I want to know if I should work towards getting funded by a VC? How does it affect my startup?
Simple answer - do what you need to, to grow your company. VCs do have positives, but it is not a make or break situation. Consider VC funding as one among the many levers of growth you have. Finally, are you ready to live the consequences of being a VC-funded startup?
a. Rationale
You have many tools to scale your startup - venture capital is one of them. However, there is quite some media attention given to startups raising VC funds. This results in external funding receiving more importance than it deserves. So, understanding its nuances, helps you see it for what it is, rather than putting it on a pedestal.
b. Timing
It is good to know about the functioning of VCs irrespective of your startup's stage (even before thinking of an idea).
The same holds for considering a fundraise. Additionally, in this case, you need to be convinced that this is the best tool for your startup's growth.
a. Realistic expectation
Firstly, only 1% of startups aspiring to get venture capital, actually obtain it. Moreover, the fundraising process takes an average of 6 months from start to finish.
Post fundraising, it has many benefits - money to hire talent, easy PR and access to a wider network. However, VCs expect a disproportionate return (typically, 100x+) in a fixed amount of time. Your metrics of growth might also be VC-focused rather than customer-focused.
b. Process
Here we discuss, not the steps to raise funds for your startup, but the process VCs follow while investing in startups. This will help you understand whether your startup aligns with VC investment or not.
- Getting money into VCs
- ~VCs typically get money from Limited Partners (LPs)
- ~They usually have about 10 years to return the money back to LPs
- ~Of course, the promise is that the return would be good - around 20%
- ~~This means, in 10 years VCs have to return 1.2^10 = 6 times the original amount
- Investing in startups
- ~It takes typically 3-4 years to find startups that they want to invest in
- ~This means that startups have the remaining 6-7 years to deliver the requisite return
- What does this mean for startups?
- ~Reiterating, the return of 6 times needs to be generated in the remaining 6 years of a startup (not 10 years)
- ~This implies that each portfolio startup needs to generate a ~35% return every year
- ~But only 5-10% are typically successful
- ~~So, those startups need to make up for the other startups too
- ~~That is 6x divided by 5% = 120x
- ~~This is the return expected in about 6 years from every startup a VC invests into
- Questions to ask yourself
- ~Are you ready to grow your startup in alignment with an external time bomb?
- ~There are other implications to your startup too
- ~~New product features, etc. won't always be valuable both for customers and VCs - who do you choose?
- ~~Overall, do you build your startup for customers or to give VCs the proper exit?
- ~It comes down to two things:
- ~~Does your startup require VC investment at all costs?
- ~~What is the motivation behind starting up or pursuing entrepreneurship?
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