Obtaining VC funding once stood as one of the greatest accolades to obtain in the startup community. Now a very different movement is taking place as a recent New York Times article highlighted. According to the article, 50 start-up founders gathered in a basement of a Lower East Side bar to discuss the investment framework of VC capital that has supercharged this industry.
“We are aggressive about growth, but we are not a company that chases growth at all costs, we want to build a company that lasts.” – Sandra Oh Lin, the chief executive of KiwiCo
In its most basic, VC funding can be considered like steroids for startups. Essentially, start-ups raise piles of money from investors and then use the cash to grow aggressively, faster than the competition, faster than regulators, faster than most normal businesses would consider sane. Larger and larger rounds of funding follow, states the article.
“The tool of venture capital is so specific to a tiny, tiny fraction of companies. We can’t let ourselves be fooled into thinking that’s the story of the future of American entrepreneurship.” – 38-year-old entrepreneur Mara Zepeda
As the many comments throughout the article highlight, there appears to be numerous reason why an entrepreneur might reject VC fund. To get a more in-depth understanding of what might motivate an entrepreneur to turn down investment, we spoke with Jonathan Breeze, the CEO of AardvarkCompare.com, a travel insurance comparison site for seniors, who has spent 20 years founding and growing various projects. He believes that:
“Entrepreneurs will reject VC money if they think that the VC objectives are not aligned with their own. For a VC to be successful it needs a small percentage of its investments to achieve stratospheric growth. If the majority of those investments die, but a few turn into Billion Dollar Unicorns, then all is well for the VC. However, those companies who died because they chased a high-growth at any costs approach, life does not look so rosy.
Better, arguably, to grow at your own pace, without the external pressure to bet your entire company on VC-fueled growth rates that may not be possible. The problem with reliance on VC funding, or bank lending is that, in essence, the entrepreneur has no control as to whether the company succeeds or fails. Without follow-on funding, or bank financing, the company dies due to a lack of cash. In times of funding shortages, VC investors and banks will choose which of their portfolio companies get to live or die.
Why would an entrepreneur put themselves in such a position? Surely, they would be better served by spending more time creating a business model that did not require vast amounts of capital to survive. By way of example, at AardvarkCompare we built a highly efficient Travel Insurance Marketplace, rather than a capital inefficient Travel Insurance Carrier.
Both are viable business models, but the marketplace is cash efficient. Cash efficiency is not something that the world of Venture Capital talks about, yet it is a critical measure of a company, particularly in its early years. Venture Capital needs entrepreneurs who are reliant on capital. If entrepreneurs spent more time thinking about their company design they would find themselves far less reliant on the whims of external investors.”
If this trend continues, we are likely to return to the traditional values that created the startup community today, producing a generation of resourceful entrepreneurs ready to disrupt industries throughout the world, without the help of VC funding.
Disclosure: This article includes a client of an Espacio portfolio company