Because the needs of every startup are vastly different, business owners should consider alternative methods of growing and scaling their company outside of venture capital.
Venture capital (VC) funding is available across all industries, but it’s not always easy to secure. With hundreds of thousands of startups being developed each year, many companies are constantly fighting for an opportunity to receive funding and grow at an expedited rate.
Many startups, especially in the tech industry, tend to believe the only route to success is through traditional venture capital funding. Although this form of funding can be valuable, companies should not take a one-size-fits-all approach. Instead, they should consider the level of growth, longevity and risky decisions they are willing to embark on during the startup journey.
Pros and Cons of Accepting Venture Funding
There are both benefits and downfalls to seeking out and accepting VC funding. By remaining independent of investors, startups grant themselves the flexibility to make decisions based on their company and clientele rather than their investors.
Traditional benefits associated with VC funding include increased exposure and collaboration opportunities, the ability to raise large amounts of capital and less personal liability at stake. Plus, some business owners may need startup money by way of investors just to get the business off the ground.
Many times, the drawbacks of traditional VC funding are not realized until it has already been accepted. With investors, startups might be expected to develop rapidly, and leadership may lose some of their say in the company.
Considerations for Startup Owners
Startup companies should focus on understanding internal goals prior to including a third-party in the decision-making process. They should make the following considerations:
Wanting growth is a natural part of the entrepreneur journey. However, realistically understanding the level of growth a company can handle can be the difference between its success and failure.
Although rapid growth may seem appealing on paper, growth without scaling can cause companies to make risky decisions they are not prepared to handle. Without a proper understanding of one’s industry, competitive market and offerings, startups have an increased likelihood of making decisions that do not benefit their customers – resulting in lost clients and cash flow. Rapid growth does not work for most companies – in fact, it is a pivotal reason for the 90% failure rate of startups.
However, some companies may need the expertise and support of an investor to understand how to grow effectively, especially in the early stages. If an entrepreneur is still new to the industry, having a strong investor with a lot of experience on their side can provide them with the resources they need to build their business, beyond what they’d be able to accomplish on their own.
To achieve longevity in any industry, startups must be intentional in everything they do. Through strategic growth, companies have the ability to achieve longevity. There is an astonishing number of businesses that fail in the first year because the intent behind their growth was not present.
Mistakes are inevitable in business, especially in the startup stage. It is during this stage of business that companies make adjustments to products or services based on feedback from customers. Sometimes in the early stages of a business, this margin of error is necessary. Funding may put increased pressure on startups to produce results – even if they are not ready.
The likelihood of longevity is established early on in a startup’s lifespan. If business owners determine that they need greater capital and more support in order to stay in the game for the long haul (or reach the point where they can comfortably exit), traditional funding may be the best option.
- Decision Making
There is a lot of uncertainty associated with starting and running a business – especially when finances are involved. Despite this, decision making still plays a major role in the day-to-day life of a business owner. By accepting funding from investors, business owners are not required to be the sole decision-makers; instead, they have the backing and input of a third-party to help validate decisions.
Although including an investor in the decision-making process can seem unappealing to some – because the pressure to achieve results can cause business owners to lose sight of the goal at hand – it can make a big difference for others. Third-party validation on business decision-making has the ability to provide business owners a different perspective, reduced risk and advice from an expert that has helped companies grow previously.
Although seeking out investors for VC funding is the traditional route many startups decide to take, it is not for every company. It ultimately amounts to whether a business needs the financial and experiential backing that comes with having an investor, something a decision owner should not take lightly. By weighing all options, entrepreneurs can make the decision of whether seeking out and accepting funding is a strategic move that will benefit their business in the long term.
Michael Wright is CEO of RedTeam Software. With a background as a commercial general contractor with hands-on experience in all aspects of commercial construction, Wright developed RedTeam as a comprehensive cloud-based solution for construction project and accounting management built for contractors by contractors.