Don’t Listen to Your VC’s
If I ever start a company, which is not looking likely right now, I hope to get it up and running and in the black without venture capital. However, if I do go the VC route, I’ll try to swing it such that the VC’s don’t have controlling interest.
The very nature of venture investing can run against the best interests of an individual company. For high tech, the rule of thumb is that out of 20 companies started, one might make it big, two to three do ok, and the rest fail. However, the VC’s make almost all of their profit on the company that makes it big, and they make very little or just manage their losses on the rest. Think of it like investing in a mutual fund with several hundred companies. If a few of the weaker ones go under, you might not even notice, care, nor will it even impact your bottom line. You just need enough of the companies to be successful so that your overall profits keep growing.
The magnitudes of success and failure are much greater for startup companies than established companies, so the VC’s need that one portfolio company to be really successful. One way that this can happen is if the startup takes extraordinary risks. Many successful companies took risks. However so did many unsuccessful-and-now-historical companies. VC’s might find themselves motivated to push their companies to take extraordinary risks because they have so much to gain and so little to lose by doing so. This is a great strategy for the VC’s, as they spread their risk throughout their portfolio, but it is probably not the best strategy for the startup.
VC’s also have a 3-7 year window in which they need a return on investment. In the mean time, you’re trying to build a good reputation that will last potentially much longer. Their time frame is different from yours (unless you’re trying to get rich fast, then your time frame might be shorter than theirs).
I’m not saying that all VC’s think like this, nor are they mean, heartless and cruel. Just that they have different motivating factors than the founders and employees of the startups.
So make sure you are in a position where you don’t have to listen to your VC’s. Don’t take on too much funding, spend too much money, or take extraordinary risks unless YOU think it is a good idea.