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Less and Less Desire for Venture Capital... Hmm.
TheFunded.com Open Letter
Posted by Anonymous on 2009-06-30
PUBLIC:
BusinessWeek article on Venture Capital has some interesting statistics:
“Duke University just completed a survey of 549 entrepreneurs who had started successful companies in high-growth industries. We found that only 8% of first-time entrepreneurs took venture funding. For those on their fourth startup, the percentage was 22%. That still means nearly four out of five seasoned entrepreneurs didn't need VCs' money or advice to be successful. An Impediment to Innovation? The findings matched those in Kedrosky's paper. He analyzed Inc. magazine's list of the fastest-growing U.S. companies and found that only 16% of the 900 firms on the list took venture capital during the past decade.”
I don't disagree with the ultimate conclusion that it is better to do without venture capital, if you can (and have the luxury of a choice), but I don't see where these specific facts, by themselves, directly lead to that conclusion.
I think it's a serious flaw in the study to only consider successful companies. What of the companies that never got off the ground for lack of funds? 16% of the 900 fastest-growing firms is likely much higher percentage than any other random group of 900 startups. And wouldn't the study also lead one to conclude that the more experience an entrepreneur has, the more they seek and obtain venture capital?
To Dude
VCs have to extend the sort of term sheets that they do because of the source of their money (and the promises made to secure it, in the first place).
Once you understand that, you understand that VC money is a last resort. You take VC money only if you have to, only if you absolutely cannot do it any other way.
The more interesting observation is that entrepreneurs on their 4th try get (or take) more VC money than on their first.
WHY?
One answer is that the first three were really no good and the entrepreneur didn't make a "capital kill" on any of them. So he has to take VC because he has none of his own.
Another answer is that really great deals are hard to come by. Most deals come in the door laden with uncertainty and risk. That is why you see them in the first place.
If a deal were totally de-risked, development de-risked with a product ready to go, IP completely in place, corporate structure de-risked by having the right shareholders and no debt (and no legal skeletons), the future de-risked by having capable management in place, and so on....
you would never see it. You would read about it in Forbes or see it on CNBC.
As they never walk in the door, they have to be made. And that takes guts, as well as luck.
So once you have it to where any VC would love to jump in, why have them jump in at all. Who needs 'em when they want you.
Dude, only 16% of the 900 fastest growing firms needed VCs at all! that is a very low percent. 84% that succeeded without the VC money is a good indication that VC money is not necessarily needed for success...
It appears my point was missed. Again, I agree with the principle that it is better to do without VC money, if possible, and you have the luxury of that option (both in getting a term sheet and having funding alternatives). I'm just saying that the facts that are used to support this specific article can be interpreted in various ways, and not a great article in that respect.