In recent times, venture capitalists (VCs) have become a key feature in the startup landscape. These are the money bags; the guys that startups have to please to get funding. Truth is: they’re only one source of funding; now we have other sources.
What’s interesting is how VCs have become many entrepreneurs’ default source. Some startups hardly consider other seemingly insignificant pools of funding.
There’s nothing wrong with the idea of VCs, however, in my experience, one has to be wise in dealing with them.
One important element in VC interaction is to know when to bring them in. At what point is your business ready for outside funding?
I know it’s exciting to raise millions for your idea, but that’s only the beginning. Many startups have gotten boatloads of VC cash and it still didn’t make a difference because they weren’t really ready. They just thought they were.
So how do you know that you’re ready for outside cash?
- Strong Leadership
In their book: Now, Build A Great Business, success experts, Brian Tracy and Mark Thompson, said that, “Leadership is the most important requirement for business success”. I totally agree. Strong leadership is an absolute essential!
My consulting practice has proven to me that it doesn’t matter how much money a company has in the bank, I don’t care how awesome their infrastructure is or how smart the workers are – if the leadership is crappy, that boat is sinking, it’s only a matter of time. I’ve seen how it works; it’s not pretty!
That said. Before you seek outside cash, ensure that you have a good leadership culture and structure to support your dream. Or else, more cash would simply mean more trouble – especially when it’s coming from impatient investors who want returns in good time. With poor (weak) leadership, you would literally be digging your own grave.
- Cross Assumption Threshold
We’ve heard the popular thinking by guys like author of The Startup Owner’s Manual, Steve Blank, that a startup is a faith-based initiative searching for the right business model. Unfortunately, VCs don’t want to be part of this search. They prefer to come in when you’ve found a model that works.
How do you know you’re ready? Find the right business model. Otherwise, your pitch would be an exercise in requesting more gamble money. VCs don’t like that! They want to know that you’ve addressed your unrealistic startup excitement with all (or most of) its untested assumptions.
The real question is: why do you need outside cash? Are you selling enough to warrant more funds?
I’d rather you ask your favorite uncle or sweet grandma for money than bother with VCs when you’ve not grown the business enough to scale. In other words, is there a feverish demand for your product that you’re now struggling to meet up?
If you don’t have what I call: good trouble – meaning, customers have gone wild on your products and you have to quickly increase your capacity in order to serve them better – then you’re probably not ready.