Any Downside To Venture Capital?

Danno RedDanno Red Practical Man
edited July 2014 in Wealth Hacking

Besides giving up total ownership/control of your idea and a percentage of future earnings are there any downsides to obtaining venture capital support to jump start an idea? Besides that lot's of people will say no, of course. Best places to look for help in the healthcare sphere?


Comments

  • StevoStevo Upgrade in Progress
    There's a TV show called Dragons Den here in the UK where people pitch ideas for their business in hopes of getting investment. Most want cash but other smart people know about the investors (dragons) and go for their specific skills or existing complimentary businesses. On that, it's a huge win, as one guy said, he'd rather have a percentage of a million dollar company, than 100% of a worthless company.


    The flip side, is what you may see if you watch the show. These guys are good with their money and will grill you to death, negotiate hard on terms and ride you until you perform. It is of course going to be over dramatic for TV, but I couldn't imagine them being lax when you have their money. Many contestants are ill prepared and don't know the business well enough, and they get torn apart. I imagine a VC firm being exactly the same.


    So the downside I see is basically being an employee again, of sorts. This can be totally mitigated by doing your homework and being good at what you bring to the table. You can totally come out on top!


    A good site I found is www.seedrs.com - basically crowd-sourced capital. Take a look!
  • ACH85ACH85 ✭✭


    Besides giving up total ownership/control of your idea and a percentage of future earnings are there any downsides to obtaining venture capital support to jump start an idea?




     


    I bolded that part because there is a bigger downside to obtaining VC funding to jump start an idea than to jump start a company. 


     


    Notice that Kickstarter campaigns that do well often say "we spent the money, we have a prototype, we have a manufacturer ready to go, we just need orders and money to fulfill those orders." 


     


    It sounds like the show Stevo is talking about in the UK is basically Shark Tank here in the U.S. Those guys give really rough funding/ownership terms to companies that say "I have a great idea and need your help." Those are unproven. 


     


    But they jump over each other to offer amazing deals to companies that say something like, "I have $100K in sales via [local chain store that's only in my state] but I need your funding and expertise to hire a sales staff to reach out to [similar chains in other states.]" They see that as a proven concept that just needs some more gas in the tank to go national. 


     


    The longer you bootstrap, the better terms you can get from a VC.


     


    Mixergy.com has really good interviews about this stuff. 

  • StevoStevo Upgrade in Progress

    Sounds about the same, I neglected to mention Dragons Den also had people with proven businesses and/or orders and wanted to go to the next level.


     


    I've attempted to start many a business in my time - all of them bootstrapped. I personally think if you want to get something started, go and get it started, and get the funding if you need to. I have a couple of kickstarter ideas I'd really like to start.


  • Danno RedDanno Red Practical Man

    Just listening to a podcast on Econtalk hosted by Stanford's Russ Roberts who just interviewed Sam Altman from ycombinator. I have an idea, business plan, products (tangible) and growth/monetization (future products/services) but I don't have the capital to make it happen nor the time to walk away from my job to give it the honest go I think it deserves. What I need is a severance/layoff! But even that is such short-term liquidity I'd be forced in to working for real again to make ends meet. I'm familiar with Shark Tank but I'm not interested in learning from reality TV as it's full of egos playing to the camera and while Mark Cuban and the others might be really close to themselves on the show, there's a reason they were selected over other venture capitalists...they're NOT normal personalities. If approved by ycombinator's board, founders are given $120,000 for 7% stake in the company...not negotiable...then you go live with them in California in their founder community and go to founder's school while there. Success/growth is largely based on each founder's work and decisions as it sounds like they're very hands-off. If accepted in their program, I'd have a legit 18-24 months to really focus on working the business up and developing products and a sales strategy.


    I just don't know anything about VC except what I've heard in this interview and the sensationalism on the couple segments of Shark Tank that I've seen. Bottom line is, I think I really need to put more effort into the idea like you (ACH85) suggested and get closer to reality before looking for that angel so the time on the "free" money clock doesn't start until I'm closer to ready.


  • StevoStevo Upgrade in Progress
    Sounds awesome, man!
  • Its usually hard to get vc money on just an idea. Most often teams need to prove their business model a bit first. Angel investments are smaller sums and they require less traction. 


     


    One of the problems with asking for money too soon is that the risk is very high and therefor you will pay for that risk with more shares. If you go for additional rounds later on, you might be so diluted that future vc.s will feel it will be hard for to stay motivated and choose not to invest in you. 


     


    Some interesting thoughts: http://steveblank.com/2013/11/25/its-time-to-play-moneyball-the-investment-readiness-level/


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