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What risks do I run choosing venture capital to start up my business?
Now that’s a great question! People say they need VC to start their business, but often the startups don’t necessarily understand what that means! Most people think of Venture Capital as another word for Money. It’s a lot more than that!
When you take in VC money you are taking in new co-owners of your business. Actually, the money you are taking in usually isn’t even the VCs money – its their investors money! Yes, VCs raise money just like you. And since they are playing with someone else’s money, they have to report on the activities to their LPs (limited partners). They want to report good news so they need good news to report, which is where that whole co-owner thing comes in. They need to make sure that you are doing the right thing, and are on the right track to make them a lot of money. You need to report good news to them!
So here’s a risk – you now have someone to report to! Before, if you didn’t meet your numbers, or if you didn’t want to work for a few days, or if you use your corporate credit card to pay for your hotel for you and your wife, a nice dinner and show tickets in NYC and expense it, that was no big deal. It is now!
People don’t like when you ‘mess’ with their money. The Investment you got wasn’t a favor, it was an investment. The investors are going to do anything in their power to secure this investment. Even if that means...and here’s another risk...replacing some of the management team.
Every entrepreneur loves their own business – whatever you are doing. But sometimes you are not the right CEO to take your business to the next level! Yup, take in enough Investment capital and one day you can wake up out of your CEO job. You won’t be fired, you would probably remain on as president or COB or something... Of course, this wont make you poor, you’ll still have your stock – and hopefully the new CEO will be able to take the company to an exit (IPO or acquisition) where you and the VCs make a lot of money.
Another thing I want to be clear on, is that when an investor gives you a check, he becomes a co-owner of your company. You used to own 100% of your company, now you own 68% (or something). If you raise another round, that number goes down even further. Usually by the time a company goes public, the original owners own just a small part of the company! That might scare you – but its not really a risk. One of my old investors once told me its better to own 10% of $10,000,000 than 100% of nothing.
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Your perspective on Venture Capital was great. Thanks for all the insight on it. :)
Barbara from Michigan
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