Every team needs fuel to grow its business and operations. Often founders bootstrap until they feel ready to look for external funding. We already discussed two of the funding options that are common in the early stages of development - receiving money from FFFs (Friends, Family, and Fools) and Angel Investors. (Read the articles to learn more about those options).
The third option is to partner up with VCs or Venture Capital Funds - professional investment companies that support companies in the different stages of their lifecycle.
Fred Wilson (co-founder of Union Square Ventures) says that “Venture capital is about capturing the value between the start-up phase and the public company phase.”
Here are some of the main PROs and CONs when working with VCs:
Securing money from a VC (not every investment company should be considered a decent VC) gives a certain level of credibility of the team and the startup. Often announcing an investment from a top Venture Capital Fund drives attention of other investors and the rest of the tech community.
Receiving money too early often means giving up a good portion of the company’s equity. That’s why Ron Conway (venture capitalist and philanthropist, often described as one of Silicon Valley's "super angels") says ““Bootstrap for as long as you can.”
Most of the VC companies have a certain industry focus. When founders are looking for investment they can research and connect with the most relevant ones based on their previous experience and dealflow. Having a deep understanding about the market and the industry the startup is penetrating is a huge advantage that can add value and drive positive change.
Founders should be super careful about choosing the right VCs to work with. As everything else in our lives the process of finding, filtering, and partnering with VCs is all about communication, connection on a personal level and transparency & honesty. Choosing the wrong investors can cause tension within the team and can be a problem when trying to secure the next round of funding.
Partnering with a VC firm gives a lot more than just the money. Most of the good VCs offer support to their companies in various ways - from sales and marketing to fundraising and legal services. Working with already established brands with a vast network shortens the way to success.
Most of the VCs expect fast growth that sometimes can be unhealthy for the team and the company. Overfunding and building on top of the weak foundations of a new team can cause internal disputes, overspending and inefficiencies, higher customer churn rate, etc. Founders should be very cautious about their roadmap and growth so they can have both steady growth and stable company that can support it.
Being part of a VC network provides invaluable opportunities for strategic partnerships with corporates and other startups, as well as some already successful founders. Oftentimes founders need to speak with other entrepreneurs who can support them on a mental level, sharing the same mindset and struggling with similar challenges and problems. Finding the right partners from both the corporate and startup world often makes the difference between success and failure.
CON (sometimes it can turn out as a PRO)
Sometimes VCs are setting various limitations that can be frustrating to the founders. Most of those terms are important for the investors protection and overall company stability. Learn more about the Term Sheet and what founders should know about it when interacting with VCs.
And don’t forget that
Raising venture capital is the easiest thing a startup founder is ever going to do.