4 misconceptions about VCs
Having raised VC money before and bootstrapping atm, I believe there are some misconceptions about VCs.
1. You will lose all control of the company
That's not really true at the beginning. For pre-seed you will often sell 10% of your company for $100k-500k.
Most often, they do not take a board seat.
At seed stage, you will sell another 20% of the company for $1-3M. You're still be majority share holder (~70%).
Lead investor will take a board seat. If you're two founders, this is not a problem (2:1).
If you cannot reduce your losses (or become profitable), it will get dangerous (if you have bad VCs) around series A or B.
For example, if you're a marketplace and you're loosing $100-500k a month, you need to raise every 2 years.
You need to continue to grow at a certain pace (at least ~100% YoY) and then you need to raise more. The success of your company now depends on VC money and you own a lesser and lesser portion of the pie.
2. They will tell you what to do
Have not experienced this (only raised until pre-series A).
Most of the time, they are not operators and let you do your thing.
They might suggest directions, but you decide.
3. You have to raise more and more
This is only true if you are not profitable (or close to it).
Some friends have raised $1+ million, are now profitable and hold majority share.
They can exit at a $10 million dollar valuation or more. This is life changing for them.
The VC will be disappointed because the return is only 3x.
4. There will be a lot of pressure
I think it's great that you have to set yourself milestones that you need to hit and that there is accountability.
When bootstrapping a company, there's much less accountability.
Having said that, VC expectations can be unrealistic. When we were growing 300% YoY for 3 years in a row and nobody wanted to invest, you feel like a total failure as a founder.
Friends who bootstrapped and grew 30% YoY (profitable) were substantially less stressed and much more happy.
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Agree! knowing both worlds I totally agree with you! It is worth it
Honestly, don't agree on this view. Most VCs are pretty easy to manage, if you stick to their / your hockey stick planning, i.e. 100% growth yoy.
So I made several bad experiences on my own, as well know many founders who made bad experiences.
Therefore I started an investor rating portal (investorrating . io), where you can rate investors.
Love your solution! I really feel there should be a platform to review investors. Frankly, I would not put down my linkedin link.
Raising VC early-on can be a big help and you wont loose a lot of control. That's basically what I am trying to say.
Expectations always depend a bit on the investor and their fundsize of course. The bigger the fund, the more you have to shoot for the moon (so that you become a fund returner).
Thanks for your input. Agree with your words.
If not your LinkedIn Link, how would you verify it's a verified investor rating?
Do you have enough traction to have to worry about abuse?
I would accept any legitimate looking submission first. If the investor complains, then you can maybe dig deeper (?) and validate it?
Also, can I only write a review if I received a check from them? I have met a lot of investors who took meetings with us just to get information out of us (or ask to send a deck to have the chance of a meeting). ... or pulling signed term sheets.
this feedback you also incorporate? (personally, i'd love to see it)
If you raise 500kU$ at 10%, that you have a pre-money valuation of 4.5MU$. If that's the case, I would advise to try to go for at least a 1MU$ round, which brings the percentage to 18%.
Seed-stage money is very risky, going for below 25% post-money is extraordinary, unless the business has been bootstrapped and injection of capital is just to speed up a functioning business model, and the ROI can be 'quick'. Then, it is not completely fair to call it pre-seed, since the business is already ongoing and access to capital is optional.
So, if you have two rounds for 25% equity each, your shares are at around 56% (split however you did between the founders). So, the only way the founders retain control is if they always vote together, and this is definitely not the case. Also, the presure to create a 2/3 board will be big (i.e. 2 seats for funders, 3 for investors), preventing deadlocks and offsetting the power structure.
If you face challenges with onboarding investors, you need to understand why: Sometimes it has nothing to do with you, and it's just funder/founder mismatch and you just move on.
Sometimes they don't buy your story, and it would be very wise to get their feedback. If you project you can go from a 5MU$ pre-seed (post-money) to 12MU$ pre-money, you are giving the seed investors a ~2X return. Which is not bad in itself, but it may not be what VC's want to hear.
The other, even if they are OK with the 2X return, is that it correlates very specifically with business operations. How many new customers, new markets, products, etc. If they don't buy you can deliver, either because they don't think you can capture that market share or because they don't believe the market is so large, it would be useful to know. Normally VC's are exposed to plenty of information, and that business intelligence can be crucial for your success.
From my experience, most of the pre-seed rounds I have seen (however big they may be) are for 10%. Seed is then typically for 20%. This is Asia or US. I am not sure about Europe. This should leave you with ~65-70%.
At pre-seed, investors typically do not take board seat. At seed they do. At seed, I have not seen any companies where investors had more board seats than founders.
I know that Europe (and especially Germany) is very risk adverse and there's not much "Venture" in Venture Capital.
Either way, I think we both agree that raising VC money up to a point can be very beneficial.
Relevant to this, I recommend watching Rob Walling's Microconf 2019 talk "The State of Bootstrapping in 2019." In particular, he gives a list of downsides of taking outside funding, e.g.: "Can you block a sale." When a guy came to him with a truly no-strings-attached funding offer, Rob went through his list of questions, and ended with his uncharacteristic advice: take it.
this is great - thank you!