Every week there are new headlines applauding start-ups as they raise venture capital (VC), and we are all familiar with the VC success stories of Instagram, Uber and Airbnb. But what we don’t often hear about are the downsides of VC.
Ten years ago (in 2004), when Findmyshift launched the first web-based employee scheduler, the topic of raising capital came up often. While it was easy to see the benefits that external investment could bring, we also recognized VC wasn't a golden ticket, at least not for us. So what exactly was it that tipped the balance, and why did we say no to investors?
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VC funding isn’t free, and you’re almost certainly signing over a percentage of your future profits. How much and when will vary, but should your business become a success, your personal earnings as a business owner are going to be diluted. While a small slice of a big pie can out-weigh a bigger slice from a smaller pie, you’re gambling that the VC funding will grow your profits, which is not always the case.
Success not guaranteed
Contrary to the "Look who's made the big time!" tone of the headlines, when a business raises investment they are not celebrating the end of a journey but the beginning of one. To us, venture capital would not have meant we’d made it; it wouldn’t even mean we were going to make it. In fact, in 2012 the Wall Street Journal reported that 3 out of 4 venture-funded start-ups fail.
Loss of control
Dot com millionaire Maria Bustillos revealed that private investors "ruined" her vision for her online business, and while every agreement is different, we see that one of the trickiest parts of being funded is balancing investor objectives with those that the company was founded on. For us, fair pricing and customer satisfaction were key to our long-term growth, and we didn’t believe either would survive a round of VC funding.
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If you want to be the next big thing, you’re probably not alone, but have you ever asked yourself why? Like most young start-ups, we wanted to grow and be profitable, but we wanted to do so without the pressure or the profile of a fast-growing, multi-million dollar company. And so we did, and without investor pressure we were able to listen and learn from our users, putting customers before profits, building trust, and ultimately a better product.
Rather than seeing VC funding as an end goal, think about where you’d take your business if there were no VC options. Don't let the pursuit of funding dilute your vision and drive. Although MOZ went on to raise $24 million in funding, we think this article on their "misadventures" in venture capital is a great overview of how demanding the process can be. Pour that energy (and money) into what you can do without VC and you may see the need diminished.
Whatever your opinion of VC, you should always do what’s best for your business and your team. For us, that was saying no to investors.