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First Step to Success: Avoid VCs

Venture capital isn't right for every entrepreneur. Here are a few things to consider before looking for VC backing.

Think about starting or growing a business, and it's not long before money comes to mind. With equipment, salaries, marketing, inventory, transportation, and all the other things that accompany running a company, how could attracting operating cash be far from sight?

For many (if not most) businesses, the answer to money matters is investors. And many entrepreneurs will consider the venture capital route almost out of habit.

But put down that business plan and take a moment. A lot of start-ups find that venture capital doesn't make sense, as a panel of investors and entrepreneurs recently said at a Microsoft event.

Here are some things you should consider:

More money, more problems. Don't underestimate how much you need, but don't take a lot more than you really require. Not only can the extra cash become an unsettling factor, but you'll have to give away a lot more of the company to get it.

How much money can you really make? Let's say that you've got a business concept that would bring in $30,000 a month and net out $10,000 after expenses. That could be a very nice business for you. But for a VC, which wants multiple times its investment back in returns, that type of revenue would be peanuts. But scaling a business to a much larger size can actually make it a lot less profitable for the people hours put in, to say nothing of a lot more time- and life-consuming. Is that what you want out of your business? What good is it to satisfy the VCs if you're not satisfied?

There are other sources out there. There are more angel investors and funds, agencies, and early-stage investors that can provide money in smaller amounts that might better match your needs and interests. VCs aren't the only game in town, anymore. Or ask yourself: Can you get financing from family and friends? Can you set up sales and purchasing in such a way that you can self-fund your operations? Does the Internet and associated technology give you paths to reduce your operating costs and, therefore, need for money? Find the type of investment and financing that works for you.

VCs are after rapid growth. This is another question that comes down to what you want out of a business. Most VCs want rapid growth because that's what eventually catches the interest in IPOs — for now. But that may be the wrong focus for you, particularly if you haven't yet figured out a way to scale revenue to match public attention. Again, you should consider what you want out of a business.

Before you look up the addresses of venture capitalists, be sure you've thought long and hard about your business, what you want, and whether you can realistically use a VC relationship. Even if VC money does eventually prove to be a smart move, you'll have done some deep thinking that any entrepreneur should do.

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Last updated: Apr 6, 2012

ERIK SHERMAN | Columnist

Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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