Should You Access the Big Bucks or Just Bootstrap Your Business?
I meet hundreds of entrepreneurs and management teams looking for funding every year… People from all walks of life. Some of them real smart and others as dumb as a rock.
They come to us at Blackhawk asking us our opinion regarding their respective companies and if they would be a good fit for us or for some of our friends in the private equity/VC community for funding and growing their businesses.
My response to them in general is that this is not an easy decision and it all depends on the kind of entrepreneurs they are, the chemistry involved and the kind of companies they are trying to build.
In fact, private equity or venture capital (VC) financing can either take your company to the next level–or tear it apart. It is not an easy decision and ultimately depends largely on your personal appetite for risk and what other funding options are available.
Here are some of my thoughts which I thought I’d share with you that could hopefully help you better assess your individual situation before checking with us live….
1. Resources. You’ve got to really look at the resources you have available to compete. Certain types of businesses–such as those in the renewable energy, biotech, and telecom industries–may require significant amounts of capital just to compete. Without it, they’re basically doomed from the start.
2. The ability to scale quickly. Other businesses can get by without private equity/VC funding in the beginning, but eventually need more serious capital to take things to the next level. It also proves difficult to think long-term and strategically about the business when you have short-term financial pressures. So if you want to quickly become a national or international player in a given industry, private equity/VC money might be the way to go.
3. Connections and expertise. The right private equity/VC firms not only give you access to their checkbooks, they make their rolodexes and industry experience available as well. For entrepreneurs, it is all about ‘smart’ versus ‘dumb’ money . The key is accepting money from private equity/VC firms that can bring strategic partnerships, unique expertise and key management skills.
Looking at the other side of the coin, let’s not forget the fact that there are significant risks in taking private equity/VC financing which you should be very much aware of … such as:
1. Loss of equity (and control). Taking a private equity/VC investment means sacrificing equity and ceding a certain amount of day-to-day managerial discretion. Private equity groups/VCs bring their own blueprints for success (preconceived notions about how you should be doing things). And unless you’ve negotiated autonomy into your agreement, it’s hard to say no to their ideas since they’re the ones paying the bills. What’s more, if your business model is as good as you think it is, you may be unnecessarily forfeiting a significant share of future profits by taking funding now. Bottom Line: If you want a small piece of a big pie, take the money; if not, stick to bootstrapping your business till you reach a critical mass. You will have much more leverage when dealing with the private equity/VC community in the future.
2. Misaligned goals and priorities. Don’t be naïve about the whole process…. Private equity/VC firms don’t necessarily want what’s best for you or your business in the long run. They want what’s best for their bottom line on their own timetable. These divergent opinions may not only lead to declines in efficiency, but also could create an unnecessarily hostile working environment.
3. A lack of spending discipline & focus. Having a small budget forces you to learn how to make a little money go the long way. A start-up team with too much capital may fail to develop the bootstrapping skills necessary to achieve long-term growth. An abundance of capital tends to dull the mind. There is the tendency to hire too fast, pursue too many unvalidated ideas, and spend on non-strategic elements of the business. Be careful. Also… When too much of your attention is monopolized by outside sources–such as a hands-on VC whose ideas don’t necessarily mesh with your own–your company’s day-to-day operations might suffer, leading to mistakes that cost you in terms of both your company’s bottom line and reputation….So be careful.
Bottom Line: If you are considering raising private equity/VC funding, my best advice is to proceed cautiously. Carefully evaluate your needs and whether or not other funding sources–like angel investors or small business loans–can meet them at a lower cost. After all, private equity/ VC interest does not equal success. Nor is funding an end in and of itself.
Now that you know… Share your thoughts.