Venture Capital: Russian Roulette
for Your Business

by Andy Birol

Do you feel lucky? Will venture capital make your day?

With an improving economy, you know your new business is poised to grow. However, to seize your day, you need more money. Unfortunately, with your firmís earnings history, no banker, investor, or traditional lender is interested. With your friends, family and angel investors already tapped out, venture capitalists could be your best option to get the investment you need. Or, are they?

There are good reasons to seek venture capital. Venture capitalists have and will risk their money, advice, and resources just when your business needs these most. Their cost, owning a part of your business, seems minimal in light of what they say it will be worth.

Don't be fooled again: Delusion and Dilution.

The basic problem with using venture capitalists is that their need to earn quick, big returns conflicts with your goal of building your business. Growing a companyís customer base rarely enriches venture capitalists as much as the next round of investors who buy them out. To sell your company, the VC must find shortcuts to creating customer value. The technology and life sciences industries offer capabilities that may be easily commercialized and sold. However, even these odds are very long. The venture capitalistsí own statistics show how choosy they must be. Venture capitalists only:

  • Fund one out of 1,000 business plans they see;
  • Need two of ten portfolio companies to succeed to earn the 100 to 1 payoffs their investors expect. And, therefore, VCs may only
  • Stay committed to healthy businesses, because problem companies are cheaper to close down than fix.

If you are not deluded (your business is venture capital-fundable), you face a new challenge--that of dilution. When you work with a venture capitalist, you must ensure your vision; ownership and energies stay in control. Your risk of dilution is high because:

  • After successive rounds of equity financing, it is quite possible you can end up with neither ownership nor a big payday to show for your hard work and effort.

  • Every minute you spend writing business plans for investors is time you could be spending growing customers. A business plan never convinced a customer to buy what you sell. In fact, many venture capitalists often shuffle plans among themselves in a practice called "passing the trash" in the hope of finding more investors to carry the risk.

  • After the post dot com\9-11\Enron disasters, the improving economy is favoring real companies creating real value for customers by selling real products and earning real revenues. The "home run" technology companies are fewer and farther apart.

  • The changing deal flow of venture capitalists is reflecting this. The impact of too many "dream deals gone bad" is trickling up to the VCs and their investors. They are laying-off and cutting back before funding businesses with modest returns on longer paybacks.

Donít Get Burned: Keeping the Heat Down if You Stay in the Kitchen.

Venture capital does play an important role in certain businesses. If your business must create a completely new business process before it can sell anything to anyone, you probably are well suited for venture financing. So when outside investment precedes money from paying customers, then get your business plan perfected and put it in front of the firms that fund ideas like yours. But still take the following precautions:

  1. Pay more for less money if it comes with fewer strings.

  2. Realize that venture capitalists exist to make their partners wealthy.

  3. The more customers you grow, the more of a real business you have and the less equity you will have to give away to get funding.

  4. "Lawyer up" to protect your interests and business goals.

Home Grown Venture Capital: Have Your Customers Finance Your Business.

If you really plan on building and managing your business for the long run, turn your focus to finding, keeping and growing more customers for your products. There is an old saying it is better to learn how to fish than to be given fish. No business survives without a strong and well-developed ability to get new customers. If you focus on this rather than getting money first, you will be in the driverís seat and will live and retire to tell about it. So:

  • Make your new product or service something people can buy now.

  • Put all your efforts into creating sales people, channels, and proposals.

  • Over deliver to the first customers you close and ask them for referrals and references as soon as they are happy with what you have delivered.

  • Reinvest all the money you make from your early sales into more customer services, benefits and products. This will grow your company faster than anything will.

Remember, customers get you money better than money gets you customers. Each paying customer provides you with more money you have already earned.

Turning to venture capital for money to grow your business is sort of like going to a bar looking for someone to marry. The longer the night goes on, the clearer it is that most people you meet have unacceptable objectives. So, to find capital just as you would find a spouse, the same advice holds true. Focus hard on your own success and the right people will buy into you for what you are, not who you might become.


Andy Birol is a Cleveland-based business growth consultant, owner of Birol Growth Consulting and author of "Focus. Accomplish. GrowÖ The Business Owner's Guide to Growth." He holds an MBA from the Kellogg School of Management at Northwestern University and has been published in The Wall Street Journal, New York Times, Entrepreneur Magazine, Fortune Small Business and many more. In 2002, his firm won the Weatherhead 100 Award as Northeast Ohio's fastest growing single-employee business. A guest expert on CNN's Dollar Signs, NPR, and NBC, Andy comments on national and local issues facing business owners who want to grow their businesses. Andy can be reached by visiting his website at www.andybirol.com or at abirol@andybirol.com .

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