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:
- Time to market is vital, and so is gaining market share, and raising capital is the best way to get there before others.
- You’re working on truly revolutionary technology, which requires deep pockets to bring to market (ie. semiconductors, advanced materials, biopharmaceuticals, etc.)
- 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.)
- 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.
- 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:
- 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.
- 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.
- Your business model isn’t working, you’re bleeding cash, and you can’t see yourself getting cash flow positive soon.
- You’re not very sure of your idea, and you’d rather risk someone else’s money than your own.
- You’re tired of “working for the man” and want to use venture capital to give yourself a nice raise.