Every year, about millions of new businesses are started, and fewer than one percent successfully raise venture capital (VC).
Whether it’s the feeling of acceptance into this elite club, or the misconception that it’s impossible to start a new business without millions in capital, many startup founders find themselves hypnotized by the pursuit of VCs and angel investors.
Perhaps the adage is true: We want what we can’t have. And yet it can be argued that your chances of success are greater if you stop looking for VC money and focus your energy on bootstrapping your business and attracting customers.
Here are seven reasons for budding entrepreneurs to give up the hunt for venture capital and angel investors:
1. You haven’t proven your market need
Sure, you’ve put together a pitch deck, business plan and financial projections, but those are all just that — projections. You’re basing the future success of your company solely on hypotheticals.
Before looking for VCs, prove that there are customers out there who want what you’re selling. Spend time talking to your users, and focus on giving them what they want. Invest your time in finding a place in the market before trying to convince investors to give you their money.
2. You lose control
Once you secure VCs, you’re at their mercy. Even if you maintain a majority stake, you’re giving up a percentage of equity, profits and control to a board that may have a different vision for your company than you do.
In most cases, your VCs will ask for one or more board seats giving them the right to vote on or veto key decisions that will directly affect the future of your company. These same people also have the right to fire you or members of your team, which means you could be ejected from the company you started.
3. You’re focused on the investor – not on your customer
Giving up control means you have a new responsibility. Your first priority is no longer to your customer, because your investors expect to come first. Among other conditions that are negotiated in a deal, venture capitalists can ask for anti-dilution protection, dividends, liquidation preferences, mandatory redemption and other perks that the founding partners may not even get the rights to.
In some extreme cases, VCs have the right to sue you for everything you own in the case you forget to tell them “bad news,” according to Bloomberg Business.
4. Instead of trying to make money, you’re trying to raise it
The irony of trying to raise venture capital is how much time you waste chasing down investors – when you could be chasing down customers. There are only so many hours in a day and only so much work you and your team members can take on. Every minute you spend chasing down a flippant VC is a minute you’re not working on creating a great business.
That’s all to say you’re putting a lot of your eggs into a basket that the statistics say you’ll never obtain.
5. Your burn rate is higher than if you were to bootstrap
What’s a burn rate? It’s the amount at which a company spends money, especially venture capital, in excess of income.
You may know the now viral story of CEO Maren Kate and the downfall of her company, Zirtual. She abruptly shut down all operations due to a glitch in the books that was overlooked. Basically, the company did not have a handle on its burn rate – and it ran out of money. This also supports the next point that…
6. You lose the hustle required in running a lean business
When playing with someone else’s money, many startup founders admit that it becomes less real. It’s harder to stay lean and savvy with the false impression that you’re rolling in the dough.
Investor and entrepreneur Gary Vaynerchuk writes: “Twenty-five to 50 percent of all the businesses I have ever looked at were more than capable of being a little scrappier.”
7. Your end goal is focused on an exit rather than building a company that will last
If your end game is growth over profit, then you are forever stuck in a cycle of having to raise more money. As soon as you’re no longer able to secure more from VCs, then your company will likely implode.
You’re relying on other people’s belief in you – based on hypothetical projections – rather than relying on a solid business model that turns profits and creates happy customers.
Author: Shannon Whitehead
Shannon Whitehead is the founder of Factory45, an online accelerator program that takes sustainable apparel companies from idea to launch — without raising venture capital. Committed to improving the fashion industry, Whitehead launched what was at the time the most successful fashion project on Kickstarter and now helps other fashion entrepreneurs bring their ideas to market.
Image credit: www.fortunebuilders.com
This article was originally published in Entrepreneur.com
