VCs: Angels or Demons?

by Private


In this day and age where it seems that every entrepreneur’s dream is to be funded by some bigwig VC firm… I wanted to raise a note of caution against this potentially risky pursuit.

Yes, VC funding definitely has its many benefits. Be it purely for financial reasons as a source of funding which was previously inaccessible, to gain access to a wider network of potential customers, recruits and acquirers, or even for their ‘added value’ from wisdom gained through years of industry experience. It is thus often assumed that any venture backing is good for a startup company and a clear indication of its successes to come. However, I definitely believe that albeit useful, VC funding undoubtedly has its fair share of drawbacks as well. Besides the obvious loss of control and equity, there are other fundamental and often overlooked challenges of entering into a VC partnership. This post will try to explore this from the perspective of a lean startup

Entrepreneurs who practice the lean startup methodology have to be extremely wary of the mindset and behavioral changes that VCs bring along with their money. I analogize the process of obtaining a sudden windfall of VC funds to the process of taking a wild animal like a ferocious polar bear into captivity for breeding purposes. As a VC, you know your target ‘polar bear’ is an endangered species with rare and desirable qualities. You thus try ‘replicate and grow’ them by giving them all the resources you think are necessary i.e. easily accessible food (cash) and potential mates (networks)

Nevertheless, like a polar bear who had previously been used to fending for itself in challenging and often inhospitable environments, startup companies who had previously built something out of nothing often react very negatively to their newfound environments. ‘Spoon feeding’ them with endless resources seems to shock the previously revered practices out of their systems. Be it their killer instincts or bootstrapping capabilities, they often become fat and lazy with overstaffed teams and unclear priorities.

Breeders and zoo keepers try to reverse these changes through reacclimatization programs before releasing their keep back into the wild. Even with such deliberate plans, many never manage to unlearn their habits and are thus unable to reintegrate into the environments they once thrived in. Unlike endangered polar bears though, startups don’t have the luxury of ‘socially conscious donors’ who indefinitely maintain the bills of their breeding and rehabilitation programs. Thus, many end up crashing and burning after they become overly dependant on the large sources of funding that led to their hefty and often irreversible burn rates

In the words of William Salhman, “The best money comes from customers and not venture capitalists”. Thus, the promised land of VC funding should not be seen as an end in itself, but rather as the means to an end if self-funding is not an option.

Personally, I would hate to have to make the transition from being revered as a wild formidable polar bear, to one that’s observed behind glass walls by kids who exclaim “Look ma, isn’t he cute?!”

The lure of being publicly backed by a VC is definitely one that many of us strive for. But beware, they may not be saviors but rather tempting devils in disguise.

  

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