In the startup world, venture capital is king. Or, at least, it can seem that way.
Markets measure startup ecosystem health by the amount of VC investments per quarter. Big deals are big news, fueling dreams of making it big as a founder. VC isn’t just an aspect of business growth: Thanks to ABC’s “Shark Tank,” it’s also become a spectator sport.
Venture capital is private equity provided to startups and early-stage companies with expectations of high growth and return on investment. Venture capital funds, like RareBreed Ventures in Baltimore or Black Tech Nation Ventures in Pittsburgh, manage a pool of money from accredited investors. Its use of equity means that investors gain some control of the company, thus causing the founders to relinquish some.
VC really is the right path for some startups, especially in the deep tech sector — one that, it’s worth noting, is rarely featured on “Shark Tank” in favor of gadgets and food products. But if you’re starting out as an entrepreneur and hoping a big investor falls in love with your idea and hands over a mountain of cash, there are a few things to keep in mind — not least of all the fact that VC might not be the path to success for you.
Rapid scaling isn’t for all startups
Wilmington, Delaware-based mobile advertising company Carvertise made its way to being one of the top national companies of its kind without raising significant funding from investors. Founding partner Greg Star told Technical.ly it wasn’t due to a lack of trying. But in the end, going without big investors led to a positive outcome.
“It’s like driving,” Star said. “If you don’t take the money, it’s like you’re driving the speed limit. If you take money, you’re driving 100 miles an hour on a 60-mile-an-hour road and if you have one small bump you fly off. I think a lot of companies go that route where their companies are good and promising, but because they can’t scale as fast as their investors want, it just kind of like dies out, and it’s deemed not a success because they didn’t grow to $100 million in five years.”
The rise of regulation crowdfunding
Carvertise is just a decade old, but there are options for entrepreneurs today that weren’t around in 2012. 2022 may well be the year of Regulation Crowdfunding (Reg CF), a method of fund raising for startups that got a boost with the November 2020 SEC rule change that allows companies to raise up to $5 million from investors on crowdfunding sites like Wefunder where anyone can participate, up from the previous $1.07 million cap.
The impact of Reg CF can be seen locally: DC-based RealLIST Startups 2022 honoree Urvin Finance has clocked nearly $1 million on the platform.
An early crowdfunding platform that preceded Reg CF is FundingFuel, founded by Pedro Moore, a VC advisor whose clients include Daymond John of “Shark Tank.” Moore saw crowdfunding as more of a replacement for the “friends and family” round that traditionally leads up to VC investment, but he doesn’t advise every entrepreneur to go the VC route.
“Founders should not pursue VC funding if the business doesn’t have the potential to really obtain at least a 10x return for all VCs within 5 to 7 years,” Moore said. And even if an entrepreneur feels confident that they can make that much in the next few years, they have to decide if they want to share the company with investors.
“If the founders don’t want to relinquish control of their company or experience significant ownership dilution,” Moore said, “they should not pursue VC funding.”
Bootstrapping, or investing in yourself
If the company is able to pull in revenue without significant outside investment, bootstrapping can be the healthiest way to grow the company in the long run. It’s the use of personal finances or reliance on the general operating revenue of the company, as opposed to infusions of outside cash. Though this option on its own has the potential to create personal financial difficulties if the company doesn’t produce enough of its own revenue, it might be a good idea for young companies looking to maintain founder control, as it doesn’t involve debt or equity.
“You will not be paying yourself now, but betting on your future company to pay yourself even more later,” Kamp founder Phil Castro wrote for Technical.ly in August 2021. “But, if you truly believe in what you’re doing (and have a few thousand stashed away in savings) this method is undeniably the best option since it allows you to retain ownership, and more importantly, control of your destiny. The moment you take on investors is the moment you answer to other people.”
It’s the route Carvertise ultimately took.
“It wasn’t fun,” Star said. In the company’s earlier stages, both he and CEO Mac MacLeod “worked part-time jobs to get by.”
When debt is good and other methods
They also had a line of credit from the bank which helped us with the cash flow, something Star says was preferable to giving up equity.
“It’s much better for a founder, less dilutive,” he said. “If you do it right, the more you owe, the more you grow. We have more leverage, and the banks have more incentive to keep us afloat. But that’s not news — you don’t see, ‘This [startup] just got a million-dollar loan from a bank.”
Other sources of funding include pitch competitions, which, while they may resemble “Shark Tank,” don’t usually involve giving up equity. Instead, many are essentially competitions for a portion of a grant pool. And, speaking of grants — don’t forget about them. Many cities and states have startup and small business grant programs.
None of this is to say the VC is trending out, especially in deep tech-heavy markets. Philly had an $8 billion year for VC in 2021; there’s no indication that the VC boom is going away anytime soon. If it misses your startup, it might just mean that VC wasn’t the right path.
And just because VC isn’t a fit now, it doesn’t mean it never will be.
“Now that we’ve grown a lot, and we’re at a faster stage, maybe growth capital will come into play,” Star said. “But we will only take money if it would exponentially grow the company faster than we’re currently growing. For right now, we’re in a good place.”-30-