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More than the money

With the advent of lower capital intensity business models, there are more entrepreneurs who are building their businesses without venture capital.  This gives them the ability to hold on to more equity and more control.  In the most likely event of a modestly priced exit for the company, they'll keep more of the upside.  That all sounds great, and, if you don't need much outside capital to get your business going, it could be attractive.

But, there are things you get from venture capital beyond the money.  You can add these to your business without a VC investment, but you have to work at it.  Here are some:

  • Independent perspective -- As an entrepreneur, you have to drink the Kool-Aid.  You think that what you're building is great, and you look past all the problems to see the possibilities.  But, some of the time, you need a dose of realism.  You need to find a way to hear the outside perspective on your company.  You can achieve that with one or two independent directors on your Board, or an active advisory Board.  Go beyond your friends and current stakeholders.  If you can't attract an industry insider from your segment to work with your company, you may not be good enough at networking, or have a strong enough value proposition, to be successful.  And, that's the kind of 'tough love' feedback you should expect from an independent perspective.
  • Deep contact network -- You also need to be able to attract talent who really knows your marketplace.  Most VCs have great contact networks that they have developed over years (or decades).  You need to be a great networker to find this talent for your own company if you aren't getting value-add from a VC.  For some, networking comes naturally.  For most of us, it takes work and attention.  That may mean carving time away from other things to go to an industry event, conference, or meetup.  As an entrepreneur, it's essential.
  • Relationships with key customers and partners -- After you have sharpened those networking skills to bring talent into the company, you'll need to make contact with more customers and potential partners.  No company has enough of these.  Business people you add to the company should come with some of these contacts, but there is always the potential for more.  Another value-add you can get from independent directors is access to their contact network.  I like having an independent director that is a recently retired senior executive from one of the big customers or partners in your sector.
  • Keeping you honest -- I like people with attention for detail.  At least one Director of your company should be motivated to go over everything you are doing with a fine tooth comb.  They can give you feedback on how to improve and be a sounding board for future moves you are considering.

Whether you are going it alone (without venture investment) or evaluating whether a particular VC really brings something more than money to the table, think about these types of value-adds for your Board.  Your company won't improve with a Board full of your biggest supporters.  Mix in a couple of independent, well-connected, detail lovers.  You'll be glad you did.

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Comments

Great points. I'll add a few of my own...

1) There are other reasons people are not going with VCs:

Some people are bootstrapping, not because they don't need the capital, but because they're finding it hard to raise seed or angel money (as it's the first money to dry up and the people behind it are the least likely to offer true venture deals).

Once you get a product out the door, have customers, proved the model *and* kept the lights on, you've made it past the hardest part. The question still remains, do you need venture capital? The answer often depends on the items that you've mentioned above, but there's more to it.

2) Even if you can afford to *not* take it (based on early success or lower capital intensity business models), are you doing the right thing?

Do you want to win in your space? Do you want to be first to capture the wider market (before your funded competition does)? Would you rather spend your time trying to improve the customer's experience or wondering how you're going to cover your mortgage and payroll?

What's your exit strategy? Create another company the does so-so and fades into the background? If so, you better hope that you didn't give up any equity :) Or, is it to be the biggest and the baddest? If so, you might not be able to get there without some help.

Sometimes you have to give up things to get what you want. Everyone has a place, everyone brings something to the table. It just depends on what game you want to play.

Anyway, thanks for letting me rant --it's kinda been on my mind (that and covering my mortgage this month) :)

Great post, keep 'em coming.

Gabe

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