Entrepreneurs generally have three things on the brain: product, scale, and profit. We generally believe these two principles go hand-in-hand. The more customers we pull in, the more profits we make, right? Well, sometimes. However, developing a viable product and producing large quantities of it often require lots of upfront capital, which young entrepreneurs generally don’t have. Here’s where venture capital (VC) comes in.
Investopedia defines “venture capital” as “a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential.”
It might seem like every startup worth its salt has raised some VC along the way. However, for Black entrepreneurs, the truth can be a bit bleaker. Black startups generally have a harder time raising VC, and it only gets worse the better they perform. Here are some reasons you probably shouldn’t pursue VC funding for your startup:
Venture capital isn’t free. Investors often ask for part ownership of the business in return for their cash flow. The more investors you take on, the more stake in the business gets spread out. If maintaining full or majority ownership of your company is a top priority for you, accepting VC might not be the right choice.
This builds on the previous section. When you accept VC funding, you’re not just ceding ownership; you’re giving up control. With additional stakeholders, you may have to juggle multiple creative and business visions while staying true to your original mission. The loss of creative freedom is often hardest for founders who have strong emotional attachments to their products and services. You may even find yourself in weaker voting and approval positions than those of your investors.
It Might Weaken the Business
Any startup founder who’s raised VC funding can tell you that the process is daunting. The resources and effort required to raise funding effectively can take your team away from the core business. When you divert your team’s talents and attention away from the product and towards the fundraising side of the business, your product may suffer significantly. If you’re not careful, you may damage the product and the company beyond repair. With that said, while raising capital might be crucial to your company’s survival, don’t lose sight of the work needed to make the product viable.
You Don’t Need It
VC funding can come with a host of benefits. It can give your business an influx of cash with which to do more research and development and improve the product. It can help you scale up manufacturing, which will allow your product to reach more people. It can also come with a wide range of non-monetary perks, such as mentorship and access to a network of other successful startups and entrepreneurs. However, if your business is already doing well, is VC still right for your company? It depends. If your startup is already shipping the product and breaking a profit, you might want to explore other avenues to scale up. Look around your company for inefficiencies you can eliminate. Then you can fund your R&D or expansion without giving up ownership or creative control.
Knowing if and when to pursue venture capital can be tricky. In today’s tech industry, the ability to raise large amounts of funding is often used as an indicator of quality for the company and the product. However, we now have cautionary tales to disavow us of these notions. Still, VC funding has its benefits. Just be sure you have weighed the risks and rewards before charging full-steam ahead and pitching to investors.