For young and hungry tech startups, it can seem like there is no downside to seeking out venture capital funding to help business operations find their footing and start to scale. And it can also seem like there is no shortage of funding available for the taking: in 2016, VC investment activity raised $69B across more than 7700 companies, according to Pitchbook and NVCA’s Venture Monitor report.
However, this is actually a slight decline from previous years, indicating that while VC funding is still flowing, investors are being more mindful about which companies they are willing to back. Additionally, we are continuing to see the post tech bubble trend of startups choosing to stay private for longer periods of time before seeking out VC funding rounds.
The declining focus on funding larger-than-life unicorns at huge investment levels leaves more room for a larger cast of tech startups to seek a piece of the venture capital pie, which is good news for entrepreneurs. As the market returns to healthy levels of investment across the board, there are important factors every entrepreneur should consider before seeking VC funding for their startup.
Consider Success Rates
It bears keeping in mind that receiving backing from a major VC does not guarantee long-term success. While $69.1 billion was invested across 7,751 companies in 2016, the number of companies that will achieve IPOs and mergers and acquisitions deals is much slimmer. The odds are steep. Investors are always going to invest in the companies that they think will succeed, but with so much competition, entrepreneurs must have conviction in what differentiates their startup from a crowded field, but also the realization that securing VC funding is only the first step in a potential success story.
Think of The Time Frame
While long term success is always the goal for startups who seek VC funding, it’s helpful to remember the timeframes involved in securing funding. Typical venture funds are structured as 10 year commitments for limited partners who invest. Initial investments are usually made within the first three years, and firms may make follow-up investments over the remainder of a fund’s life cycle, but that 10-year mark is a good way to think of whether you can achieve a return on the investment. It’s also a good time frame to think of whether you can achieve the kind of growth you’ll need to make an ROI and become profitable.
Entrepreneurs should also be mindful of not accepting too much capital from initial VC funders right out of the gate, because the focus should always be on building a great product, not raising massive amounts of capital. Raise what you need, so that you can keep the focus on building one great product rather than scaling operations too fast, which can lead to a high burn rate and diluted multiple product offerings. Entrepreneurs should raise the amount that matches their benchmark, and operate with a scarcity mindset to motivate success.
Choose The Right VC For You
Because initial VC investors often end up on a company’s long-term board of advisors, you want to make sure your longterm goals align well with that of the investment firm and the partner’s areas of expertise. Investors are main stakeholders not only in the early stages of a startup, but in its long-term growth. So it’s critical to make sure goals and expectations are aligned from the get-go.
Whether venture capital funding is the best choice for a startup really comes down to the individual goals of founders and entrepreneurs. Entrepreneurs have to be confident in their product’s success while not being afraid to fail. Founders have to accept that with funding can come more management partners around the conference table, which is why it’s critical to find a firm whose goals and vision align. Seeking VC funding is a great way to take your startup to the next level, and approaching the process with these concerns in mind can help to ensure that you end up happy with the investment relationship.