In Silicon Valley (SV), there is one dominant formula for starting a successful business. Someone has an idea, develops an MVP, raises angel funding, launches the product, raises venture capital, grows to some degree, then gets acquired and, in rare cases, goes public. Anything short of acquisition is considered a failure by definition and, if your startup isn’t “VC fundable,” it’s a failure from the start. Of course there are counter examples, but this formula is engrained in the SV culture.
It is this singular-path mindset that leads many founders to seek VC funding at all costs, whether it makes sense or not… and usually it doesn’t. Despite what Silicon Valley will often tell you, not being VC fundable isn’t a death sentence, and it doesn’t mean that your startup isn’t still a good investment opportunity – for the right investor! The trick is finding the right investment vehicle for your company. Some alternative investment strategies include:
- Debt (Loans) – This can be challenging for startups unless the founders have personal assets to offer as collateral (NOT recommended!)
- Royalties (Revenue Sharing) – If you can handle a lower gross margin while you grow, this is an okay option.
- Demand Dividends (Profit Sharing) – This is a great alternative if you will generate positive cashflows within a year.
- ICOs (This is not my area of expertise, but under the right circumstances, is still a possible option.)
Although the startup I founded followed the exact path laid out above (minus angel funding), in hindsight, VC funding was not the best option for us. It forced me to make decisions when negotiating our acquisition that I never would have made had I appropriately capitalized the company early on. Similarly, every week I meet with startups that are trying to raise venture capital but shouldn’t be. Either they don’t need VC funding, aren’t ready for it, or have no concrete exit plan.
If you are currently thinking of raising VC funding, stop and ask yourself, “Why?” Does it make sense for the amount of money you need? Where do you see your company going in the next four to seven years? Are there less-expensive funding options that make more sense for your situation? Feel free to ask questions in the comments on Instagram.
Jennifer P. Hopp is an investor, advisor and entrepreneur from Silicon Valley who recently moved to Puerto Rico. In addition to being the Managing Partner at ATO Ventures, an early-stage Venture Capital fund, Jennifer works with aspiring entrepreneurs and experienced business owners to start and grow their companies while maintaining a healthy lifestyle. She is an avid supporter of Puerto Rico and often helps companies relocate or set up new operations on the Island. To learn more about Jennifer and funding opportunities for your startup, follow Jennifer on instagram @Hopp.vc