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Nothing Ventured, Nothing Gained?
Is Venture Capital the Right Solution for You?
From bank loans to bootstrapping, there are numerous ways to muster up funds for a growing business. In some instances, companies have experienced great success working with venture capitalists (read: Apple, Compaq, FedEx). But is venture capital a viable route for you?
"Working with a venture capital partner is very much like a marriage," says Emily Mendell, vice president of strategic affairs and public outreach for the National Venture Capital Association (NVCA). "You have to decide if you want to be married or not."
According to NVCA, venture capital firms are "private partnerships or closely held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves." Not just supplying a source of money, venture capital firms take an ownership stake in the company and actively participate in its management and strategic planning. They may invest early in the business life cycle, when a product is but a brilliant idea, or later, when a company looks ripe for a dramatic expansion.
For most VC firms, the goal is to move the company toward either an IPO or a favorable acquisition. Companies with a high potential of generating somewhere between $100 million to $200 million in annual revenue within five to seven years are prime targets for venture capital.
"Venture capitalists are looking for the next Yahoo!, Google, or YouTube," says Guy Kawasaki, managing director of Garage Technology Ventures, an early-stage venture capital firm. "Most service firms, restaurants, and retail operations are, therefore, not appropriate. Sure venture capitalists 'settle' for $25 million to $50 million liquidity events, but these are rockets that never reached escape velocity."
Assuming that your company has serious potential to generate revenue at that level, your management team needs to clarify its vision for the business before engaging a VC firm. If the vision is to keep the company private or as a stand-alone entity, venture capital is not the answer.
"Something that entrepreneurs need to understand is that the venture capitalist is taking an ownership stake in the company, so you'll lose some control," Mendell says. "Sometimes the decision that a venture capitalist makes to grow a business is not the same decision that a founding principal would make."
As an example, Mendell shares a scenario regarding management teams: "Let's say you're the CEO, but at heart, you're really a scientist and business strategizing is not what you do best," she says. "The VC partner might decide to make you the chief technology officer and bring in someone else to serve as the CEO."
So, why would an entrepreneur or management team want to work with a venture capitalist? If the goal of the business is to get the highest return on investment possible, a venture capitalist can get you there.
"Your venture capital partners are going to roll up their sleeves and get into the business with you," Mendell says. "They have expertise to grow your business that you wouldn't get anywhere else -- business development connections, global networks to leverage your business. They're going to utilize every resource at their disposal because your company's success means their success."
If venture capital looks like the solution, a proper introduction is paramount to landing the deal. "The three best paths . . . [are] a referral from a corporate finance attorney who does lots of venture capital financing, an engineering professor who is recommending his or her best students or a recommendation from a CEO in the venture capitalist's current portfolio," Kawasaki says. "Over-the-transom approaches have as much chance as sending a book proposal into Penguin or a movie idea into Sony Pictures and expecting the receptionist to rush it to the decision makers."
