With the popularity of entrepreneurial shows like Shark Tank and the influence of tech news headlines, there is a growing misconception that to succeed as an entrepreneur, you must seek venture capital. Contrary to popular belief, this is not true.
Sure, the proven venture capital financing route yields its benefits, such as million-dollar checks, business expertise, active support, and new connections, but it is smart to consider all options before settling on a final decision.
Here are five important questions to ask if you are considering a venture capital investment:
1. Do you understand the motivations of venture capitalists?
Investors are motivated by winning big. Thanks to the venture fund business model, they are substantially incentivized for hitting home runs by betting on the right companies.
This is why investors make risky bets into startups that have the potential to soar and become billion dollar companies. Funders gain a tremendous amount of upside if your startup is sold or becomes public through an IPO.
2. What is your definition of success?
Before your founding startup team considers investors, seriously take the time to think about what success means to your team. Is the ultimate goal to build a service that changes the lifestyle of everyday people or to develop a product that changes the world?
Many budding companies are valued at $1 million or $50 million. However, they are not always venture backed companies. In the venture capital world, firms are not looking to invest in singles or doubles, but to hit home runs.
3. Can your venture scale fast?
The majority of upside revenue that venture capital firms gain from their investments comes from a liquidity event, such as an acquisition or public IPO. The lifetime of a fund can usually last 7-10 years, with the first three years dedicated to investing those funds.
Therefore, the goal is for a few of the portfolio companies to reach a liquidity event by the end of the fund. To meet that goal, your company has to be able to scale quickly to be worth a sizable amount of money.
4. What aspects of your product or business model will enable you to scale?
Consider the market you are entering. Is it big enough? What characteristics of the business make you different from the current or future competition?
Your answers will determine if you are ready to take on venture capital money. If you have difficulty answering, wait until you are comfortable with the time commitment it takes to scale.
5. Are you interested in other options?
If your interest is not in selling your business, going public, or building a large corporation, there are alternative funding sources to consider. Small business loans, company profits, and municipality grants for entrepreneurship may be suitable funding mechanisms.
Are you ready for a venture capital investment? The final decision is yours, but it will benefit you to do your due diligence and weigh all options before you commit.