with technology As the industry tightens and VC firms tighten their standards, savvy founders should consider this counterintuitive question: Even if my vision is good enough to attract funding, should I take it?
Today’s market is littered with companies that grew too fast with the help and abetment of their venture partners, and now find themselves dealing with the pain of raising capital, cutting expenses, laying off staff and retreating from the boldest strategic bets.
Wouldn’t it be better for many of them not to have too much venture capital in the first place?
This seems like an odd question for me to ask. As an investor, my job is to make capital work. But the truth is, every day I see founders looking for funding for the wrong reasons. They — and to some extent, we as investors — have lost sight of when venture capital can be the catalyst and accelerate the demise of an otherwise viable business.
The pressure to invest ready capital has grown in recent years, meaning investors are not as sharp as they might otherwise be. In 2021, venture capital firms will pump a record $329.1 billion into start-ups. Some of these funds are clearly not being used optimally. This extrapolation supports a 63% decline in funding for the fourth quarter of 2022 compared to the same period in 2021.
If it is not clear what caused the loss, venture capital will only accelerate your demise.
Add to that inflation, corporate cost-cutting, and market volatility, and it’s understandable why many investors and founders are timid.
The current situation can be difficult for entrepreneurs looking to raise capital. But even for founders who can still attract funding, now is the time to be wary: You could very well destroy your business by deploying that cash.
Consider some of the wrong reasons to fundraise:
Accelerate businesses 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 capital to increase sales and marketing. But businesses don’t make money on a contribution margin basis, they make money on the variable cost basis of a good or service.
Their assumption (probably incorrect) may be that the new money for sales and marketing will solve the company’s problems. In reality, what is required is a deep understanding of the fundamentals of the company. Most of the time, it’s not a lack of money that’s holding a company back from achieving scale.
Better to ask: Do we have a hustle problem? product problem? Workmanship issues? Human problem? Is there a fundamental flaw in my business model?
More money won’t fix these problems. If it is not clear what caused the loss, venture capital will only accelerate your demise.