Collectively, myself and the team at Dynamo think a lot about fundraising. While we’re venture investors, we’re acutely aware that venture isn’t right for every business. Nor is every founder predisposed to being good at leading a venture-backed company.
When considering venture capital, founders need to pause and answer two questions in the below order:
Is my business best served by raising venture capital?
Are my cofounders and I prepared for what comes with leading and running a venture-backed company?
Is my business best served by raising venture capital?
Relatively speaking, I think this is a fairly easy question to answer. It requires “honestly inputting three variables”:
The TAM. The billion dollar cliche– is there enough money to made and furthermore, is the target market able and willing to adopt your solution? A big mistake most make early-on is to introduce more customer types if the primary one is still largely unpenetrated
Pricing Introductory deals aside, it is important to get investors comfortable around pricing in a run-rate environment. Often times pricing is so low, it is difficult for investors to see a path where it will improve. Not to mention, pricing is quite hard to increase once a large number of customers are used to it being lower
Business model. In the early-innings, many unscalable things happen– but the once investment has been made– can we economically attack the TAM at a fast pace? This is where “X”aaS business models are attractive– make investments early on and assuming product/market fit, in year 5, a company has a large series of cash flows that exceed the upfront investment
Tying these three points together is the bow we call “traction.” Nothing can prove that a business is venture worthy more than a lot of customers quickly adopting a product at an undiscounted price. Traction is looked at in context to one’s TAM and the amount of time you’ve been in business– speed does matter. After all, venture investors are after returns derived from fast-growth.
Are my cofounders and I prepared for what comes with leading and running a venture-backed company?
This is a big question that requires honest self reflection. Founders need to understand what happens when they sell a portion of their company to VCs. Below are just a few considerations:
the Company is no longer just “yours”– you answer to a Board
growth needs to occur at an exponential rate– no longer set by the founding team
once you go down the VC route, it is hard if not impossible to get off
dilution will ultimately result in founding ownership of 10-20% at exit
founders can be replaced by seasoned operators
cofounders who have waited to ID who is CEO will be allowing a new party to opine on the decision– dynamics might not end up as friendly
This is a question that a good mentor who has been there/done that can help with. It’s more important to answer and also significantly more difficult to answer relative to the first. Understand the demands of VC, reflect on it, discuss it with cofounders and mentors before making an ultimate decision.
Away from VC, there are many ways to fund a business: bootstrapping, reinvesting cash flow, bank financing, non-VC private investors (think those ok w/ slow growth and dividends), etc. None of the aforementioned capital sources detract from a founder’s success when they exit their business. Choose your funding wisely.
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