After a few startup events, you start noticing patterns. People buzzing with energy. Organizors running around to make sure everything's ok. Bloggers typing in to give up-to-date information to their readers. And amongst all this, one of the familiar scenes is VCs being searched and hounded by entrepreneurs and wannabes. Many rush to introduce themselves, asking questions, pitching ideas, exchanging cards. A few keep reminding them of their previous meeting at another such event. Some refer about a mail they have written long time back (for which they didn't get any replies!). And VCs, like celebrities whom fans asking for autographs, oblige almost everybody with a minute or two of their precious time. VCs are rockstar at such events.
To a bystander, it'll appear like entrepreneurs are there because of VCs. Getting to a VC seem like their sole aim. It's almost as if if you don't get to VC, your day is wasted.
I wonder why isn't it the opposite? Why should not VCs hound entrepreneurs. Sure money is important, but aren't VCs there because of some folks who risk their professional life (and many a times even more) and start something new? Isn't it how it's "supposed" to work? Whose risk is greater, VC or entrepreneur?
To be fair, it does work like that, sometimes. VCs do initiate on their own when they see a bright startup. But it's so rare that you seldom hear such stories. And when it does happen, it becomes legend.
Why is it that this doesn't happen often enough? For one, their inbox are flooded with business plans. They don't need to. And, it's but obvious that for somebody with tons of money and lots of risk involved, it'll take an exceptional startup to get VC going after it. And certainly, extremely good startups happen less frequently. Although it doesn't have to be, at any point in time, there are only a few ideas that are life changing. And when VCs spot them, they take the initiative. No doubt, world would be a better place if we can have such startups more often.
Why, then, we don't see these brilliant startups that often? Is it lack of ideas? Or ideas?Any VC will tell you that they see tons of brilliant ideas every day. And it's not hard to believe. There are so many things wrong in this world that can be fixed. There are so many brilliant people who take up these problems and try to solve. Where they fail is execution.
And I think *one of the reasons* we don't see brilliant people execute successfully is because of our obsession with VCs - we overrate VC funding. In early stages, entrepreneurs are better off doing what they do best - executing ideas, solving problems, creating value. Not chasing VCs.
Mind you, it's *one* of the reasons, and an important one at that, it's not the sole reason. There are other reasons for startup failures - wrong strategy, wrong decisions, dispute between founders etc.
One has to realize that VC funding is difficult for a first time entrepreneur, anywhere in the world in general, and India in particular. By difficult I mean it not only is less frequent (i.e. less startups get the VC money), it also takes lots of time. Probably a minimum of 3-4 months, and an average of 6 months. Now that is detrimental for two reasons - it not only engages your precious manpower, it also shifts the focus of the startup away from their core business.
It would be foolish to say that you can get somebody to invest hundreds of thousands of dollars without adequate effort. To get VC money, you need a good chunk of your manpower focused on it. And manpower is a precious thing for any early stage startup - that's the most valuable resource you have. Rather than working on the product, you are now tied up with updating the business plan, creating forecast spreadsheets, preparing for anything and everything a VC can ask. Now that is some task. When you have limited number of people to work, it is almost impossible to do it without affecting your core business.
More importantly, the focus of the company can get affected. Now, the focus is not what customers want, but what VCs want. VCs are the new customer. Suddenly, you start working on features which will make you look good in front of VCs. It's not always a bad thing, but many a times, it can be. And it can be the make-or-break-bad. More often than not, the difference between a startup and it's well established competitors is the focus. The moment it's affected, it has the potential to setback the startup by a few months, if not close it down completely.
One other minor reason to not go for funding at early stages is equity dilution. The earlier you approach funding, the less chance you are giving yourself to implement the idea. That means less bargaining power with the VCs. Even if you are successful in raising money, you'll probably end up with little money for significant share to VC. Remember, most startups raise funding only twice, and in rare cases thrice. Each time, you'll have to shell out minimum 20%, likely more. In almost all cases, by the second round, you'd have lost control of your company.
However, the reason I mentioned the third reason as minor is because it's not going to close down the company, unless it has very bad effect on your motivation, which is less likely since by definition, entrepreneurs are strong willed. The only drawback here is that you'll probably be less rich. (Yes, as Paul Graham said in one of his articles, one of the first things you learn when you get rich is that there are different levels of richness.)
Many a times, entrepreneurs mistakes VC funding to be a success in itself. It's as if they have won a battle. They are wrong. VC funding is just an enabler for a larger good - your product. VCs are not the best judge of ideas, or people for that matter. If they reject your idea, it does *not* mean your idea is not worth pursuing. If you believe in your idea, you should continue on it, VC or no VC. On the other hand, if you get funding, that does not necessarily mean you'll be successful. We have numerous example where funded startups tanked. VCs themselves have an equation where out of every 10 startups, more than 5 just close down (2-3 giving moderate returns, 1-2 super successful). The best judge of your startup is your customers. They are the ones whom you should treat as barometer.
So, you shouldn't get VC funding at all? Is it bad to approach VCs?
No, not at all. When you need money for your startup, you should definitely approach VC. It can be a question of survival. With lack of funds, your shop can get shut down.
However, the key is to identify whether you need funding or not. Many of the startups don't realize how long they can go without funding. It's known as bootstrapping. Many don't even know what they'll do with the money they are raising. There should be a definite purpose to ask for funding. If you don't, continue working.
Before approaching a VC, you should ask yourself -
- Have we analyzed thoroughly the need for funding? Can we not cut the costs and continue?
- Have we explored all other avenues of money - savings, family, friends (in that order)?
- If we need to approach VC at all, what are we going to spend the money on?
Indian entrepreneurs live in a world dominated by VC-centric thinking. The earlier we come out of it, the better. Part of the problem is that we do not have any role models, any celebrated success stories from which we can learn on, take comfort from.
To close, I'll quote Mahesh once more -
Think of 5 entrepreneurs your really admire, and you'll realize that none of them took VC funding in early years.
If not from Indian context, maybe we can learn from US counterparts.
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