In the year 2017, venture capital funding reached its decade high of $155 billion. So, you see there is a lot of funding. Yet, you will be surprised to know that only 0.62 percent of startups raise VC funding. One should try and raise VC funding as soon as possible. But, you shouldn’t go for VC money every time. It may become a big distraction and eventually unnecessary. So, before you go for VC funding in your startup, think if you really need it and what is the right time to go for it. These questions will guide you:
Should you get a “hockey stick growth curve” which ends in exit?
Well, a hockey stick growth curve is a through process where you think of a hockey stick as your income growth curve: straight up and then a turn towards right. If you have just begun your startup, you may not be aware of what your growth curve will be and what your exit strategy should be.
VCs expect you to exit in as big a way as available. Till the time you are prepared for being liable for break neck speed growth, do not go for VC funding.
Do you want to retain as much ownership of your company as available?
For instance, your goal is to grow your business to a $100 million valuation. So, if you along with your founders own 100% of the business, the owner piece will be marked at $100 million. But, if you go for VC funding, then the ownership equation will get divided into:
- Lead Venture Capital: 20 to 25%
- Co-investors: 20 to 25%
- Option pool: 15 to 20%
- You: 30 to 45%
To own the complete valuation, you have to scale up to $333 million valuation which is certainly quite challenging. However, you do get support and advice with VC funding. And a lot of companies have succeeded with its help. When you serve as a portfolio company for a venture fund, it comes with support community which enhances your capability to scale.
VCs are separate from one another. If you are going for VC funding, it is important to vet prospective investors for your business help and suggestion they are capable of giving.
Do you want to have autonomy to work as per your will?
If you work in coordination with VCs to scale you fast, the Ventura Capital team will surely make you put in a lot of hard effort and several working hours. And, surely most of the startups require a lot of work. Yet when you are owner of your startup, you get the autonomy to select the speed to scale your business.
Thus, you can change your mind and lifestyle as and when your priorities change. When you tie up with VC funding, the VC will want to put in all your effort, energy till you either flourish or exit or crash.
Do you want full control or are you fine being answerable to other people?
A lot of entrepreneurs hate the idea of being answerable to others. VCs frequently demand data, forecasting, report and different details. It is easy for the leadership teams to easily wrap up during boards or venture capital reporting requisitions.
When you team up with VC funding, you are answerable about the progress which you have made. The CEO has metric to present before the funders and board and because of the fear of repercussion; you may have to lie about your progress sometimes. Answering others means losing control from your hands. It means you have to be honest about the failures and successes of your company. It is important to keep your comfort level while being answerable to others both during good and bad times.
Knowing the right time to seek funding is complex. However, if you wish to embrace risk and want quick paced growth and you have complete reports and data which shows your startup has a chance at accomplishing VC’s objectives- then just go for it. However, if you want to seek capital just because you think it is likely what all startups do, then Venture Capital funding isn’t favorable for you
Some of the key things to consider when raising venture capital funding are mentioned below:
- The size of funding
- The time period of funding (When will it need to get repaid)
- The price of the funding along with interest rate and fees
- The covenants (fiscal and non-fiscal)
- Amortization timing
When should you raise VC funding?
The answer to this question majorly depends on the founder of the company seeking funds. The entrepreneur has to customize his approach and idea to answer the question. However, below here are some of the situations where it is right to raise VC funding
- To refresh the enterprise cash reserves to expand and reach to the next company milestone. For instance, if you have raised 100 million and need 20 million more to hit the next important milestone, then go for it.
- Funding capital expenditures which are exponentially and vehemently bigger, for instance under situations of acquisitions.
- Reserve fund function as buffer under the situation, when it is predicted to take more time to hit the next company milestone.
Under these scenarios, a startup can go for Venture Capital fund raising and work in collaboration with them for a better future.