In the business world, there are few bigger ‘rushes’ than getting the backing of a VC.
I’ve had that rush myself, have felt the thrill of seeing a VC place millions of pounds on the table for a business a school friend and I started. It’s incredibly flattering and the heart really does flutter. But that’s often the problem.
While it has countless merits, venture capital has become so fashionable that it now eclipses all other ways of growing a business. Today, people shout from the rooftops about VC investment, with journalists writing about funding round after funding round.
There’s a serious kudos attached to Series A funding. Organic growth, by contrast, is plain dull.
The message often given out to the UK’s small business owners is that VC cash is a must-have for the serious business. How far from the truth this is.
Beware the ‘short-circuit’
Now there’s no doubt whatsoever that for many businesses, VC backing is the right thing. It’s been the making of them and helped them achieve the success they have. VCs and VC investment play a vital role in the economy and are key to its growth.
But, for me, the fascination with securing big backers early on in the growth process can actually harm some companies.
One reason for this is that entrepreneurs take the focus off their business and onto fundraising. Secondly, those who get VCs on board are almost always hard-wired for growth.
In plain English, this means that they are going to be driven relentlessly, come what may, towards a major capital event.
And in fairness, you can’t blame your backers for this as they will have put a lot of money on the table. But it’s an event that could result in them ‘short-circuiting’ along the way — missing the opportunity to become a profitable SME as they stretch to become a ‘unicorn’.
New relationships, new masters
There are many good reasons why you should consider growing your business organically, as I have decided to do this time round with Critical Future.
For starters, the VC route simply isn’t suited to all people. You immediately have new relationships to master and – in most cases – new masters.
Given that many entrepreneurs like being in control and being able to make their own decisions, having investors means you give up that control and effectively become an employee (albeit one with shares) implementing an agreed plan.
You are certainly not able to grow your business around your lifestyle, which many entrepreneurs value more than they think. What was seconds earlier a courtship morphs, once the ink has dried, into a black and white business relationship.
What type of business is right for venture capital?
Some of the greatest businesses of our time have come through the VC model. What did they have in common? They were technology businesses that required a lot of upfront investment, were not profitable for several years, and aimed to transform an entire industry — if not change the world.
As an entrepreneur there are certain ideas you will have that are just as revolutionary. For this you will need VC funding, and angel investors and every other source you can find.
Elon Musk needed so much funding for Tesla that in 2008 he was just hours from bankruptcy before he got a loan on Christmas Eve that saved the business. Today, Tesla is worth $49 billion and more than Ford.
The Musk/Tesla example shows how determined you need to be to succeed, but also something else — how realistic the possibility of failure is.
Now I am sorry to be the one to break it to you guys, but the chances of you creating the next Facebook or Tesla are pretty tiny. But the possibility of you building a great sustainable business, which makes you wealthy, happy and enhances your life, are much better.
What business does not need venture capital?
Most businesses do not need venture capital funding and the vast majority of successful businesses have not received it. For example, only one per cent of businesses in the United States have received VC funding historically.
You can build a business progressively, by finding a need in the market, and satisfying it. I believe entrepreneurs should spend much less time trying to impress investors, and more time asking themselves.
What can I sell right now to generate revenues?
I meet great talented entrepreneurs who are tearing their hair out looking for investors, when instead they could already be generating revenue in many different ways. These sales could then provide funds to grow the business progressively and over time invest in the brand, infrastructure and growth. Such businesses also develop a credible track record of clients, revenues, and are able to maintain ownership of their company, and be in complete control of their business.
As the business scales over time, learning about its market, and reinvesting back into the company – who is to say it cannot reach the top position in its industry, off its own steam?
Master of your own destiny
As an entrepreneur growing your business progressively, you are also the master of your own destiny. You can make your own decisions, quickly change the direction of your business to follow the market rather than a hermetically sealed ‘roadmap’, hire the people you want to hire and pay yourself what you feel you deserve (subject to revenues!).
In short, you get to retain absolute control over key decisions about service, product, markets and quality.
So there is a real and important choice facing entrepreneurs. Going for VC backing has its merits without doubt, and is the right choice for certain types of company, and can be a fast-track to success.
But most companies do not need VCs, and entrepreneurs should become more aware of the opportunity to grow a business through sales and revenues. Stop trying to impress Dragons, and become true masters of their own destiny. This is exactly what I have done at Critical Future. We are growing at over 100 per cent year on year, and doing it all progressively.
Adam Riccoboni is managing director of Critical Future.
Further reading on VC opportunities
