progresses. If you’re an alpha type, that can be a difficult pill to swallow.”

– ANDREW SCHRAGEMoney Crashers Personal Finance

 

6. Personal DisciplineEmerson Spartz

“Taking VC money can be a great way to kick your company into the next gear, but it’s also a dangerous road. Bootstrapping forces you to ruthlessly prioritize your spending and cut away unnecessary expenses, but having a pool of venture money forces you to have much more personal discipline when it comes to spending money.”

– EMERSON SPARTZSpartz

 

7. Unexpected AccountabilityMITCH GORDON

“There’s a lot of debate about taking government funding. There are good arguments both ways, but this point is inarguable: An injection of cash from a VC makes accountability more difficult. Money in the bank changes how you measure the bottom line. It makes net income (or, more likely at a startup, net loss) a less meaningful number. When companies have money, they spend it. That’s not always a good thing. Some startups are meant to grow at a more gradual pace. The mixed blessing of funding is scaling quickly, but this also means you may run out of money faster. By definition, you’re growing at an unsustainable rate. The decision-making and cultural impact of cash infusion has positive and negative consequences. Startups don’t always have their eyes open to the impact of funding.”

– MITCH GORDONGo Overseas

 

8. More ComplicationsLIAM MARTIN

“Any investment you make will distract you, slow down your business and will generally complicate your business. You can build anything for dollars, and I have dozens of examples of companies who, with a few thousand dollars, have started income-generating products in a few months. The argument that you need an investment to start is moot. Once you actually start your company, you should generally be trying to hit the following numbers: Monthly churn below 5 percent (ideally less than 2 percent), 10 to 20 percent month-over-month growth and proven advertising funnels that get your invested dollars back in less than 12 months. Once you hit those numbers, go to investors — or just wait, and they’ll probably come to you.”

– LIAM MARTINStaff.com

 

9. Forced TimelinesCHUCK COHN, Varsity Tutors

“Once you take VC money, the clock starts ticking on time until exit. Businesses should wait until they have a strong foundation before accepting capital. That foundation usually takes the form of a developed team and strategy that is capable of quickly and intelligently investing the funding you have received. If you take the money too early, you are likely to waste it and suffer unnecessary dilution.”

– CHUCK COHNVarsity Tutors

 

10. Liquidation PreferenceARAH SCHUPP, UniversityParent

“One of the scariest terms in a VC term sheet can be the liquidation preference. In Brad Feld’s words, this “determines how the pie is shared on a liquidity event.” If the company has an exit, often the VC makes out with a much bigger share because of how this term is drafted, especially if multiple rounds of financing are raised. Oftentimes, to get a 10x return, the company will have to raise more than a round of financing to hit big enough targets to create a meaningful exit for the VC. Make sure to pay close attention to how this is crafted in your term sheet.”

– SARAH SCHUPPUniversityParent

 

Originally published by StartupCollective.

 

Photo Credits

James Cohen | StartupCollective

Author : Young Entrepreneur Council

The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world's most promising young entrepreneurs. In partnership with Citi, YEC recently launched StartupCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.

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