Here is the problem with venture capital: A lot of startups think they should be VC-funded, but are fundamentally not set up for it.
When you raise venture capital, the simple and common assumption is that your company needs to grow 10x in its valuation over a 5–7 year time frame.
Most companies (and interestingly a lot of companies which participate in incubators, accelerators and some who subsequently raise VC money) have no real path to this level of growth.
Let’s dissect this a bit:
Say you raise $5M on a $20M pre/$25M post money valuation (which by the way is a fairly typical smaller Series A these days). To make this investment work, your VCs will need to see you exit with at least a $200M — $250M valuation.
A quarter of a billion dollar valuation is a tall order!
To get there, you will need to drive your company in a very specific direction: Very aggressive growth of your core metrics, often initially at the cost of growing your bottom line and the aim to “switch the flip” sometime later in the game to generate the profits which will see you through to this kind of a valuation.
The problem with this is, that 99% of companies are simple not set up for this.
They are often amazing businesses which can create incredible returns for their stakeholders, but they are fundamentally businesses which should focus on driving revenue and profits; not valuations.
Therefore venture capital, as much as it is being talked about and how ever cool it seems to be, is typically not the right form of capital for most companies.
Sadly, too many companies, which are simply not right for VC money, waste precious time and resources in chasing venture capital dollars.
Now might be a great time to step back from the daily grind and ask yourself what kind of business you really are. And once you know — figure out what that means in terms of your growth, your capital needs and your strategy.
What do you think? Have you attempted raising capital for your venture? What was your experience? Let me know in the comments below.