5 Ways Venture Capital Can Steal Your Dream

When faced with the frustrating constraint of limited capital, many entrepreneurs contemplate venture capital (VC) as a potential solution. Armed with a compelling vision, marketplace traction and a high revenue growth rate, these businesspeople believe that the only thing standing in their way is their lack of cash to scale the organization. And, certainly, venture capital, approached with the right mindset, can unlock the potential in bootstrapped, fast-growth businesses.

I say that from personal experience: As the co-founder and CEO of Hireology, a talent technology company launched in 2010, I’ve raised more than $26 million in venture capital from top-tier investors and experienced the incredible opportunities that having the right VC partners affords you.

However, I’ve also seen many peers’ purusit of VC funding lead to harmful, even destructive, results. Before you consider raising outside capital, here are five things most entrepreneurs don’t realize about the risks associated with raising venture capital:

1. Your business may not be ready for rapid scaling.

Your new VC partner will expect you to immediately deploy your newly raised capital. Most VC rounds give the company 18 to 24 months of runway. And you may think you understand your customer acquisition model — after all, you didn’t get to this point by not selling things to customers. But, when you double or triple the size of your sales and marketing operations in three to six months, you’ll find out quickly whether or not your model was ready for prime time.

The worst-case scenario occurs when you invest heavily in ramping up your customer acquisition operation, but the additional sales don’t come fast enough. At a minimum, if you aren’t getting $1 of revenue growth from each dollar of investment, you’re not getting the job done.

My company was in this situation in 2014 after raising our first institutional round. We ramped the team, and revenue was increasing, but not efficiently enough. We were spending $1.40 for each $1 of revenue growth. It didn’t take much analysis to realize that the path we were on wasn’t working well, so we retrenched to get ourselves back on track and get our selling model right.

2. You are on your investor’s time line, not your own.

A typical VC fund raises money from investors, such as university endowments, insurance companies and family offices — and that fund typically has a lifespan of 10 years. That means the VC has approximately a decade to make back all of his or her investments and harvest the returns so investors down the line can be paid back on time.

The rule of thumb for a newly raised venture fund is that VCs will deploy capital for the first five years of the fund and harvest their returns during the second five years of the fund. Your venture capital partner will be facing all kinds of pressure to return capital to investors as that 10-year mark draws closer; and that pressure may be directed squarely at you.

In the most common scenario, your VC could look to force a sale of your company sooner than you’d like in order to meet his or her fund’s investment targets. When your VC decides that it’s time to sell, there’s not a lot you can do to change this person’s mind.

A prominent example of this dynamic played out when Sequoia Capital forced Zappos CEO Tony Hsieh to sell his company to Amazon rather than go for an IPO. Despite the fact that Hsieh had brought the company to $1 billion in revenue and what was reportedly $40 million in EBITDA, his investor forced the sale.

3. You might not get along with your new boss.

One of the biggest changes that entrepreneurs fail to anticipate is the impact a professional investor makes on your ability to run the company. Venture capital investors will almost always rework your company’s governance structure to give themselves one or more board seats. It’s not uncommon for a large venture…