As the technology industry retrenches and venture capital firms tighten their standards, savvy founders should consider this counterintuitive question: Even if my vision is compelling enough to secure funding, should I take it?
Today’s marketplace is teeming with companies that simply grew too quickly, aided and abetted by their VC partners, and now find themselves managing the pain of down rounds, expense reductions, layoffs and a retreat from their boldest strategic gambles.
Would it have been better for many of them to have not taken excessive levels of venture capital in the first place?
This might seem like a strange question coming from me. As an investor, my job is to put capital to work. But the truth is, I see founders every day looking for money for the wrong reasons. They — and to some extent we, as investors — have lost sight of when venture capital can be an accelerant and when it can hasten the demise of what might have been a viable business.
In recent years, increasing pressure to invest ready capital meant that investors were not as discerning as they otherwise might have been. In 2021, VCs poured a record-breaking $329.1 billion into startups. Some of that capital was clearly not put to its best use. This reckoning underpins the 63% drop in funding in the fourth quarter of 2022 over the same period in 2021.
Without a clear picture of what is fueling losses, venture capital will only accelerate your demise.
Add inflation, corporate cost-cutting and market volatility, and it’s understandable why many investors and founders are skittish.
For an entrepreneur looking to raise money, the current landscape could prove difficult. But even for founders who can still attract capital, it’s a time to be wary: It’s quite possible that you could destroy your business deploying that cash.
Consider some of the wrong reasons to raise money:
To accelerate a business with negative unit economics
Imagine a founder looking to grow a same-day delivery service in a niche market with negative unit economics. They seek venture funding to increase sales and marketing. But the business isn’t making money on a contribution margin basis, only the variable costs of a good or service.
Their assumption — likely incorrect — might be that new money for sales and marketing will solve the company’s problems. In reality, what is needed is a deep dive into the company’s fundamentals. Most of the time, what stands between a company and its ability to achieve scale is not a lack of money.
It’s better to ask: Do we have hustle problems? Product problems? Process problems? People problems? Is my business model fundamentally flawed?
More money won’t solve these issues. Without a clear picture of what is fueling losses, venture capital will only accelerate your demise.
4 problems venture capital can’t solve by Ram Iyer originally published on TechCrunch
