As I write this, the California state lottery jackpot sits at $189 million. Now, as a startup founder looking to finance your business, would you rather take your chances on the lottery or the shark tank?
The question seems absurd. We all know the odds of winning the lottery are slimmer than the odds of dying in a plane crash, getting hit by an asteroid, or Kanye being elected president. But your likelihood of winning over a venture capitalist isn’t much better: according to self-reported data, less than three percent of new companies secure financing through venture capital (VC) investment.
The feasibility of getting funded is only one aspect of a larger fantasy surrounding VC, a fantasy that harms business owners as well as—believe it or not—venture capitalists themselves. Take a look at a few more VC myths and the corresponding reasons you should probably steer clear of the ecosystem altogether:
Myth #1: Most Successful Companies Get Venture Capital
While VC-funded firms have a disproportionate presence on the Inc. 500/5000, Fortune 500, and other catalogs of the largest, fastest-growing, and most influential companies, they still account for only a small portion of each list. The vast majority of successful businesses do well without ever involving venture capitalists.
Myth #2: Venture Capital Funding Always Makes a Big Difference
Not all infusions of venture capital are massive, and not all investors are ready to dig in deep and commit to advising your company. Some investors may be hedging their bets, building diverse portfolios in the hope that one $1 million project among several pays off, big time. If your company doesn’t immediately demonstrate value, your investors may consider it little more than sunk cost and move on.
Myth #3: Investors Will Preserve Your Ideas and Mission
By funding your company, venture capitalists are buying equity, meaning they have an ownership stake in your business. How investors use their authority differs, but suffice it say most are are interested in your company’s potential rather than its current condition. Don’t be surprised if the new members of your board call for sweeping changes or a dramatic pivot in strategy—they paid for the ability to do so.
Myth #4: VC is Easier to Obtain than Other Investment Alternatives
As with the people who found them, each startup is one-of-a-kind. How you achieve growth all depends on your company, industry, circumstances, personality, and timing. Some startups can raise millions through crowdfunding, while others transform overnight thanks to a sudden trend or market opportunity. There isn’t one all-around solution to kickstart a business, and VC represents only a small, small piece of the pie.
Myth #5: Investors Always Know What They’re Doing
Just as tons of ventures succeed without private investment, VC intervention can spell doom for a company. Aside from the ones who provide middling or dismal returns, as many as three quarters of venture-backed startups simply fail. Although it’s wrongheaded to lay the blame entirely on VC firms—many are staffed by extraordinarily capable and shrewd minds—there’s a reason investors caution business owners to conduct due diligence before delivering their pitch to a group investors.
Alternatives to VC Funding Your Early-Stage Business
So, if VC isn’t the best option, where should you focus your efforts instead? For each misconception laid out above, I’ll leave you with a time-tested piece of advice, plus one bonus tip:
Tip #1: Tap Into Your Network
Friends and family may not be as affluent or appealing as venture capitalists, but they’re a hell of a lot easier to access. Moreover, they might know people willing to help you grow your business—through cash or guidance—on your terms.
Tip #2: Spend Money Where It Counts
Instead of spending your time and money trying to woo the financial elite, focus your energies on tangible outcomes:
- Building your customer list
- Increasing consumer awareness
- Developing your products and services
Tip #3: Avoid Debt Even If It Means Slowing Down
Only take out a loan if you absolutely need it. A surge in momentum now may not be worth a prospective grinding halt later. At this stage in your startup, sustainability is likely more important than scalability. After all, owning your own damn company means limiting the number of suits holding the strings, and a bank or other lending institution is just another person to answer to.
Tip #4: Prioritize Relationships
Your relationships with partners, suppliers, contractors, and (of course) customers are priceless. Technology evolves and markets shift, but human connection doesn’t degrade unless you let it. The people you’re making inroads with now can turn out to be the keys to prosperity in the long term.
Tip #5: Trust Your Instincts
You started your company and you’ve taken it this far. If something doesn’t feel quite right, or isn’t happening the way it should, consider what your instincts are telling you not only about your external situation, but your internal compass. The obstacle you’re facing could be a sign that you’ve strayed down the wrong path, or that your idea of success needs tweaking.
Tip #6: Pay for Help, Not for Hope
In simplistic terms, VC is basically equivalent to gambling with someone else’s money: it doesn’t ensure success, but may qualify you for a significantly higher payout. Most startup founders would benefit much more from an hour with an accounting, sales, marketing, or legal professional than they would from a minute in an elevator with Mark Cuban.
Looking for more financial tools and guidance for your startup or early stage business? Check out our Resources page and stay in touch with our blog. If you have thoughts or questions about this article, feel free to leave a comment or get in touch with us.
And if any of the advice here helps take your business to the next level of profit, I’d love to hear from you… because I expect a cut!