5 Reasons You Should NOT Raise Venture Funding
Nov 25, 2019
Recently, this question hit the WorkSmart inbox:
As you may know, I’ve raised over 9.5M+ in venture capital (VC) from silicon valley investors and often advise startups on how to scale their revenue, teams and businesses. This week I'm answering Angina's question and any one else who needs to hear it about how to determine if you and your business are ready for VC funding. Here are the questions to ask yourself:
- Will you be able to return every dollar you receive into 10x in the next 5-7 years? If you’re raising a 1 million dollar seed round VCs will expect that you exit for at least 10 Million dollars. Raising 5M? → 50M… Raising 10M? → 100M.
- In other words...can you and your business grow insanely fast? Do you want to grow insanely fast? I’m talking from 10 employees to 35 in under 9 months… or from 2 Million dollars in revenue to 8 Million dollars in a year?
- Do you (and your family) want to live the lifestyle of a CEO growing a company really fast and fundraising every 9-12 months? This means few vacations, lots of risk, flights, high stress - quick decision making, public and private pressure to grow….
- Are you willing to potentially lose control of your business and decision making in exchange for a higher valuation or faster growth? The venture firms that invest in you will likely have an opinion about how to run the company and if there is a conflict, and they sit on the board there could be a chance that they have more voting power than you.
I cried for days when I was raising my 6.5M Series A and did the math on how much of the company I owned after the round. While I was willing to make the trade off for Blavity Inc. having a larger potential impact and reach, seeing my personal ownership drop below 50% had me HURT/SHOOK/DEVASTATED/IN SHOCK for weeks. I remember calling my friend Diishan and a few other CEOs who had raised their Series A/B and being like… WHY DIDN’T YOU TELL ME THIS WAS WHAT IT COST! (Pro Tip: get CEO friends who are 2-3 steps ahead of you so they can coach you through tough choices...)
- Lastly, are you willing to either: Make your company public, Sell your company or Kill it? Harsh… I know… But I want to make sure you hear me... VC money means going big or going home.
Let’s take a quick look at 2 media exits that you may be familiar with:
- Arianna Huffington, CEO, founder of The Huffington Post sold her company for 300M+. After raising multiple VC rounds she walked away with a reported 21M. That’s about 6.6% of the company.
- Michael Arrington, CEO, founder TechCrunch sold his company around ~40M but since he didn’t raise any big VC money he walked away between 22-30M.
So why do so many CEOs feel compelled to become venture funded? IMHO, the culture of VC-backed startups makes us look at companies that have raised a significant amount of money as the successful ones. One of the reasons I started my WorkSmart program and this newsletter was to share information with entrepreneurs on how to build a business with revenue and opportunity.
Ultimately, the decision to raise is yours. It’s important that you understand the stakes…