Venture Capital - What's the rush?
I sit on a number of boards and advisory boards for early-stage companies. I also have a wide network of entrepreneurs that I advise on a regular basis.
Recently, I have noticed a developing trend of people starting companies and rushing to raise venture capital. I've had more people come to me in the past 6 months seeking advice on raising venture capital than I have had in the past 6 years.
I have some theories on why there is this sudden infatuation with venture capital:
1. People simply think it's "cool" or want to build their resume
2. They think that the right venture capitalist will "make their business"
3. They are afraid
Venture capitalists don't validate business models, they don't "build" businesses and they don't make it "easier". If they did, they would do it on themselves and own 100% of the business, rather than only a fraction of it. Venture capitalists provide capital for growth. Customers validate businesses.
Of my 5 startup companies, the one that did the worst was the one that raised outside capital too early (Startup 4.0: Zondigo). It gave us a false sense of validation and security and ultimately, we never developed the "hunger" required to build a wildly successful business.
Venture Capital is a resource, not a business plan. It should be used for "roll out" not "find out".
I've talked to a lot of companies that have spent a lot of time (months upon months) chasing venture capital. Often times, that time investment could have been better spent talking to customers or acquiring users. If they spent that time proving the business model, raising the capital would be much easier. Without solid traction, you'll get a lot of questions about whether the market opportunity really exists. Rather than spending time trying to persuade a VC, wouldn't it be easier to simply say "just ask our customers"? It's better for them and it's better for you.
Momentum sells. Period.
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BTW -
If there are any specific topics that anyone would like me to address or comment on, please email me with ideas or suggestions: frank@addante.com
Also, please feel free to comment on any of my posts by clicking on "Add a comment" at the bottom of the post. Thanks!
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Recently, I have noticed a developing trend of people starting companies and rushing to raise venture capital. I've had more people come to me in the past 6 months seeking advice on raising venture capital than I have had in the past 6 years.
I have some theories on why there is this sudden infatuation with venture capital:
1. People simply think it's "cool" or want to build their resume
2. They think that the right venture capitalist will "make their business"
3. They are afraid
Venture capitalists don't validate business models, they don't "build" businesses and they don't make it "easier". If they did, they would do it on themselves and own 100% of the business, rather than only a fraction of it. Venture capitalists provide capital for growth. Customers validate businesses.
Of my 5 startup companies, the one that did the worst was the one that raised outside capital too early (Startup 4.0: Zondigo). It gave us a false sense of validation and security and ultimately, we never developed the "hunger" required to build a wildly successful business.
Venture Capital is a resource, not a business plan. It should be used for "roll out" not "find out".
I've talked to a lot of companies that have spent a lot of time (months upon months) chasing venture capital. Often times, that time investment could have been better spent talking to customers or acquiring users. If they spent that time proving the business model, raising the capital would be much easier. Without solid traction, you'll get a lot of questions about whether the market opportunity really exists. Rather than spending time trying to persuade a VC, wouldn't it be easier to simply say "just ask our customers"? It's better for them and it's better for you.
Momentum sells. Period.
---
BTW -
If there are any specific topics that anyone would like me to address or comment on, please email me with ideas or suggestions: frank@addante.com
Also, please feel free to comment on any of my posts by clicking on "Add a comment" at the bottom of the post. Thanks!
---
Labels: venture capital, Zondigo
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Capital makes execution possible. You want management focused on executing on plan as opposed to raising the next round. One of the greatest mistakes a new company can make is undercapitalization. A lack of capital requires management to constantly adjust the business plan due to an inability to execute. I speak from experience. It is true that capital doesn't create innovation, but it does give the management team the breathing room they need to execute with single minded focus.
- David Baeza
Posted by
dbaeza |
1:53 PM
Just curious, but even true entrepreneurs are poor at some point in time and to get their ideas off the ground does require capital, which means having to sell. I am in a similar position right now, where acquisition of assets are too expensive for my bank account, yet, I know there is a market for what I want to do and that has been validated by people at some of the most advanced companies in the world who keep telling me, " Great, when you finish building it, come back to me... The issue is, with out the capital, I can't build "it."
So I guess I am caught in my own circular argument and can't shake free. If I could finance even the first phase of my project, I would and investment becomes a non issue... So where too from here?
Josh
Posted by
Anonymous |
12:05 PM
Josh, I'm by no means saying that entrepreneurs shouldn't raise venture capital. Venture capital is an important ingredient for many business plans. I was simply saying that it should be -part- of the business plan and not the business plan itself. I see many companies that rush the decision to raise capital and they aren't really applying it to a plan, they raise capital simply to raise capital because they "think" they need it or because they think it's "sexy". It's not good for the entrepreneur and it's not good for the investors.
Personally, when starting up a new business, I like to use venture capital as a last resort for getting a product built and taking it to market. My preference is to line up a key customer(s) who is experiencing pain, work out a deal to solve that pain for that customer, use the opportunity to have them pay you to build the product, then you can grow your business from there. There is -a lot- to be gained from that: product feedback, first hand experience, customer reference (for other customers and VCs), validation. That first customer will take you a very long way. This perhaps works well for product-oriented business plans, for consumer internet sites, however, that may not work. In that case, the costs of building a consumer Internet site are relatively low and are typically 99% labor. I'd recommend building it in nights/weekends and getting others involved to do the same. You'll learn to focus on what's -really- important to develop and discover whether there really is a demand or not before you waste a bunch of time and money trying to prove it.
It is a lot more powerful when you approach investors saying "talk to my users/customers" than asking them to take your word for it.
You'll appreciate it, and your future investor prospects will appreciate it too.
Just my two cents...
Posted by
Frank Addante |
9:04 AM
Rumor has it that the key to success in raising VC is in having the "right look". Comments?
http://smartstartup.typepad.com/my_weblog/2007/09/secrets-of-rais.html
Posted by
Anonymous |
3:07 PM