Here is the problem with venture capital: A lot of startups think they should be VC funded, but they are fundamentally not set up for it.
When you raise venture capital, the simple and common assumption is that your company needs to grow 10x in its valuation over a 5-7 year time frame.
Venture capital, no matter how cool it seems to be, is typically not the right form of capital for most companies. Tweet This Quote
Most companies (interestingly a lot that participate in incubators and accelerators, and some who subsequently raise VC money) have no real path to this level of growth.
Let’s dissect this a bit. Say you raise $5M on a $20M pre/$25M post-money valuation (which by the way is a fairly typical, small Series A these days). To make this investment work, your VCs will need to see you exit with at least a $200M-$250M valuation. A quarter of a billion dollar valuation is a tall order!
A lot of startups think they should be VC funded, but they’re fundamentally not set up for it. Tweet This Quote
To get there, you will need to drive your company in a highly specific direction. This means aggressive growth of your core metrics, often initially at the cost of growing your bottom line, and the aim to “switch the flip” sometime later in the game to generate the profits that will see you through to this kind of a valuation. The problem with this is 99 percent of companies are simply not set up for this. They are often amazing businesses that can create incredible returns for their stakeholders, but fundamentally they are businesses that should focus on driving revenue and profits—not valuations.
Therefore, venture capital, as much as it is being talked about and how cool it seems to be, is typically not the right form of capital for most companies. Sadly, too many companies that are simply not right for VC money waste precious time and resources in chasing venture capital dollars.
Too many companies that simply aren’t right for VC money waste precious time and resources chasing it. Tweet This Quote
This weekend might be a great time to step back from the daily grind and ask yourself what kind of business you really are. Once you know, figure out what that means in terms of your growth, your capital needs, and your strategy.
A version of this post originally appeared on Pascal’s blog, The Heretic.