Will you go to VCs if your business is cash flow positive. Why or why not?
Let say if I have a profitable business which is making few times your regular salary and growing at 20-30% per month. Will you go for VCs? why and why not?
Clarification added January 2, 2010:
What is good and bad with VCs? What is the best way to diversifying my 100% ownership of the shares if I plan to go VC?
Answers (5)
Al C.
Experienced international business development
Best Answers in: Government Policy (2), Business Development (2), Using LinkedIn (2), Staffing and Recruiting (1), Manufacturing (1), Starting Up (1), Telecommunications (1)
VCs are like enzimes: they only SPEED UP things that would happen ANYWAYS, they do not create a reaction unlikely to happen.
Same thing with VCs, they do not invest in companies that would not make money normally.
And when they do invest, all their money does is to speed up projects, goals, etc that would happen anyways with the company´s own cashflow.
That being said, if you think you can wait for those projects and goals to happen naturally then don´t go to those people, as they´ll want like 40-60% of your company for something that was bound to happen soon anyways.
Avi S.
Associate at Reitler Kailas & Rosenblatt LLC
Best Answers in: Intellectual Property (1), Small Business (1)
VC’s offer you liquidity, which can be very important in early stages of a venture. However, keep in mind that whenever you take VC money they will want a significant piece of your upside. VC agreements often have VERY onerous term that can limit their dilution and exponentially increase their influence and power over your company’s board and management.
There are advantages to VC money, which is that it can be a quick infusion of cash, you have (limited) access to people who have worked with start-up companies and helped them grow and they may have access to a network of potential investors or collaborators who will help your company grow.
The reality is that VC money is a cure-all. VC’s invest in high-risk ventures as a business, so that means that many of their investments will fail and they will lose money on those ventures, which means that they need to make boatloads of money when they are successful – and that means that you make less money if you are successful, because the VC’s are making it.
You need to analyze your current situation and see whether you need that money to get to a place that you could not normally get to or whether you are just looking to cash out a little. Friends and Family or Angel Investors might be a good way to go first, then VC. I have seen the VC contracts first hand, and the results thereof, which is where I am coming from.
Krishnaswami C.
Ex banker, Financial advisor, education delivery and management
Best Answers in: Personal Investing (2), Regulation and Compliance (1), Education and Schools (1), Compensation and Benefits (1)
It is not what you do at present should be a motivating factor to approach VC. It is your business plan that should seek the VC. if expansion is contemplated and you wish to scale up instantly, then VC may be an answer.
Neil G.
Corporate Finance and Strategy Consultant
Best Answers in: Starting Up (5), Accounting (2), Public Funding (2), Corporate Governance (2), Equity Markets (2), Small Business (2), Using LinkedIn (2), Commercial Real Estate (1), Certification and Licenses (1), Corporate Debt (1), IPO (1), Venture Capital and Private Equity (1), Corporate Taxes (1), Financial Regulation (1), Mergers and Acquisitions (1), Staffing and Recruiting (1), Tax Law (1), Business Development (1), Public Relations (1), Business Analytics (1), Planning (1), Nonprofit Management (1), Manufacturing (1), Personal Taxes (1), Personal Real Estate (1), Business Plans (1)
Compare your business plan without outside capital to a plan based on raising money from VCs. Which plan makes your stake in the business more valuable? Complicating factors in the analysis: (i) picking the time to exit; (ii) risk adjusting the two outcomes; (iii) the value of control.
By the way, the notion that capital is simply an accelerator to what will otherwise occur more slowly is naive, as opportunities exist within specific time vacuums.
Joe A.
Founder/CEO of BOSI & Author of Entrepreneurial DNA
Best Answers in: Small Business (10), Starting Up (5), Business Plans (2), Lead Generation (1), Search Marketing (1), Planning (1), Career Management (1)
Do some homework on the last 50 deals funded by VCs. If your company is...
1. In the high growth segments that VCs are actively investing in
2. Doing $5 million to $20 million in revenues
3. Poised for high-double to triple-digit growth
4. Staffed with a management team that has minimum MBA education
5. Led by a CEO who has a proven track record in starting-building-selling a company in this space
6. Armed with strong market protections through patents and/or proprietary technology with significant barriers to entry.
Then you may be perfectly poised to talk to a VC.
If you do not have at least 4 of the 6 qualifications above, you'll be wasting your time.
If you are experiencing 20-30% growth, do you really need the money? Or are you looking to sell your company and cash out.
If you need more working capital, consider a loan. It is the cheapest money you can get during a high-growth time. Why give up equity during high growth? It makes no sense.
if you are looking to sell a substantial part of your company to cash out and put some money in the bank, consider bringing in a partner who can add value to the company while giving you the liquidity you are looking for.
VC's make great partners for book-smart entrepreneurs (MBA, PhD level) because VC's are highly sophisticated and educated individuals themselves.
VC's don't do well with street-smart (bachelor's degree or less) entrepreneurs. The 2 groups speak totally different languages.
Joe...
