Oh, the lure of the VC. When they call you had better answer, right?
I get the phone call often, “VCs are calling us, what should we do?” My response is always the same, “Take the meeting. Explain where you are in the process, and never under any circumstances accept an exclusive term sheet from a one-off investor.” Well, unless you are three months behind in rent and can’t make payroll. That’s a different blog post.
Back to capital raising. The capital-raising process is a marathon, not a sprint. Entrepreneurs should prepare for the race by researching all capital sources – equity, debt, and of course the cheapest capital of all: customers’ cash. If you don’t know about crowd funding, you may be living under a rock.
Entrepreneurs need to understand their funding roadmap. Hopefully, it includes non-dilutive capital sources early in the game, and a conservative amount of dilutive capital sources as needed. When you are just starting out you don’t need VCs.
If you are too early for venture capital, don’t feel the pressure to take it. To use the staid marriage analogy, it’s similar to marrying your high school sweetheart, only to realize three years later that you haven’t reached the maturity required for a long-term commitment. You now have a mortgage, two kids and a minivan, and you’re lost.
Take time to grow up. It’s okay to say no to venture capital if your company is not mature enough. Allow your valuation to grow. Allow investors time to get to know your company. Investors love companies that are able to gain traction with non-dilutive sources of capital. And, of course, entrepreneurs love holding on to as much equity as possible.
There is a danger in letting go of too much equity too soon. You don’t want to be an Angie, you want to be a Miucca. When Angie’s List went public, Angie Hicks held only 1.8% of the company. Compare that to Miucca Prada who owned 33.2% of her company, which was enough equity to garner her multi-billionaire status at her company’s IPO. Miucca was conservative in her funding roadmap and used non-dilutive sources of capital for as long as she possibly could. Angie used extensive amounts of dilutive capital (read: venture capital) to grow her company, and she ended up losing it. I bet Angie wishes someone would have told her that she didn’t need VCs.
You spend the best years of your life building your company, shouldn’t you be able to enjoy the rewards when you exit? I think so.