Venture capital is the money most founders go after first. But is it the right money?
The real (and sometimes uncomfortable) answer is no.
There’s a lot of different early-stage funding out there. Grants, foundations, angels, aligned family offices, revenue-based finance, strategic and corporate investors, friends and family. All with different profiles and requirements, many of which are less onerous than VC money. Founders tend to go to VC first, partly because it’s the most visible, and partly because a VC round has become a bit of a badge that says you’re a serious company.
But VC money comes with a very particular set of expectations. If your business doesn’t line up with them, it can make life a lot harder.
What VC money is built for
In the last Dispatch, “Your Lead Investor’s Second Cheque”, we looked at the power law. Most investments in a fund won’t move the needle, and one or two will transform it.
That drives everything we do. A good business isn’t enough on its own. We need businesses that could become very big, quickly enough to return the fund within its lifetime. In practice, that shows up in two ways.
Timelines
VCs can be impatient. Most work to a three- to five-year plan from investment to exit and will hold you to it. All will push you to hit the plan you laid out when we invested, and if you keep missing your targets, attention may start to drift.
It’s not personal. A fund has a fixed lifespan, usually around 10 years, and we have to return our investors’ money within it. If your development curve is longer than that – years of R&D, long qualification cycles with industrial customers, regulatory approval – the maths just doesn’t work.
In deep tech and the circular economy where we operate, this is a real tension. Getting a new material approved can take years. So can getting permits for a new plant. When delays hit, and they usually do, the VC feels the pressure too.
And funds are made up of people. They have their own targets to meet: for their own renumeration, for their social capital within the firm, for the promotion up the ladder, and for the track record the firm needs to raise its next fund. These all factor into decision making, even if they’re not talked about.
Speed and growth
VCs expect growth at a pace that may not suit your market or your customers. Each round also sets the clock for the next one, usually 18 to 24 months later. By then you need to have hit milestones big enough to justify a higher valuation.
Signs VC might not be right for you (yet)
This isn’t a judgement on your business. These are just signs that a different kind of money might suit it better, at least for now.
• Your path to revenue is longer than five to seven years. Grants and other non-dilutive funding can carry you further, and more cheaply, in the early days.
• You’re building a steady, profitable business rather than one aiming to take the whole market. That’s a great business to own, just not a venture one.
• Your market is real but modest. A VC needs to believe in a very big outcome. A smaller, defensible market might be a better match for aligned angels or asset finance.
• You want to set the pace yourself. VC comes with board seats, information rights and expectations. If control matters to you, other kinds of funding may suit you better.
Questions to ask yourself before you raise
• What does success look like for me in ten years? Does it include an exit? Or do I want to pass the business on to my family?
• Can I hit the milestones a Series A investor would expect in the time this round buys me?
• If I raised no venture money at all, what would I do instead?
• Am I raising VC because my business needs it, or because it feels like what startups are supposed to do?
Closing
Some brilliant companies were never meant for VC. We’ve met plenty of them, and admired a lot of them.
If you’re not sure what kind of business you’re building, ask the investors you’re pitching. A good one will tell you honestly, even if it means saying no.
