Business Startup

Why Venture Capital Is Toxic for Your Startup

Why Venture Capital Is Toxic for Your Startup

When starting a business, we often start chasing venture capital sooner that we should. What we don’t recognize is that this race for funding can actually be the first step on the road to destruction. In this article, I want to discuss with you why venture capital can not only do nothing good for your startup, but even hurt it in the end. Sure, not all companies are created equal. Some companies will thrive thanks to injections of venture money. On the other hand, for some companies it will only equivalent of surviving on medical apparatus.

If you are considering pitching venture capitalist and raising capital, please take your time and read this. What I want to do by writing and sharing this article with you is to make you rethink the reasons behind that decision. Take your time and question your assumptions and information your decision is based on. In majority of cases, business has to face struggles and obstacles before it will flourish. If this seems like I’m trying to discourage you from taking VCs on board, you are right.

I also want to encourage you to do it by yourself, to assemble all the will and strength you have inside you endure these tough times. Remember that building a company is a long journey and without couple downs you will not be able to recognize and appreciate the ups. Don’t get me wrong here. I don’t suggest that you should become a masochist. You should just understand that without experiencing one you will not see the other. What’s more, by going through the tough times you will gradually build resilience and get lots of worthy experiences for your future business ventures. Without further ado, let’s begin!

Focus and Distraction

First reason why bringing venture capital into your startup can be toxic is possibility of blurring your focus. What I mean by that is investors are often more interested in squeezing profit from their investment buckets than in your product or services. Sure, they want them to be good. Otherwise, nobody would want to buy them and you will not make any money at all. However, there is a big difference between company focused on delivering the best product or service (read value) to their customers and company that is shipping something average.

“Be a yardstick of quality. Some people aren’t used to an environment where excellence is expected.” – Steve Jobs

Although it seems logical investors should be interested in pouring his money into companies bringing the highest value and best experience to their customers, it is not. Where this premise hits the wall is the fact that developing groundbreaking products require a lot of time and resources. For some investors this is acceptable and necessary part of a game. For other it will be something they will want to avoid saving resources for something “more” important. It should be clear that for every company, creating the biggest value should be the ultimate goal.

“Great companies are built on great products.” – Elon Musk

As the quote above says, great companies are built on great products. You cannot shortcut product development and expect your company to thrive in the long term. You employees will spot the change from product-focused to investor-focused mindset. Then, it is just the matter of the time until customers will start to see the quality of your products to deteriorate. Unfortunately, this is often too late to do something with it. Your company is already sinking. What you can do is to focus on saving what still can be saved, but it will not rectify your reputation.

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” – Warren Buffett

If accepting venture capital money means distractions from pursuing building and shipping perfect product, find a way to supplement it. In many cases, there are other less visible paths which you can go without compromising your core values. It will be probably harder, but it will payoff in sense of bigger base of happy customers. Happy customers will, in return, bring you the profits you need to keep your company alive and even grow.

Unnecessary Hiring

Honestly, this one is my favorite one. When venture capital enters the game, one of the reactions is to start hiring like crazy. Logic behind it is flawless, almost. Contrary to popular belief, more hands will NOT get more job done. It is almost the opposite. The more people are working in a team, the less work will be done. What’s more, there will also be much more need for meetings and flow of information will suffer.

“There’s nothing wrong with staying small. You can do big things with a small team.” – Jason Fried

The somewhat funny reality is that small and agile teams are one of the things big companies are trying to copy or steal from startups. If many companies are taking this as an advantage, why should you want to do the opposite and grow your team? If you face some challenges with too much work to get done, look for what can you get rid of or optimize. Sometimes, having too many things going on at the same time is a symptom of doing something wrong. Use advice from Rework and cut off unimportant parts instead of hiring. How do you know if your team is too big?

“If you can’t feed a team with two pizzas, it’s too large.” – Jeff Bezos

Another reason of hiring fever can be that you as a founder want your company to look big. There is nothing wrong with being proud on your company. However, using venture capital and hiring as an artificial catalyst to make your company bigger will have its consequences. Sooner or later, you will have to fire some employees you hired back then. The more your hiring fever was the more people you will have to let go. Before going for venture capital to be able to hire more people, consider whether there is a place where you can tighten the belt.

“You don’t need to have a 100-person company to develop that idea.” – Larry Page

Zombie Companies

Reason why many entrepreneurs and founders are looking for venture capital is to keep their company alive. There will be times during the company’s life cycle when you will barely make it through the month. It is tough, but also something every businessman has to understand. Every company should be able to make enough money to keep itself alive and pay its employees. When this is not truth, there is no reason to keep your company in this “zombie” mode and pump it with venture capital. It is better to acknowledge the truth and let it go.

“In business, money is either an important thing or it is everything.” – Peter Thiel

That being said, how does this maxim applies to early-stage companies that just got started and are looking for ways to make profit? First and foremost, you should have at least some idea about how will you make profit before starting your company. This is one of the reasons I like philosophy of a lean startup. Even though you are starting something new, you don’t have to go blind. Instead, you can do market research to find out if your business idea is viable at all. Please, don’t overthink it. Having a plan in mind is important, but it doesn’t have too complex. Keep it simple.

“A good plan violently executed now is better than a perfect plan executed next week.” – George S. Patton

Unfortunately, there will be times when no amount of research or lean startup philosophy will help you. This will happen when you are about to introduce something market has never seen before. If the product or service your business is based on is brand new, innovation in its core, it will be impossible to test it. Why? People simply don’t know what they want until you show it to them. If you don’t believe me, think about products such as Instagram or iPhone or Facebook. Going back to 90′ did you feel the need for these products? Probably not.

“If I had asked people what they wanted, they would have said faster horses.” – Henry Ford

Only after they were introduced to the market and people saw them and tried them, they also want them. From this point of view, your startup may need some “testing” time to see whether it is viable and justifiable to pursue this or that idea. In this case, I would suggest that you put together as much money as you have and go with bootstraping. Another option is to prepare your pitch, gather your family members and friends and sell your idea like your life depends on it. Pitching venture capitalists should be the last frontier.

Command and Control

The last reason why venture capital might be toxic for your startup is that by letting an investor in you are giving up part of the control. What’s more, the earlier you will invite venture capital into your company, the bigger piece of the cake you will have to give up. As I mentioned in the beginning, people will be less likely to invest in your business in the early stage. The only way to overcome this reluctance is either by having amazing business idea or by giving away bigger part of your company and taking the risk of being pushed out later.

I guess that even if you overall goal selling your company, which shouldn’t be, you probably want to keep the majority of company as long as possible. Unless you have some ace in your sleeve, such as great business idea or established customer base, you will not be able to get both. You will have to decide between giving up part of your company and getting an investment or going through some tough times when you will struggle with finances. Neither of it probably sounds pleasant to you, but it is reality.

“Being in command means making tough decisions. Not being in command means shutting up and doing what you’re told. “ – Eoin Colfer (Artemis Fowl)

Is Venture Capital Really Bad

Chasing venture capital is often one of the tasks entrepreneurs and startup founders have on their lists. Is that bad in all cases? I don’t think so. There are situations when raising a venture capital will do more good than harm. However, these situations almost never occur in early stages of startup life cycle. Unfortunately, one of the signs that you are in the early stage is that venture capitalist or angel investors are not banging on your doors day in day out. In other words, if you are going through struggles you never experienced before and nobody is offering you a check you are in the situation when, paradoxically, you should not reach out for venture capital for the reasons above.

On the other hand, for startups and companies able to take care about themselves reaching out to venture capitalist and other investors can bring many benefits. Sure, there will still be some downsides, like mentioned above, but the these benefits will outweigh them. So, if money from venture capital are not critical for survival of your startup, go ahead and include it as one option for future development and growth of your company. Still, it is at your own risk.

Closing thoughts on venture capital

Building a company for the sake of chasing venture capital later on is lousy reason to start business. Next to it is building a company just for exit and cashing out. If one of these goals, or both, are reasons why you want to get in the business, think about it once again. Starting a business is incredibly hard. Otherwise, everyone would be doing it. In a fact, you will often wake up more exhausted and tired than you were when you were to bed. If you start with wrong reasons you will only make this much harder.

On the hand, it can be amazing adventure and one of the best things you did in your whole life. Just for this reason you should choose wisely because this is one of the decisions you will not be able to take back. At least not without consequences. I will leave you with yet another quote by Elon Musk to give you a glimpse on what entrepreneurship often looks like:

“Being an entrepreneur is like eating glass and staring into the abyss of death.”

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