Should you raise venture capital?
Many founders ask themselves this question and here are some learnings from my observations
I just read the 10-year fund report of a major venture capital fund I was associated with. It is a detailed 100-page annual report on a A$400M fund with about 25 portfolio companies from Seed to Series B. The “vintage year” of the fund is 2007 (ie. when it was started), though, to complete fundraising may take a year or two for such a VC fund.
The startup graveyard in that report is brutal and effectively comes down to fundamental misunderstandings and asymmetries between VCs and founders:
Founders talk themselves into all the buzzwords VCs want to hear and VCs encourage them to do so and buy into it in the hopes that it may work out (and yes, it’s all a murky grey area). Mismatch number 1 is the valuation between what VCs pay (forward valuations) and what buyers are willing to pay.
The other main mismatch is too much money raised too soon. There is an implicit expectation between investors and founders that money raised is to be spent. Hence 12-24 months later you need to raise again. If company growth doesn’t follow, the music stops at some point.
Years later, the spectrum looks like this:
Write-offs for some deals.
Highly dilutive follow-on funding rounds for most of them followed by 10-year-plus-stories of pain and sorrow.
Small successes (>5x capital returned) that don’t matter because they don’t move the needle (for the fund).
One massive success that made everything above worth it (for the VCs and the founders of that one deal).
Certainly, more founders in that portfolio benefited from the VC capital, some even became angel investors, despite no successful exit. And a few built profitable companies even though the profit is too little to matter and no one is buying the company for the price they want or need because of the amount of venture capital invested.
In conclusion, whenever you think about giving up independence by raising money, think about this. You have only one shot, while the VC has a portfolio. You’re exclusive with them, but they’re not exclusive with you.
Christian Thaler-Wolski is Space Lead at Stone & Chalk and a member of Startup Adelaide and the SA Migration Advisory Council. He’s an investor in Pipedrive and currently works with selected SaaS and NewSpace entrepreneurs on go-to-market strategy, recruiting, pricing software products, and VC readiness. Christian recently relocated to Adelaide and his geographic focus is Australia and the wider APAC region.