What nobody tells you about taking VC money

9th May 2017
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Looking for venture capital has become a lot like chasing the lottery. Some strike gold while most others go home empty-handed. Raising VC funds makes sense in certain scenarios. Entrepreneurs generally take VC money to provide guidance and support to their business. VC investors tend to know exactly where the industry is headed and what its customers value. Most entrepreneurs rely on VC cash as it promises rapid growth. However, those who think that VC money can work miracles for their business are sadly mistaken. While VC money has its fair share of benefits, it does not necessarily guaranty success in business. Here are three situations in which your company can probably skip VC funding:

Image : shutterstock

Image : shutterstock

Your startup is going to be service-based

You'll have no need for pitching to VC investors if you're thinking of starting a service-based business. The VC system works wonders for companies who have a product to sell and are seeking parabolic growth in the near future. These companies intend to use the VC money to scale production without adding personnel and infrastructure. Service-based businesses on the other hand need to increase their employees at a rate similar to their business growth. Therefore, VC investors don't prefer providing funding to service-based companies as they don't fit their growth structure.

Not all entrepreneurs can afford to pay back a high-interest VC loan

Venture Capital isn't given to entrepreneurs free of cost. If an entrepreneur is successful, investors want to see ten-fold returns. If your company is not growing at the speed the investors have in mind, they are bound to liquidate your company to recoup their funds. VC investors are interested in playing a high-risk, high-reward game and they prefer to be involved in decisions that affects their investment's growth. However, this kind of pressure is not always bad for entrepreneurs as taking VC money can create a financial wiggle-room for cash starved companies. On the other hand, entrepreneurs who have taken VC money have little time to prove themselves and equally little say in structural business decisions. When a company is not VC backed, it has the freedom to explore business initiatives at its own pace.

You're concerned with incremental growth in small markets

It is unlikely that all businesses will achieve rapid growth like Snapchat and Twitter. Most companies, especially the service-sector ones, are best served by steady and linear growth. Startups that are VC-backed tend to grow at the rate of 15 percent to 20 percent with each passing month. But it is okay if you're not taking over large markets or growing at a substantial rate. If you're able to spend your free time tinkering with new technology and delivering great service to clients, you're growing just as well. The idea is to build a profitable business and forge strong partnerships that will determine the growth of your company in the long run.

It is therefore best to think twice before you reach out for VC money. If autonomy is important to you and you have your own growth goals, it is best to stay away from VC money.

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