14 Jul 9 Unexpected Pitfalls of Raising Capital (And How to Avoid Them)
Raising rounds of venture capital is the goal for many companies: An influx of cash is certainly the fastest way to jump-start your growth and start hitting key milestones more quickly. But venture capital isn’t a silver bullet, and it’s not the right fit for every company.
To better understand the benefits and drawbacks, I polled nine successful entrepreneurs from YEC to get their thoughts on some of the biggest pitfalls to be wary of, and advice on how to avoid them entirely.
1. You Could Give Away Too Much Too Soon
It is extremely sexy to be a “venture-backed” startup. This leads many entrepreneurs to seek venture capital as soon as humanly possible. This, however, is not always in the best interest of the entrepreneur. The longer you can wait to accept investment, the better. A track record will increase your valuation and thereby decrease the percentage of the company that you need to sell to raise the requisite capital. Remember, venture capital companies are in the business of making a return on their investment; act accordingly. —Matthew Moisan, Moisan Legal
2. It’s Hard to Maintain Culture and Quality
When you’re tight on money, it’s easy to be rigorous in your hiring process; a bad hire can be a costly affair. Conversely, after a new round of funding, the pressure to grow quickly may lead to a decrease in the quality of new hires as you say yes to the borderline people you used to reject. The result could be a dilution of the company’s culture as the droves of new hires can’t assimilate quickly enough.
Two suggestions:
1. Stay disciplined in your hiring process. Make sure you have your long-term goals in mind. Ask if this person will be a great employee in three years.
2. Codify your company values and devote a significant portion of your onboarding process to conveying culture. —AJ Shankar, Everlaw
3. It Can Lead to Excessive Dilution
With a new round of financing, the true value of your business does not necessarily increase. Once you raise money, the expectations for your company skyrocket. If you are unable to grow bigger, faster, you might find that you’ll have to give up more equity to investors under far less favorable terms. At some point, your equity is diluted so much that you are no longer motivated to grow the business, since you’d get a minuscule percentage of the upside during an exit. Capital helps, but be very careful about how much you raise and when you do it. — Danny Wong, Grapevine
Read full article>>