Venture Capital Isn’t Worth the Trouble
Entrepreneurs should stop chasing after venture capital and fund themselves. Pro or con?
Read the debate by guest columnists George Gallegos and Jon Kondo and watch the video with Bloomberg private equity analyst Jill Lewandosky
Pro: Hello? Solyndra
It would probably surprise most technology executives to hear that the majority of startup companies never receive venture capital funding. In fact, I recently read that not even 1 percent of all startups receive outside funding. Dell, for example, started privately with less than $1,000. The benefits of financial independence often outweigh the loss of business control that VC funding can create.
I’ve seen plenty of startups wasting huge sums of money as a result of shoddy management, poor execution, or a business plan that never had a chance. Solyndra, a Bay Area producer of industrial solar panels, is the latest high-profile example of this. The company blew through almost $1 billion in investor money and another $535 million in stimulus money from the government. Not only did 1,100 employees lose their jobs but also the bankruptcy has been a black eye for the clean-energy stimulus program for investing in what analysts were calling an already shaky company.
On the flipside, the benefits of running your business in a cash-flow-positive manner are numerous. Most important, you are beholden to no one but your customers. This means you will be making business decisions that drive value to your customers rather than to the pockets of investors. Focusing on the customer is the key to any successful business, and in the long run your employees will reap the rewards of this model. Without millions in VC money, you’re also forced to get creative, run the business efficiently, and execute with velocity in an environment that separates top talent from the rest of the field.
Con: Cachet and Guidance
Venture capital is absolutely worth the trouble for entrepreneurs―when used correctly. It has funded some of these most successful companies in the world. The financial help is the most obvious aspect of landing funds. Venture capital enables you to build your team by attracting the seasoned veterans and top performers critical for early success. As your company grows, the needs of the business scale with it. Surrounding yourself with others who share your passion and bring different perspectives and experience to business problems is crucial.
Consider also the issue of image. Receiving funding adds credibility to your story. It shows that someone has put you through a vetting process and is betting on you to be a winner. It puts more “eyes” on your company, which can translate into bigger sales, coming from a larger audience pool. VC firms will be well versed in your industry and can offer counsel that you simply wouldn’t get if you were bootstrapping. They can connect you with potential customers, partners, and other important resources. You also get to spend time with CEOs from their other portfolio companies, which expands your network.
Venture capital is not the cure-all for entrepreneurs, however. To succeed, you still need a passionate team and a great product in a solid market. VC should not be used to create a business but rather to augment what already exists. There’s a certain amount of maturity and business acumen that entrepreneurs need to develop first. It’s the only way to clear the barriers around true corporate growth.