It’s not because I couldn’t. I own a technology-based social-media services company, and there is a great deal of venture capital activity in this space. Indeed, many of our competitors are VC-funded, and over the last few years we’ve had interest from and conversations with several top firms. But we chose not to take the bait.
People think VC funding is a critical stepping stone towards success. But the reality is that three out of four VC-backed businesses fail, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School. Plus, there are downsides to taking VC funding, which entrepreneurs tend to overlook.
Here are a few reasons why I personally didn’t go this route -- a choice that has been instrumental to my success.
VCs are interested in selling, not building. When I started my business, many people told me to get outside funding. But I have sensed that building businesses with long-term potential is not a VC’s primary agenda. Instead, their objective is to sell a company at a hefty price and get out as quickly as possible.
Not taking VC cash meant that I had to embark upon building a business on my own. This required me to make money quickly and continue to enhance our product to ensure our clients were (and still are) happy. In other words, our motto became “we need to run a business that is profitable,” which was both terrifying and liberating at the same time.
Not having a buffer of VC cash sitting in the bank forces you to innovate. It forces you to provide superior customer service and to grow. It ensures that your feet are held to fire each and every day. When this happens, everyone wins: clients, employees and partners.
When you focus on VC funding, you stop focusing on your product. Recently, I ran into a fellow entrepreneur of a VC-backed firm. When I asked how things were going, he said, “Well had you asked me that question a couple of weeks ago, I would have told you that we were on top of the world! We were about to close a huge second round of funding. The deal fell through at the eleventh hour -- basically, throwing away six months’ worth of work.”
He went on to tell me that they had been so focused on the deal that most of the management team (and a large part of the rest of his staff) did nothing but respond to requests from the VCs and prepare. They took their eye off the ball, eschewing customer complaints, important product enhancements and employee requests. Now, clients were unhappy and canceling contracts, employees were annoyed and leaving the company and their investors were also very unhappy.
Sadly, this is not the first -- nor will it be the last -- of this kind of story. The key lesson here is that time and energy spent chasing outside funding is time and effort that could be put towards meeting with customers, listening to employees and building the partnerships necessary to keep growing your business.
I didn't REALLY need VC cash. I, along with four other founders, was recently invited to speak at an event for aspiring entrepreneurs. Of the five panelists, I was the only founder who had not taken VC investment.
The conversation quickly turned to how to raise VC, how difficult and time consuming it is and the importance of managing your investors. One brave audience member raised her hand and asked, “It sounds like taking VC has lots of downsides. Why did most of you decide to go this route?” The panelists’ answers were enlightening for me. It really boiled down to one thing: They didn’t know how to do it any other way. In other words, they didn’t know how to build a business that would make money. In fact, many of their businesses still had no clear path to profitability.
Instead of going down this road and pursuing VC investments just because it seems like the thing to do, start by building your business plan. Be creative and identify profitable services that are going to make your customers happy and make them want to continue doing business with you.
In the end, I realized I didn't need VC money; I could do it on my own. Plus I did not want to put time and energy into answering to investors who I felt may not understand my business. I decided to make my business plan, and I chose to run my company, not to sell it. I know this approach is not the appropriate choice for everyone (there are pros and cons to every route you choose) but VC funding is not always necessary to becoming a profitable and scalable company.