Why you probably don’t need venture capital

VCs are looking for freaks.  Wierdos.  We long to see mutants: companies that are not normal.

VCs are looking for category definers.  Companies that return five or ten times their investment.  This is weird. It is not normal to build a company that will grow from zero to $1bn in four years.  Yet, it can happen and this is the potential that most investors look for.

Saul Klein has been saying some excellent stuff recently from about how it IS possible to build billion dollar companies in Europe.  The presentation  he gave at Nextweb was a great motivational rallying call to us all.

European entrepreneurs should be going after the massive opportunities. 

But I want to remind entrepreneurs that its also OK to not raise VC.  There are loads and load and loads of great businesses that shouldn’t touch the VC world.  These companies can still make the founders rich.  Just probably not as rich as the founders of Skype.  Nor have the rewards of Last.fm at such a young age.

What are the reasons not to raise VC.  Why not?
·    VC is the most expensive money you can get.  This is a fact.  The cost of debt is lower than the cost of equity and venture carries the highest risk premium of all.  This means that you have to give up BIG CHUNKS of your company. (Nic has recently written on how important it is to get right the amount you raise at the first round.  My point is, however you do it, it's expensive). 
·    You can’t get big enough. Remember that VCs need 5 – 10 times their investment.  Ask yourself; can your web app really be worth $500mn? 

Ryan Carson is a great guy to talk to or read blog post on this.  Some time back, he analysed his DropSend business and realised that he could make a great business out of it.  It would make him money year on year.  Just it wasn’t going to take over the world.  He wouldn't need to riase external finace. Consequently his focus on building a brilliant web app and profitable business has made him very successful.

I chatted to him about this recently and he said his personal metric was 100 million dollars.  Unless he has a business that can sell for more than a yard of US, there’s no way to justify the dilution.

He also pointed out it’s a personality thing.  From some entrepreneurs there is great pride in keeping it small. It’s also a question of risk.  If you have the risk profile to keep betting the farm on three cherries you are right for VC (explanation).

So you should only really be looking to raise VC if
·    You need the brand, network and advice of a marquee investor
·    The market opportunity is massive.  Ridiculous. Whitespace.
·    You can’t do it off cashflow or debt.

For these companies, VC is a wonderful option because rather than having to re-mortgage the house and invest, what Fred Wilson calls “divorce equity, lack of sleep equity, gaining 15 lbs equity”  you can take someone else’s cash and risk that.  VCs can also offer loads of additional help in terms of sage advice (what not to do!) introductions and network.  Lots of our portfolio businesses also enjoy the additional credibility of having a marquee investor to show off about: it helps to gain credibility with certain partners.

If you still think you raise VC that’s great.  Drop me a line.

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