This article appeared on the growthology blog under the same title.
growthology, September 13, 2012
We’ve written a few things recently about funding and venture capital (here and here). It often seems you can’t talk about startups without discussing how company X raised Y in round Z. Sometimes, this is a good way to gauge the future or current success of a startup – sometimes it is not. If you’re an entrepreneur this can be a crucial topic. Here are a few important things to consider when considering the issue of venture capital:
VC is actually a small way entrepreneurs fund their companies. From 1981-2005 .11% of new companies received VC. In the hay day of VC investing, 1996-2000, this number was double that…at .22%.
Not all VC-backed projects go public or become highly profitable. The nature of venture capital, and entrepreneurship to a degree, is that you are more likely to fail than to win big. One study found three out of four VC-backed entrepreneurs get no return while one in four receives an average of $5.8 million upon exit.
Many companies do well without it. This follows logically from the fact that the 99.89% of companies who don’t receive VC funding aren’t drowning in failure and mediocrity but moreover we know that while VC-backed firms do have slightly lower failure rates and tend to grow more rapidly than non-VC-backed firms they aren’t more profitable at the time of exit. Anecdotally, all these companies made over $1 million in revenue and never took VC.
VC funding can take control away from the entrepreneur and may or may not make your company more successful than other types of funding, depending on a variety of factors like the amount of funding needed. Noam Wasserman has more on this in his book.
While $70 million rounds are sexy and exciting, they’re not reality for most startups. Entrepreneurs should be carefully consider the amount, source, and timing of their fundraising. There isn’t a magic formula so entrepreneurs, as busy as they are, should invest some time into learning about funding options—the payoff is potentially very, very large.