The Allure of Venture Capital Funding
In the startup realm, venture capital funding often shines like a golden ticket. The promise of sizable investments can be incredibly tempting, as it seems to grant startups the capital for rapid growth. However, let’s explore some widely accepted reasons why startups should think twice before pursuing this kind of funding.
Control Over Your Business
One significant drawback of seeking venture capital is the dilution of control. Venture capitalists want a say in how your business operates, which could mean sacrificing your vision for someone else’s interests. If you cherish the freedom to nurture your startup without interference, alternative funding sources may be worth considering. They often include protective provisions, makeup clauses, performance minimums (with valuation and equity penalties), consent requirements on key decisions, and other ways to protect their investments.
The Pressure to Scale Quickly
Venture capitalists expect rapid growth within a short payoff timeline. This ‘go big or go home’ mentality can push startups to scale prematurely, potentially leading to operational chaos. Building a long-term sustainable business is not always aligned with VC demands. Taking on venture capital may leave you in a position where you have no choice but to rapidly grow or risk losing control of your company, being replaced, or worse, stagnating in a ‘no man’s land’ where you earn little to no profits while neither growing nor shutting down.
The Time Investment
Early-stage investments (incubator, seed stage) typically take 45-90 days from start to finish for most venture capitalists. Later-stage investments take 90-120 days. Timelines vary by market, stage, and company performance. Some investors will take longer, others will write a check sooner. For example, Silicon Valley investors are generally quicker than those in other parts of the world. Later-stage investments involve more money, take more time, and require signoffs from internal stakeholders (even if the CEO agrees, they need consent from investors and/or the Board). The process is time-consuming and draining, requiring thick skin to handle repeated rejections. Only about 1-3% of pitches get funding.
Long-Term Relationships versus Quick Cash
When you seek venture capital, you enter into a complex relationship that often prioritizes not just money but also your equity and company direction. These relationships can become adversarial if expectations aren’t met. In contrast, raising funds through angel investors or bootstrapping can foster a more supportive environment, allowing for collaborative growth without the pressures of VC funding. You may also contend with investors at different stages who may clash (e.g., an early-stage investor wanting to exit while a later-stage investor rejects a buyout, believing the valuation will rise). Giving away too much equity early on can disqualify you from future funding or force you to negotiate down-rounds that further dilute your holdings.
Alternatives to Venture Capital
Angel Investors: From my experience investing in seven countries, I believe angel investors are a better fit for most growing companies. Angel investors vary from high-net-worth individuals to collective angel investor networks. Negotiations should be reviewed by legal counsel, but you can structure more favorable terms. Angel investors can be found for both tech and non-tech businesses, offering profit-sharing agreements that allow growth while ensuring investors receive a percentage of profits based on their equity. VC funds typically reinvest excess capital to accelerate growth with a focus on a liquidation event (buyout, IPO, merger).
Incubators: Consider an incubator or early-stage fund. These investors typically take a small percentage of equity, invest some cash, and offer valuable non-financial support like product-market fit assistance, positioning, and introductions to customers. The combined value of cash and in-kind support can significantly boost your startup. There are worthy incubators (sometimes called pre-seed investors) in established and emerging markets, such as YC, 500 Startups, Plug and Play, Flat6, in5 (Dubai), and QBIC (Qatar). They are perfect for refining your product and reaching product-market fit before seeking further growth capital.
Bootstrapping: I believe in raising capital as late in the process as possible and trying to launch a working, and preferably revenue-generating, beta version of your product. For example, if you have a double-digit margin, early revenue-generating SaaS product that you can deploy without external capital, then bootstrap your business. You may initially only attract a small segment of the target market, but this first cohort serves to proof the value you offer, validate assumptions and to learn what customers want. Not every business can launch a revenue-generating beta product, but many tech-based B2B and B2C models can. For large-scale projects like airline startups, mobility solutions, or hotel purchases, bootstrapping do not apply, but there are countless models where bootstrapping to product-market fit is viable.
Start with a lucrative niche you can grow within; stick to one customer category, three pain points you obsessively address, within one geographic region (or major city). Your first service may target families (rather than every traveler, which is too broad), originating from Hanoi, looking to travel to five leading religious pilgrimage sites in a frictionless and personalized way. This approach is big enough to test, refine, and use as an initial market.
Creating working tech products is easier, cheaper, and faster than ever before; leverage rapid software development resources, prepackaged code to customize further, open-source software, third-party sites like UpWork, your own programming abilities (or find a co-founder who can and share equity), and take advantage of free or discounted services large SaaS companies offer to startups (e.g., Notion, Zoho) to create a working first version, preferably one that generates revenue. Tools like Canva and Figma allow you to create working demos so investors can visualize what they’re investing in without you actually building the final product. Nowadays, you can easily create a mobile app with rapid development tools, templates, and AI-generated code services and get a first version to market within months.
Conclusion
While venture capital can fuel impressive progress for some, it’s not universally the right fit. Consider alternative funding sources that align with your long-term vision and business goals.
