Are You Opposed To Venture Capital?

The debate continues on: does venture capital increase value? In the cloud/lean start-up stage many B2C organizations arguably aren’t in need of venture backing anymore. When I spoke to business owners, this theme arises quite often, so I wanted to explore it in a blog post.

For better or for worse, some business owners I interact with who are typically opposed to venture capital. Primary worries I’ve heard about include the dilution of founder’s equity and disruption because of lengthy due diligence processes. (One business owner went through a six-month due diligence process with another VC firm. Ouch! As a matter of record, our average procedure takes 6-8 weeks.)

For the data-oriented: my friend Furqan Nazeeri (who runs the popular @altgate blog) posted an excellent paper on this very topic. The Harvard Business School research indicates that excellent VC firms are like excellent stock pickers, supporting serial entrepreneurs and those who are highly likely to do well.

Conversely, you have scenarios where raising venture capital obviously adds up. HubSpot, a leader in online marketing, just recently received $32M in backing from Sequoia Partners, Google Ventures and Salesforce.com. The co-founders describe why this is sensible for them in a really superbly written post. To sum it up, for B2B SaaS companies, consumer acquisition costs are paid up-front. Even though your unit economics are rewarding, it’ll take substantial cash to progress from being a great company to becoming a leader in your industry. And, as the authors stress, in the Internet age, being #1 means everything. (Although if you’re late to the party, don’t lose hope. As the respected Al Ries & Jack Trout indicate, if the #1 spot is taken, you can still distinguish yourself and be #1 in a connected but somewhat different category.)

Whether or not to work with VCs is a personal and a tactical decision. Debatable, good VCs aid in greatly reducing the risk associated with new ventures. Seeing that a majority of ventures fall short, the argument goes, it’s almost certainly a good idea to solicit all the help you can get, even if it means giving up some equity along the way (the idea being that some equity in a big company is worth much more than a lot of equity in a small company). Even the HBS researchers show that serial entrepreneurs raise venture money in “21 months as compared to 37 months for beginner entrepreneurs.”

Outside the money and the involvement, there are other advantages as well. For OpenView, we have a full-time internal consulting team (called OpenView Labs) that we bring on to speed up our portfolio firms’ growth. As a former management consultant, I believe the value-add here is significant, which was one of the motives why I joined this firm. But just how this helps will have to wait for another post…

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