Blue Sky VC Elaine Stead on why startups shouldn’t raise venture capital

venture capital

Dr Elaine Stead, head of Venture Capital at Blue Sky.

Most of you do not need, nor are cut out for, nor should want, venture capital.

On a panel and Q&A session we had a great discussion about when or if you should take venture capital. As someone who has been on both sides of the table, I feel I can offer a view that at least attempts to be balanced and so I’ve come up with a checklist of 10 things you need to be genuinely okay with, if it happens (read: comfortable with the trade-off), before you even consider raising venture:

  1. Getting fired from your own company;
  2. Letting someone else have a genuine vote over the future and decisions of your company;
  3. Losing control of your company;
  4. Reporting to someone or something else;
  5. Having to still go through the fundraising process, and justify your existence and strategy, in the future;
  6. Losing peoples hard earned life savings and having to face those people directly to explain why;
  7. Becoming more interesting to the public and your failures or missteps becoming news or public (and immortalised on the internet forever);
  8. Being expected to deliver on expectations that may be greater than your own or on timelines that are not of your own making;
  9. Entering into a marriage that you cannot seek a divorce from without consent; and
  10. That you’ll be able to handle any of the above with grace and dignity so that your reputation and relationships will remain intact so that you can do it all over again when you come up with the next idea (which you will because you are a hard-wired entrepreneur).

Sounds pretty sobering, huh? So why the hell would you ever do it? Well in my mind, there are only two reasons:

  1. Because you absolutely cannot, under any circumstances, not pursue the growth strategy and still live with yourself, and you simply cannot do it without venture capital
  2. The combination of the venture capital fund and you are greater than the sum of the parts, because the capital will help you get somewhere you can’t on your own, with more than money (the elusive added value). This is the only reason not to pursue other financing strategies that provide just money.

So, what are the other options, you ask? Well, there is the best option — customers and revenue. Then the next options are using your own money or savings, debt financing or crowd financing. But you’ve heard these all before, I’m not telling you anything new here. However, I reckon people dismiss these options too easily, because they think raising venture capital is somehow a validation or a shortcut to an end goal, or is kind of sexy, or obviously the right thing to do because everyone else is trying to do it, or possibly seems easier. But talk to anyone who has raised venture capital, and they’ll disavow you of all of those notions pretty quickly.

Venture is expensive, and it’s risky. And I don’t mean for investors, I mean for the entrepreneur. My observation is many entrepreneurs know where they want to get to and also are pretty good at knowing what they don’t want to give up to get there. But they are often not financially literate enough to know what options are available and what suits them best. And honestly, with the sum of all knowledge in our hot little hands these days, there really is no excuse.

This piece was first published on Medium.

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Peter Vroom
Peter Vroom
4 years ago

Agree with everything you say Elaine, based on my experience with venture capital backing.

We used our VC money wisely and gained a bunch of blue chip business customers in Australia and many more of them in Asia. We won awards, including ‘Best Use of Technology in Asia’. Then the South East Asia ‘economic meltdown’ of 1997 happened, and our signed up customers in the region deferred on projects, and prospective customers stopped talking.

One quarter of revenue downturn became two, and then three. We started to run low on funds. The VC told us our story had been great and had met their expectations up to that time. But, they said, ‘Now it sucks. No hard feelings Peter, but no more cash from us and, in fact, we now want you to wind the business up as it doesn’t look like your major market will turn around anytime soon’. They pointed to the clauses in the investment agreement about ‘revenue downturn’ allowing them to dictate what happened from thereon, even though they had a minority shareholding. Sure I knew the clauses were there, but never thought I’d get caught up in them because, to a ‘glass half full’ person, this was just a ‘phase’ I thought we would would work through. They forced the issue, and there was a fire sale of the business. Not the ending we had in mind!

In retrospect, the VC had just put in money, and nothing more other than a bunch of words. When the going got tough, they abandoned any pretence of ‘the team’ concept they had talked about to sign us on. They just wanted to move on to the ‘next big thing’.

I agree, Elaine, customer money is the best money. Sooner or later, you have to get customer money!

We had done business on just customer money for many years before the VC money came along. The money dangled in front of us for taking our new technology to market quicker seemed a good idea at the time. I still think there can be situations where VC money is appropriate. However, in my view, the VC would need to show a track record of understanding your target market and business issues, and contributing real value to your business over and above just money. I’d look harder at the calibre and likely continuity of the VC representative on your board. I’d also look a lot harder at some of those agreement clauses.

Peter Vroom

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