Learn How Venture Capital Can Steal Your Dream
Venture capital can be a lifesaver for certain businesses only if it’s done in right way. Like every lucrative offer, venture capital also comes with risk which most entrepreneurs either don’t understand or overlook it initially. Here are some of the most common ways it can shatter your dream.
Rapid scaling might be bad for your business
After getting the long-awaited capital, you will need to deploy it as soon as possible. Most of the VC partners give about 2 years to companies to apply everything that needs to be applied. You think that you are well prepared to deal with this, after all, you reached here by doing a good market study.
You know your customers, processes and how they work. That might be true, but your research was at a micro-level. When you multiply the size of your operations and sales in a short period of time, things get messy throwing you in a bad situation.
One of the worst things that might happen is when you invest a lot in increasing your customer acquisition operation, and the sales don’t come as fast as you thought. The minimum ratio for surviving is 1:1, you should get 1$ of revenue growth for every dollar you invested.
You have a deadline. You can’t work at your own pace
Usually, the amount raised by VC comes from investors like insurance companies, university endowments, and those funds have a lifespan of 10 years.
What does that mean? Well, the VC has only 10 years to get back his investments. The only golden rule for raised venture fund is that VCs deploy capital for the first five years of the fund. For the other five years they will get their returns on their investment. That means your VC partner will be more and more stressed out as the deadline approaches. He will face a lot of pressure to return the capital to the investors, and of course, you will be the one that will need to deal with all of this pressure and stress.
The relationship you have with your boss can be destructive
Most entrepreneurs don’t realize the “danger” a destructive relationship can have on them and their business. Most of the time, VC partners will change your company based on their views and also improve their place on the board of directors.
You are the one responsible for your results in front of your new boss. Entrepreneurs are habitual of making decisions on their own, without having someone to watch over their actions. Well, in this case, things will change quite a bit.
You should pay a lot of attention when you choose your VC partner. If you’re lucky, your VC can be patient, open-minded and helpful when your business gets in trouble, because it will once in a while. If you’re not lucky, your VC can treat you like a nobody.
Does your VC really care about your company or is it just one of dozens of companies that he invested in? He needs to invest time to improve your business.
Your VC is all about grand slams
Average growth doesn’t give enough returns in order for the VCs to keep their job. That’s why being a VC is hard. Usually, 7-8 out of 10 investments fail, that’s why they need to hit grand slams with the other 2-3 investments so they cover the loss they made.
For example, your company has 40% revenue growth after 1 year of collaboration. That’s good, but it’s not even close to your expected goal. You might think the best thing would be to keep 40% growth on long-term, but your VC will not be happy with that. Therefore he will press you to burn your rate to increase the growth and eventually get more financing. The chances to get this done are too close, if you manage to do it you’re lucky if not… your VC partner will most likely turn his back to you and move his focus on other companies.
Your payout is at risk
To make it as simple as possible, let’s say you raised 20$ million from an investor. The agreement you have with that venture investor says that he will get two times his investment back before other shareholders get anything. That means you have to give him 40$ million and only after that you will get any money.
This implies a great risk, most fail to sell their companies with more than they owe to the investor, therefore they don’t get a single penny and all the money goes to the venture investor.
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