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Over the past several years, I’ve noticed a trend emerging in the tech world: Startups have been taking early-stage venture capital, whether they need it or not. Instead of startups building something and then asking for money, we now have companies that are asking for money to build something.
Venture capital is universally seen as a good thing in the tech space, and it’s easy to see why. More money is always better, right? But the blanket statement that venture capital is “good” for your business ignores not only the fact that there are many distinct types of funding, but also that taking early-stage funding from VCs may harm your business. And I’m not the only one that thinks this; Y Combinator President Sam Altman also warned startups that taking too much funding will hurt your business if you’re successful. As a serial entrepreneur and angel investor, here’s why I think early-stage VC funding—and taking too much funding in general—sucks.
Don’t sell yourself short
When you receive funding, you’re trading something for that capital. With venture capital, you’re trading a percentage of ownership of your company. But how can you decide what’s a reasonable amount of control you should give up if your company hasn’t even gotten off the ground and shown its potential?
Typically, when you’re first starting out, your team is small and scrappy with low overhead. Do you really need to take millions to get your product off the ground? Most times, the answer is no. Anyone selling 6% of their company for $100,000 or 25% for $1MM is selling themselves short and much too early, except if they’re a Shark Tank contestant and they get massive exposure on top of it. And it’s a crapshoot if that’s even worth it.
By only taking the amount you need, you can easily pivot or change fundamental things about your business rather than having to convince a VC that the pivot will still net them the returns they expect. Having full ownership of your business early on means you can make these tough decisions without being distracted by the future returns for a VC.
Probably one of the worst case scenarios is Box. While the company raised a reasonable $350k in angel investment for its seed round, it also took a lot of early-stage money and then continued fundraising for a decade, which diluted the CEO Adam Levie’s control each time. Today, Levie maintains just 4% ownership of the company. It’s noble for founders like Levie to give up control to help their companies be successful, but giving over the reigns to investors, especially early on, may not be the best way to ensure the longevity of your company that you’re working so hard to build.
Read more here:: B2CMarketingInsider