Venture capital financing is available to only a tiny fraction of the companies founded globally each year, with over five million new companies opened last year in the US alone. While it’s not meant for everyone or every business, it allows founders of those few companies to pursue visions that can truly change the world, and that would otherwise be impossible to achieve.
That said, far too often startup CEOs orient their business plans towards achieving their next fundraises rather than building durable, long-lasting businesses and VC becomes a double-edged sword. Without regular, fresh capital, startups will die; but with every dollar raised, the CEO takes additional time away from working with their teams and customers, adds additional equity partners that have their own goals and mandates, and dilutes their personal ownership, ultimately complicating their life. For these reasons, we view fundraising as a necessary evil for the startup CEO.
Below we dispel the most common misconceptions we run into in conversations with venture-backed CEOs on fundraising:
1. It’s not glamorous and it should not be the goal in and of itself.
Fundraising is a means to an end (i.e. something that you have to do in order to accomplish a higher goal). Far too often CEOs conflate a successful fundraise with actual business success and get seduced by the feeling of raising a big round and the press and accolades that come from friends, family, and peers as a result. Instead, CEOs must internalize that every extra dollar raised means more dilution for them and their team and less control over their own destiny. Ultimately your goal is likely to exit the business or reach profitability with as much ownership as possible. Your fundraise is just a tool to achieve that.
2. It’s a grind and you should mentally prepare accordingly.
You will inevitably here stories about peers who received inbound interest, never made a deck, and raised a big round a great terms. You should not expect this or feel like you are doing anything wrong if it doesn’t happen to you. The truth is that for 99% of us, fundraising is a grind and you should mentally prepare accordingly. For most CEOs it takes over 100 conversations with investors to complete a round.
3. Fundraising makes it harder, not easier, to exit.
Most CEOs reflexively conflate fundraising success with long-term business success (aka the probability of an exit). In most cases though, the exact opposite is actually true for two reasons:
- The higher the mark of your previous round and the more money you’ve raised to date, the higher the exit valuation you have to achieve for your investors to make money and for you to make money. Not to mention that your major investors have negative consent rights, which means they can block your sale if they don’t like the terms.
- The bigger you get, the smaller your pool of potential buyers becomes. Venture-backed companies are 16 times more likely to be acquired than to go public and 75% of all acquisitions happen at or before the Series A.
4. Giving up any control of your board is a big deal.
Typically, at the Series B the board is balanced with two common seats, two preferred investor seats and one independent seat. At the Series C that often shifts, with the founder/common officially losing control of the board.
But even at the Seed or Series A, investors acquire negative consent rights allowing them to block major decisions they disagree with. This is often overlooked and ignored by early-stage founders, but shouldn’t be accepted lightly. VCs sit on your board to help you, but they also sit on your board to monitor their investment and intervene if you’re not doing what they want. And the more VCs you have on your board, the bigger the set of diverging interests and voices, all of whom have negative consent rights and voting rights.
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