This article originally published on 11/1/2018
I’ve personally raised venture capital, I’ve professionally worked with venture capitalists, I have close relationships with venture capitalists, and I operate the largest online training center for underrepresented founders seeking to better understand venture capitalists. I think it’s fair to say, I know a thing or two about these people, what makes them tick, and how they decide which founders to invest in.
But the reality is: most others don’t. And why should they? Movies like The Social Network or shows like Shark Tank oftentimes serve as people’s first (and only) introduction to this world. So from the jump, people are misinformed about the “off camera” realities that accompany this type of entrepreneurship. That’s where my company, Founder Gym, comes in: we exist to educate underrepresented founders on what it really takes to build successful tech startups.
For the next three months, Founder Gym has partnered with Afrotech to explore the unique challenges black founders face when trying to raise venture capital and what they can do to secure the bag and scale their startups. It’s time to pull back the curtain and expose the true secrets to winning this game, and I’m thrilled we’re working together to make it happen.
With that said, are ya’ll ready for your first lesson? Great, let’s get into it!
What is venture capital?
Venture capital is a tool to help tech startup founders build their companies faster than they otherwise could. It offers these founders an unfair advantage over their competition, because they now have a big pot of money to use that they didn’t before. A venture capitalist (VC) has the full-time job of selecting founders to invest hundreds of thousands or even millions of dollars in. In exchange for that investment, a VC usually gets equity (shares of the company). The founder then uses this influx of capital to hire more people, purchase more resources, and leverage bigger networks, all with the intention of capturing more users, customers, and/or revenue than anyone else in the space.
The ultimate purpose of venture capital is to make companies so valuable that a larger company would want to purchase it (think Microsoft buying LinkedIn, or Facebook buying Instagram), or to take the company public (think of your ability to buy shares of companies on the NYSE). And why would a founder want to sell or IPO their company? Because that’s how they, their team, their investors, and anyone else who owns equity in the company gets paid. The equity must liquidate, meaning it must turn into straight cash monies.
Now before we move on, let me be 100% clear. This definition is in no way exhaustive, but it serves as a starting point for those just beginning to wrap their hand around this foreign world.
Now, onto what you came here for: Should you raise venture capital or nah?
Below are 10 questions you should ask yourself, in order to figure out whether or not raising venture capital is right for you?
If you answer “no” to these questions, you may want to think twice about raising venture capital.
If you answer “yes” to these questions, then pursuing VC may be the path for you.
If you answer “maybe” to these questions, you’ll definitely want to read my next article to learn more about venture capital before deciding.
Impact: Are you interested in making an impact so big that your company earns hundreds of millions of dollars from paying customers? Revenue is one key metric of impact and in that sense, venture capitalists expect you to make a HUGE impact.
Technology: Are you willing to collaborate closely with a Chief Technical Officer (CTO) to craft the vision for the company and ensure it’s built to scale? Don’t sleep on the importance of technology. It’s the reason why Facebook was able to reach 500 million users in just 4 years. Crazy, right?!
Dedication: Are you willing to dedicate most of your waking hours over the next 5-10 years to the development of your company? 8-16 work hour days. For years. Are you about that life? Because that’s the type of commitment it will take.
Speed: Are you willing to grow your business as fast as possible? Think cheetah speed vs. turtle pace.
Scale: Are you willing to grow your business as big as possible? Most VCs will tell ya: “Go BIG or go home.”
Ownership: Are you willing to give up the majority of ownership of your company in exchange for millions of dollars? Listen, this VC schmoney isn’t charity. It’s an investment. Investors are paying you, the founder, money in exchange for pieces of ownership in your company. And they expect you to make their pieces of ownership more valuable over time by getting increasingly more people to use and/or buy your product.
Reporting: Are you willing to report to a Board of Directors who have influence over what you do and don’t do? Remember that ownership thing I was just talking about? This ties into it. As investors now own larger portions of your company, they may also request Board seats. A Board of Directors make up a group of investors that govern your company and have a say in what you can and cannot do.
Risk: Are you willing to pursue this path knowing that you have less than 1% chance of making it to an “exit” (i.e. sale or IPO). Yup, it’s like being in the pee-wee leagues now, hoping to one day make it to the pros. It’s that hard.
Exit: Are you willing to either sell your business to a larger company or take it public on the stock exchange? People need to get paid. And I’m not just talking about paid. I’m talking about PAAAAIIIIIID. And there’s only one way to do that: a liquidity event (sale or IPO).
History: Are you interested in making history? In order to “make it” in this space, you have to build something that doesn’t currently exist and you have to build it so big that people all over the world use it. This is history-making stuff right here. Not only will you help the people using your product; you’ll also inspire a whole new generation of founders eager to follow in your footsteps.
So where did you end up? All yes’? All no’s? Or a mix?
No matter what, it’s all good news, because now you are more aware of what you want and what you don’t, as it relates to raising venture capital. Of course there are many more things to consider, but this covers some of the most important questions that will begin to help you gain clarity on the type of founder you want to be.
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