In the world of startups, venture capital is king. Or, at least, it may seem so.
Markets measure the health of the startup ecosystem by the amount of venture capital investment per quarter. Big deals are big news, fueling dreams of going big as a founder. Venture capital is not just one aspect of business growth: through ABC “shark tankit has also become a spectator sport.
Venture capital is investment capital provided to startups and start-up companies with expectations of high growth and return on investment. Venture capital funds, such as RareBreed Ventures in Baltimore or Black Tech Nation Ventures in Pittsburgh, managing a pool of money from accredited investors. Its use of equity means investors gain some control of the business, forcing the founders to give up some of it.
VC is definitely the right path for some startups, especially in the high-tech sector — one that, it’s worth noting, is rarely featured on “Shark Tank” in favor of gadgets and groceries. But if you’re just starting out as an entrepreneur and you’re hoping for a big investor to fall in love with your idea and hand you a mountain of cash, there are a few things to keep in mind, including the fact that VC might not be the path to success for you.
Rapid scaling is not for all startups
Mobile advertising company based in Wilmington, Delaware carvertize made its way to be one of the best national companies of its kind without raising significant funds from investors. founding partner greg star Recount Technically it wasn’t for lack of trying. But in the end, doing without large investors led to a positive result.
“It’s like driving,” Star said. “If you don’t take the money, it’s like driving the speed limit. If you take cash, you’re driving 100 miles per hour on a 60 mile per hour road, and if you get a little bump, you’re flying. I think a lot of companies go down this path where their companies are good and promising, but because they can’t scale as fast as their investors want, it kinda burns out, and it’s not considered a hit because they didn’t grow to $100 million in five years.
The rise of regulatory crowdfunding
Carvertise is only a decade old, but there are options for entrepreneurs today that didn’t exist in 2012. 2022 may well be the year of Regulatory Crowdfunding (Reg CF), a fundraising method for startups which received a boost with the month of November. SEC rules change in 2020 that allows companies to raise up to $5 million from investors on crowdfunding sites such as Wefunder where anyone can participate, up from the previous cap of $1.07 million.
The impact of Reg CF can be seen locally: RealLIST Startups winner 2022 Urvin Finance has racked up nearly a million dollars on the platform.
A first crowdfunding platform that preceded Reg CF is FinancingFuelfounded by Pedro Moorea venture capital advisor whose clients include John Daymond from “Shark Tank”. Moore viewed crowdfunding as a replacement for the “friends and family” cycle that traditionally leads to venture capital investing, but he doesn’t advise all entrepreneurs to go the venture capital route.
“Founders should not seek venture capital funding if the company does not have the potential to actually achieve at least a 10x return for all venture capitalists within 5-7 years,” Moore said. And even if an entrepreneur is confident that he can earn that much over the next few years, he has to decide whether he wants to share the business with investors.
“If founders don’t want to give up control of their business or experience significant ownership dilution,” Moore said, “they shouldn’t seek venture capital funding.”
Start or invest in yourself
If the business is able to generate revenue without significant outside investment, starting up may be the healthiest way to grow the business for the long term. It is the use of personal finances or reliance on the general operating income of the business, as opposed to infusions of money from outside. Although this option alone has the potential to create personal financial hardship if the business does not generate enough of its own revenue, it could be a good idea for start-ups looking to retain founder control, as it does not involve debt or equity.
“You won’t pay yourself now, but bet on your future business to pay yourself even more later,” founder of Kamp Philip Castro wrote for Technical.ly in August 2021. “But, if you really believe in what you’re doing (and have a few thousand dollars in savings), this method is undeniably the best option because it allows you to keep the ownership, and most importantly, control of your destiny.The moment you face investors is the moment you meet other people.
This is the route that Carvertise eventually took.
“It wasn’t fun,” Star said. In the early stages of the business, he and the CEO Mac MacLeod “worked part-time jobs to get by.”
When debt is good and other methods
They also had a line of credit from the bank which helped us with cash flow, which Star said was better than giving up equity.
“It’s much better for a founder, less dilutive,” he says. “If you do it well, the more you owe, the more you grow. We have more leverage and the banks have more incentive to keep us afloat. But that’s nothing new – can’t you see, ‘This [startup] just got a million dollar loan from a bank.
Other sources of funding include pitch competitions, which, while they may look like “Shark Tank”, usually don’t involve giving up equity. Instead, many are essentially competitions for part of a grant pool. And, speaking of grants, don’t forget about them. Many cities and states have grant programs for startups and small businesses.
None of this is to say that VC is on the way out, especially in tech-heavy markets. Philly had an $8 billion year for VC in 2021; there are no signs that the VC boom is going away anytime soon. If your boot is missing, it may just mean that VC was the wrong path.
And just because VC isn’t suitable now doesn’t mean it never will be.
“Now that we’ve grown a lot and are at a faster stage, maybe growth capital will come into play,” Star said. “But we will only accept money if it grows the business exponentially faster than we are doing now. For the moment, we are well placed.