On the hunt for Holy Grails, Unicorns, VC funding and other fabled creatures

This article may be a little controversial but it is part of my mission to guide our entrepreneurs to success — and if we can stop our founders from wasting time doing things that will never bear fruit, then we are doing our job.

New venture founders are massively overly focused on VC-sourced funding – which may initially seem appropriate as lack of money is a problem that most startups face at sometime. However, there is undoubtedly a disproportionate amount of time and resource dedicated to seeking VC funding which will remain for most, a holy grail.

In the UK there were roughly 500 000 new businesses launched in 2014 and about 280 VC backed deals (Dow Jones VC Report and Companies House data) — that equates to 0.06% getting VC finance. Sure we can refine the calculation and eliminate certain types of new businesses, add in angel funding, consider cross-border transactions — but after all this even if you are in one of the more promising sectors the odds are certainly far less than three percent that a startup will ever get VC funding.

Unfortunately, 9 out of 10 entrepreneurs will probably already be thinking: “yes, but I am different and my business is definitely fundable.” Let’s test that. Ignoring all the slick pitches, frenetic networking and startup jargon, there are really only a few questions you need to answer:

Am I addressing a really big market?

• If I am successful, is the potential return on investment massive?
• Have I got concrete evidence that my model can deliver this (think sustainably, competition, risk levels, scalability)?
• Have I got a team that can definitely make this happen?

Answer “yes” to all of these and just maybe you are in the group who just might be right for VC’s. But remembering, it is not just your venture that is important, you are being compared against plenty of other potential investment opportunities as well.

Hypothetically, if you are in the group that might obtain a round of finance, do you really want it? VC’s will try and reduce risk and the best way to do that is by investing in businesses that have a higher likelihood of success and with big upward potential. That translates into businesses that already have significant traction with real paying customers. If you are in that situation, would you rather not consider using customer revenue to fund your growth?

The logical conclusion is to focus on getting to that desired level of traction. Even if , despite the warnings you still wish to seek VC funding, it would still make more sense to do all you can to reduce the riskiness of your business by proving that it works and in so doing, strengthen your negotiation position before you even consider seeking funds. What is more it also gives you the option to continue bootstrapping your business and retain control if funding does not become available at acceptable terms.

On the subject of control, this is another good reason to think long and hard about the funding route because once you are on board its going to feel like you are on the fabled train in Jethro Tull’s Locomotive Breath “ the train it won’t stop going, no way to slow down” (most readers won’t recognise the reference but will get the imagery). There will be constant pressure on you to exit or move to subsequent financing rounds. The good news is you could have a skyrocketing net worth; but the negative is your control over the business is going to be moving in the opposite direction.

Furthermore if you do decide to go the VC path, you are going to have to get familiar with the ever more complicated terms and conditions that the VC’s are dreaming up. Terms like full ratchet anti-dilution and reverse vesting should make a founder’s blood run cold!

I am not anti-VC. I think the majority do a great job and have a valuable role in injecting money into the system. When they do invest they also generally add tremendous benefit in terms of support, experience, network and credibility. The leverage that people like AirBnB, Uber and the other “unicorns” have gained from these funds has been massive.

The inspiration and motivation that those successes provide is also a positive factor in encouraging entrepreneurship.

But lets not forget the VC’s raison d’etre is to make money for their funders, which means the better the deal they negotiate for themselves, the worse for you! Although I have heard some compelling and passionate presentations from these “suits” about how they desire to support and protect the entrepreneur, the fundamental is that a negotiation is a zero sum game and the VC’s normally hold the good cards.

In summary, we suggest:

Focus on building your business all the way to real traction and waste no time on the funding trail until then.
If you then fall into the category of VC-fundable, you can consider that path, but be highly attuned to what Wasserman calls the “cash versus control” in his book The Founders Dolemma. (see this HBR article)

Remember that funding does not equal success. Plenty of ventures fail post-funding, but the VC-funded casualties tend to be a lot messier to clean up.

So founders … concentrate on the areas that matter – insanely great products, customer acquisition and refining your business models to develop sustainable customer revenue streams. Learn to say “no” to the next sexy pitch or national startup event. You really do not have time for the distractions of searching for the VC Holy Grail while you have a business to build!

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This article by Simon Gifford originally appeared on Mashauri.com and is republished with permission.