When your company is poised for exponential growth, you may have a shot at convincing venture capitalists to take a gamble on you, your team, and your product.
But should you go down a VC-backed path if offered the opportunity? What are the advantages and disadvantages of taking venture capital? Some entrepreneurs take the VC plunge and others are nervous about sharks in the water—loss of control and a significant equity dilution are two elements that scare away many entrepreneurs.
The right decision is the one that will benefit your company most, which largely depends on your long-term funding and business strategy.
Here are three reasons why you should take VC money—and three equally valid reasons why you should run.
Reason 1. Cash is king, but how much do you need to build?
Take the money
Some startups need a large cash infusion to develop their product and scale. If you’re in a big market, developing a disruptive product requires significant capital to build the infrastructure and get off the ground. Taking VC money is not only worthwhile—if your market is as big as you think it is, it might be your only funding option.
If you’re not ready to put all that money to good use quickly, you won’t be able to fully leverage the investment and you will pay a higher price than necessary. You risk sending your company in the wrong direction if you have too much money at your disposal. Are you ready to handle a dramatic increase in new customers? Without adequate resources, your company could suffer costly hits to productivity and morale. Think about how much money you need and if you can put a large VC investment to good use.
Reason 2. Think about your cost of capital
Take the money
Taking a VC round instead of some form of debt financing means you won’t be saddled with repayments when your company is growing rapidly. And with the one-time large cash injection, you have the potential to bring on an important strategic partner. Most VCs will sit on your board, giving you mentorship and guidance on your business operations. This can be helpful for your recruiting and partner referral efforts.
Contrary to popular belief, VC isn’t free. In exchange for their capital, you give up a big piece of ownership in your business. And, if your business becomes successful, equity is the most expensive form of capital. Many entrepreneurs don’t realize the effect of dilution until it’s too late.
And the mentoring and guidance we talked about can also mean control over your business. Remember, VCs only get paid when there’s a sale or IPO. They will be steering your company to be poised for that liquidity event, targeting a 10x return in five to seven years from the initial investment. If that’s not what you have in mind for your business, the VC funding path is not right for you.
Reason 3: Fundraising never stops
Take the money
When you’re fundraising, it can feel like all you’re doing is chasing money and networking with potential investors, when what you really want is to focus on is building and managing your company. Landing a big venture capital deal, and having the significant cash infusion in a lump sum is the only way to allow you to do that. For the next a couple of years, your company’s need for growth capital is met. You can map out your plan and milestones and solely focus on running your business… for the next couple of years.
Receiving your first term sheet can be the most exciting moment in your professional life. But stop for a moment and breathe. Think. Realize that fundraising is a cycle, that all the investor meetings and presentations and preparing financial documents and negotiations you’ve just been through have bought you another 18–24 months of runway, and then you’re going to be back on the VC hamster wheel. Two years of running your company followed by another six months of courting VCs. If you need to stay fully focused on growing your business and can’t afford the six-month distraction, VC money may not be your best path.
A blended path
Many startups use a blended approach, in which they leverage debt financing like a Lighter Capital revenue-based financing to grow the company and increase valuation, and then use their increased visibility and higher valuation to get a better deal when pursuing VC money.