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Venture Capital: Myths and Miracles

Venture Capital investment. It’s the gold standard for measuring startup success. Well, at least in the popular press and in big startup ecosystems, where “who funded you” and “how big was your last round” are ice-breaker questions. Is the startup community’s obsession with venture funding healthy? Is it what aspiring founders should focus on? Probably not, though as someone who has guided dozens of companies toward the VC end zone, it feels like heresy to say so.

Some stats: A high school footballer has a better chance going pro than a startup does getting VC-funded. Why? Because the amount of VC dollars, and the number of deals made each year, has not significantly increased in the last decade. Despite this thin sliver of opportunity, the startup industry–accelerators, investors, and the media–focuses almost exclusively on models that aim all companies toward a VC exit. As a consequence, an expanding number of viable startups are threaded through a narrow needle that shows no signs of widening. While there are thousands of companies each year that will grow fast and make millions, they will fall short of the huge valuations now considered to be “venture scale.”

This dynamic begs the question, is achieving VC funding–and giving away huge shares of your company along the way–really the right goal for most startups? And if not, is there another way to build a company that makes big money?

Consider this: only 7% of the companies on the INC. 500 list of fastest growing companies have taken VC dollars. How are the other 93% growing? They are using small investments from angels, friends and family, or debt financing, but overall, they are growing through revenue and profit. If only 7% of companies take VC dollars, why does it dominate the headlines? Why is raising money, rather than building and selling, so often the first hurdle startups attempt to clear? Founders--especially new ones--are falling under the spell of a startup mythology that celebrates elite companies and rarified deals, virtually ignoring everything else. Let’s face it, “Uber Valued at $41B” is a much sexier headline than “Smart Company Turns a Profit.”

So what does this mean for founders who need capital to bring their ideas to life? First, separate the myths from the miracles, and accept that even very good companies will never get picked up by the VC tractor beam. When early stage ventures are hyper-focused on VC funding, often it is a red herring, signaling that the founders are distracted from the more important task at hand: make something that someone else will buy.

Before you embark on a VC fundraising strategy, ask yourself why, and understand the true consequences of that decision. Some infusion of capital is likely necessary, and friends and family, personal savings, and angel investing are options. Equally important, but less celebrated, is a company’s ability to generate revenue, enough for the team to live and for the company to operate effectively. We call this ramen profitable. From here, you don’t need to take investment, you choose to take investment--and the distinction is important. Once ramen profitable, a company is often more attractive to investors, improving odds of raising money and at better terms. What might happen if you put the energy devoted to fundraising into creating and selling? Maybe, like 93% of the fastest growing companies in America, you can build a profitable company the “old fashioned” way: by finding customers and getting them to pay you. It’s not glamorous, but far more effective than blindly chasing the VC dream.

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