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.

Opinions and conclusions expressed in the Debate Room do not necessarily reflect the views of Bloomberg Businessweek, Businessweek.com, or Bloomberg LP.

Reader Comments

Tang

I will ask this fundamental question: Whose money is more important to the start-up? The VC's or the customer's? Someone said before that entrepreneurs sometimes need up to a year to engage VCs before any investment decision is made. To me, that time is better invested in engaging potential customers instead.

Squeezebox

The problem I have with venture capitalists is that some of them are morally questionable people. I would investigate any potential VCs or "angel" investors before I approached them for funding. Anyone who puts profits before people is not an acceptable investor to me.

jstaf

The VC model is changing--lower investment in software companies now that everyone isn't trying to be the next Microsoft, and the philosophy of releasing early and often means that revenue can be recognized earlier.

Customer dollars are always "better" in the sense that they are non-dilutive. Raising money too fast can cost the founders control early in the game and turn an entrepreneurial adventure into the worst job you ever had.

Eddie

I noticed that when Nasdaq is low, the VC will ask if you are already profitable. If Nadsaq is okay, they will ask if you have revenue and customers. If Nasdaq is ultra-high, they will ask if you have an idea.

This shows that they are not indepedent.

Do not let anyone tell you that VCs are business savvy as they present themselves. Some are and some are just with Ivy League MBA degrees or well connected. It is not true that they mostly can read business and direct it to sucess. I do admit that they are very familiar with buzz words because they talk with many people.

I do not believe I have seen statistics that indicate VCs are any more sucessfully than the average entrepreneurs.

Not to discount them, but they are in general overrated.

John Seiffer

You say Dell got started with $1,000 of private money. Sure, if you look at the first $1,000 spent of any company I bet it's private money--if for nothing else than to put together a way to find investors to pitch to.

Many companies should be started without outside investment (and I say this as an angel investor). Still others would do better if they could grow faster, and that takes outside money.

The key is to understand not every startup is the same type of startup. Some business models make sense for bootstrapping; others can't ever reach the economy of scale needed to get off the ground without funding. It's more dependent on your business model than the team or the passion. And ultimately the business model is determined by the market, not the entrepreneur.

Park McGraw

Hello John Seiffer.

I have spent the past six months trying to get VC or angel funding for a revolutionary new electrical generator invention, and all have rejected or dismissed on grounds that are trite, not merit based, and in reality appear more like manifestations of general laziness. The firms I have talked with are of the narrow and popular belief that good ideas also require little development effort. Such that I hear condescending retorts as the business plan is not a single page while not even reading the content, the project is too big, the idea is too novel, you only have math and physics to back up your idea.

Complicating matters is the general attitude that most VC and angel firms do not want to get involved with manufacturing or engineering processes, having little experience in such areas. That, or desire to have the product be manufactured overseas to pass off such responsibility. Avoiding with prejudice regardless of product or idea merit, that which lies outside of their comfort zone and/or experience set. In my efforts, finding the majority of VC and Angel firms large on talk and small on action. That when the chips are on the table, and moment for robust leadership arrives, they scurry away from the light.

There's a very limited and sliver window of experience, representing the vast majority of the men in our country. Many men in America having never been tested as men or seriously challenged in life, with fewer than 10% of all men having served in the US military. As a result, the US male population is too insecure with themselves, unsure of what they are capable of performing, therefore too afraid to confront a seriously massive venture. In short, adversely affecting today the scope and diversity of VC and angel project funding.


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