With worldwide venture capital activity for 2016 down by 24 percent — and total deal funding down from $141 billion in 2015 to $127 billion in 2016, according to a KMPG report — seeking venture capital has become a lot like playing the lottery. A lucky few strike gold, but most go home empty-handed.
Related: Seeking Venture Capital? This T.I.P. — a Team, an Idea and a Plan — Is Crucial to Follow
Of course, raising VC funds makes sense in certain scenarios. Entrepreneurs frequently cite guidance and support as major reasons for taking such capital. VC investors are typically subject-matter experts who know where the industry is headed and what its consumers value.
But the VC route doesn’t just bring knowledge and capital. VCs, through their work, are connected to similar entrepreneurs in the space. They can open doors to partnerships and talent that make rapid growth possible.
For many entrepreneurs, that promise of rapid growth is at the heart of their decision to take VC cash. Those in new or changing markets, for instance, need to capture market share as quickly as possible. In such situations, bootstrappers can’t compete. Canada’s Venture Capital & Private Equity Association, in collaboration with the Business Development Bank of Canada, found that over a five-year period, VC-backed companies posted nearly threefold greater sales growth, realized almost 50 percent greater employee growth and were 15 percent more likely to survive than their peers.
The hard truth about venture capital
To be sure, there are good reasons to take venture capital. But in San Francisco, where I live and run my business, everyone wants to be Mark Zuckerberg. Here, entrepreneurs are expected to raise VC funds, and its downsides are rarely discussed. Shows like Shark Tank make entrepreneurs think VC money works miracles for businesses, when in fact, less than 1 percent of companies are built that way.
With those realities in mind, my company chose not to take venture capital. We’re not trying to create a massive, fast-scaling operation, so we would have been of little interest to investors anyway.
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