Marketing Articles
Do You Really Need Venture Capital?
Written by James Garvin for Gaebler Ventures
More and more companies are emerging as profitable sustainable businesses with out ever having raised a dollar from outside investors. Sure Venture Capital has its welcome benefits, but it does not guarantee your success. If so many firms are creating sustainable profitable businesses with outside capital, why are you so adamant about trying to raise funding?
Some entrepreneurs spend their early days focusing on trying to raise outside capital to fund their ideas.
Others work exclusively on building and growing their business. Do you have time for both? Usually not and when you don't it is up to you to decide what is more important to the growth and sustainability of your business.
Venture Capital is a relatively new industry that boomed during the dot com industry. Prior to that, most businesses were started the old fashioned way with money from friends & families, a few bank loans, and a lot of credit cards. When compared to all of the new businesses that are formed each year, very few ever received venture capital. My estimates would be less than 2% of all companies formed receive venture capital. Lately, even the venture capital industry and model is being challenged due to illiquidity and lack of sufficient returns many VC firms provided their investors.
VC's can put very unfavorable terms into their terms sheets for entrepreneurs. Many require a guaranteed 2-3x return on their investment when you sell your company. They are also the first ones to get paid if your company fails. Unless you can grow substantially with the funding you receive from VC's, you can actually end up with nothing, even if you sell your company!
Today, especially in the online and software businesses, most companies can be started with a few hundred dollars thanks to the numerous free applications available. Open source technologies have provided entrepreneurs to take very little risk, due to almost no cost when starting their ventures. So if a company can be started and grown with out venture capital, why are so many entrepreneurs so adamant about only trying to raise capital before they have even try to validate their business model?
Venture capital provides entrepreneurs with validation of their idea, even before the idea is implemented. By receiving millions of dollars, entrepreneurs feel empowered that they have created the holy grail of all ideas. If you are raising capital from the right venture capitalists, the greatest benefit you will receive is experienced guidance and advice from the network of professionals that VC's offer to the firms that they invest in. Lastly, VC firms do provide the needed capital for many firms to get started that otherwise could not get funded.
If you are working in an industry and a startup that can get launched with out venture capital, then my recommendation would be to do it. This isn't to say that you shouldn't be networking with VC's and other established entrepreneurs in your industry from time to time to build those relationships, but rather than focusing your entire energy on raising funding, transfer that energy to focusing on building a great business. Once you have that business established and up and running, this may provide a more opportune time to seek funding that can be used to fuel your growth.
James Garvin began his education studying biotechnology. In recent years he has turned his interest in technology to helping two internet startup companies. The first business was an online personal financial network and the second was an e-marketing platform created to help entrepreneurs demo their web sites. Currently a student at University of California Davis, James is spending his summer incubating two new online businesses and writing about his entrepreneur experiences.
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