Here’s a random, unsupported and unsubstantiated, list of five good, and five bad, reasons for raising venture capital — based on the opinions I’ve drawn from frequent interviews with entrepreneurs and learning a lot from the local venture capitalists in Southern California.

Five good reasons to raise venture capital:

1. Time to market is vital, and so is gaining market share, and raising capital is the best way to get there before others.
2. You’re working on truly revolutionary technology, which requires deep pockets to bring to market (ie. semiconductors, advanced materials, biopharmaceuticals, etc.)
3. You need to hire and scale out a team to bring products to market (i.e. you need to ramp your operations, put together a logistics chain, and otherwise expand ahead of launch.)
4. Adding capital will accelerate revenues and growth — ie, you’re business model is proven, there’s a big market, and spending ahead of revenue actually results in a multiplier effect. Prime example of this: You have a software-as-a-service tool which has a 98% retention rate, and will return you a hundred dollars for every dollar you spend on acquisition, and you just to acquire more customers to ramp revenues.
5. Venture capital will bring critical, strategic relationships to bear on your business. A typical deal here might be taking capital from Steamboat Ventures — which is Disney’s Venture Capital arm — to smooth a supplier relationship for your technology to their content divisions.

Five bad reasons to raise venture capital:

1. You’ve got a great idea, but no experience –engineering, marketing, sales, operations or otherwise–and you want to hire someone to do those for you.
2. Five other companies with your exact same idea/web site for the “next YouTube” have just gotten funding, and you think you ought to get venture capital too.
3. Your business model isn’t working, you’re bleeding cash, and you can’t see yourself getting cash flow positive soon.
4. You’re not very sure of your idea, and you’d rather risk someone else’s money than your own.
5. You’re tired of “working for the man” and want to use venture capital to give yourself a nice raise.

Filed under:
Venture Capital by Benjamin Kuo