How To Decide If Venture Capital Is Right For Your Business

All the factors that a business should consider to determine if venture capital is the right funding option for them.
February 24, 2024
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Peter Thiel in a suit

This is Chapter 4 of The Venture Capital Bible by Kieran Ryan.

4:1 Benefits of raising venture capital

  • Increased credibility: When a reputable VC firm invests in a startup, they loan that startup its credibility. The added credibility can make it easier for the startup to attract future capital partners, customers, and early hires. For example, when a startup job seeker is applying for jobs, they may look at which VCs invested in the startup to determine whether it’s a company worth interviewing with.

  • Capital infusion: VCs provide companies with large sums of money when they decide to invest. This money can be viewed as an accelerant for a growing business to help them grow even faster. 

  • Startup resources: Many VCs build platform teams and partnerships to support companies in their portfolio. For example, Pear VC embeds a talent team in your startup to help you hire, and FirstMark hosts 100+ events annually to help your startup expand its network of corporate customers.

  • Advice: VCs may have valuable insights and perspectives that they can share with your startup. For example, say a VC invested in a similar startup to yours in the past, which failed. They can then share those insights with you so you don’t make the same mistakes.

  • Connections: VCs often have a large Rolodex of valuable contacts. For example, Robinhood called on one of its VC partners, Micky Malka from Ribbit Capital, to use his Rolodex to help them assemble a $3.4 billion round in four days to keep the company from going under during the GameStop meme chaos.

4:2 Risks associated with venture capital

  • Growth expectations: VCs expect startups to grow into billion-dollar companies typically within ten years so that they can return money to their LPs. This can lead a startup to grow at all costs. Unhealthy growth can kill a company by causing them to overhire, etc.

  • Less flexibility: VC-backed businesses have less flexibility than other businesses. For example, a startup may want to pivot to a new product in a different market, but VCs may be hesitant to support it because that’s not what they invested in.

  • Misaligned incentives: VCs may give you advice that serves their best interest instead of yours. For example, they may recommend taking an early-acquisition offer because they need liquidity to pay Partners at their firm or LPs.

  • Binary outcomes: When startups take VC, they elect into a game of binary outcomes. It’s no longer acceptable to sell for $100 million. VCs want billion-dollar companies, or else they will go out of business.

4:3 When should you consider raising venture capital?

The best time to raise money is when you don’t need it. This may sound counterintuitive, but it means you shouldn’t try to raise VC when you’re running out of money. Instead, you want to raise VC when you have the leverage to negotiate when things are going right for your business.

Before deciding to raise VC, it’s important to ask yourself the following questions:

How big is the problem you’re solving?

You either need a lot of people willing to pay a small sum or a small group of people willing to pay a large sum.

Do you have a unique way of solving the problem?

Some of the best businesses look like copycat businesses—for example, Instacart vs. Doordash or Uber vs. Lyft. But, if you look closely under the hood, they solve the same problem uniquely with different technology, pricing, and distribution.

Do you have a repeatable way to scale your solution?

Key word being repeatable. Your business needs to find a lever for growth. So, if you keep doing these things, you get more revenue and growth. For example, a lever for a startup building an online school may be launching a new course. Every time the school launches a new course, they expect to get 100 people confirmed, which accounts for $100K in revenue. So the startup speeds up the time it takes to launch a new course, accelerating its growth.

What timeline do you want to build it on?

You should be excited to bring on customers at a much faster pace than what you’re doing now. If you’re not, then VC may not be suitable for you. VCs invest with the expectation that your business may become a billion-dollar business within the timeframe of its fund, typically ten years. 

What resources do you need to build it?

Can you build your business on the desired timeline with existing cash flows from the company, or does it require more capital and people?

Is VC the best way to get the resources you need?

Is VC the cheapest and most aligned source to get the needed resources, or are there other ways to raise money that are better for your business?

4:4 How much money can you raise with venture capital?

U.S. startups raised $217 billion in 2021 and $107 billion in 2022 from VC firms. How compelling a business dictates the amount a startup can raise. For example, a16z invested $350 million, its largest individual check ever, in Adam Neumann’s new real estate startup Flow for its first round of funding. But, of course, this is an outlier.

Here is the median cash raised broken down by round and quarter for Consumer, Fintech, Healthtech, and SaaS businesses that you can use as benchmarks when determining how much you may be able to raise:

Seed Rounds in 2022

  • Consumer: $3.7 million (Q1), $2.9 million (Q2), $2.9 million (Q3), $2.2 million (Q4)
  • Fintech: $4.0 million (Q1), $4.3 million (Q2), $3.9 million (Q3), $2.7 million (Q4)
  • Healthtech: $2.6 million (Q1), $4.0 million (Q2), $2.4 million (Q3), $3.5 million (Q4)
  • SaaS: $3.8 million (Q1), $3.7 million (Q2), $3.5 million (Q3), $3.0 million (Q4)

Series A Rounds in 2022

  • Consumer: $8.5 million (Q1), $7.6 million (Q2), $7.0 million (Q3), $6.4 million (Q4)
  • Fintech: $13.5 million (Q1), $12.0 million (Q2), $7.4 million (Q3), $7.3 million (Q4)
  • Healthtech: $12.6 million (Q1), $10.2 million (Q2), $9.8 million (Q3), $7.5 million (Q4)
  • SaaS: $12.0 million (Q1), $12.0 million (Q2), $9.8 million (Q3), $9.3 million (Q4)

Series B Rounds in 2022

  • Consumer: $29.5 million (Q1), $12.6 million (Q2), $10.0 million (Q3), $8.7 million (Q4)
  • Fintech: $28.6 million (Q1), $25.9 million (Q2), $33.6 million (Q3), $15.0 million (Q4)
  • Healthtech: $25.0 million (Q1), $22.1 million (Q2), $21.1 million (Q3), $15.2 million (Q4)
  • SaaS: $25.0 million (Q1), $24.9 million (Q2), $20.0 million (Q3), $12.5 million (Q4)

4:5 How much of your time is required when raising from venture capitalists? 

In 2020-2021, the average time to raise a seed round was 18.5 weeks (~4.3 months) from the first VC meeting to money in the bank. When it’s time to fundraise, the CEO should be 100% dedicated to fundraising. This is due to three main reasons:

  • Fundraising is a distraction. You should get it done so you can get back to work building your business.

  • The longer it takes to raise money, the harder it becomes. Fundraising gets exponentially more challenging the longer you’re in the market raising money. Investors want to fund businesses that other investors want to fund. If you take too long to raise money, investors will assume the worst and think other VCs are passing on your company.

  • You need to generate authentic competition to close your round. Investors only invest if they need to. Investors will wait as long as possible to invest since they get more information – who else is participating in the round, how your metrics change, how you communicate, what other people say about your round, etc. – the longer they wait. By simultaneously lining up conversations and term sheets, you create authentic competition between investors and force them to invest right now or risk missing out. 

4:6 Which parts of the venture capital process can you outsource to teammates?

While the CEO needs to be 100% involved in meetings with VCs, selling your business vision, and securing money, they can outsource some of the preparation and process to teammates. For example, a CEO may ask their team to help them with the following things during a fundraising process:

  • Create a spreadsheet of potential investors and people within the team’s network who can provide warm introductions.

  • Share feedback on the fundraising narrative to ensure it’s crisp and compelling.

  • Improve the design of your deck.

  • Help track meetings, notes, next steps, and outcomes from meetings.

  • Coordinate scheduling and travel for in-person meetings.

  • Help prepare a data room with historical P&L and burn, usage data, LTV/CAC, and other vital metrics investors will request.

Generally speaking, the more mature the business is, the more it can offload. For starters, mature companies will have resources in other departments that can play critical roles in the fundraising process. For example, your finance team can own the data room, the design team can own the pitch deck, and the brand team can own refining the narrative. Cause those are things within the scope of their skillsets which they are uniquely capable of helping with. Secondly, the more mature a business is, the more the investment is a bet on the company rather than the founder. When a startup is raising its first couple rounds of funding, most don’t have enough data for VCs to index on, so they invest based on the caliber of the founder and the size of the opportunity. When the startup grows into a mature business, the unit economics, growth rate, LTV/CAC, and other metrics become the main reasons a VC will participate in the round.

4:7 What expectations do venture capitalists have of you?

VCs have high expectations of the businesses they invest in. Here are some key expectations that VCs typically have of you:

  • Transparency & communication: VCs expect you to communicate during good and bad times. This may look like a monthly email with a short written summary and visibility of key metrics.

  • Financially responsible: VCs expect you to treat their money like it’s your personal money. This means not burning through your cash excessively, managing your financial runway, and setting up systems and safeguards to ensure your company is financially responsible.

  • Growth: VCs expect you to grow fast. With every growth milestone you hit, the expectations will only get bigger.

  • Exit strategy: When you take money, VCs expect you to have an exit plan down the road. This may mean looking for potential acquisition buyers or prepping for an IPO when the time is right.

4:8 How to pick your venture capital partners

It’s essential to pick the right VC partners. Choosing the right partners can significantly increase your chances of success, while selecting the wrong partners can leave you on the wrong side of a board vote and ousted from your company.

As a founder of a promising startup, a lot of money is available. So when considering who you want to partner with, ask yourself the following questions:

How credible is the VC firm?

You can use my VC rankings to identify more credible firms than others. I tiered these VCs based on their track record of investments, what founders and other investors think of them, and more.

How credible is that specific Partner at the VC firm?

Some VC firms have their investors specialize by stage or industry, while others hire generalist VCs who invest across stages and industries. Find the Partner at the firm who is the best fit for your type and stage of business. Consider their specific investment track record and the opinion of founders who have worked with them.

What do you want your VC to help with?

Some VCs are great at helping with fundraising, while others are better suited to help with the product. It’s important to consider what you need help with and seek out VCs uniquely capable of assisting you with that part of your business.

Do you trust them?

Build relationships with your VCs before you start to fundraise. Some founders opt for VCs they trust to vote alongside them in a hostile board takeover. This can help keep them in charge, but it may not be the best decision for the business. I think founders should trust VCs enough to do what they feel is best for the company.

Do your research

VCs will conduct thorough due diligence on your company. Similarly, you should conduct thorough research on your VCs. If they want to invest in your business, ask them to outline how they plan on helping, provide references to portfolio founders, and create a list of advisors and other helpful connections they can make.

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