A lot of founders ask, “When is the right time to take on venture capital investors?” The specific answer to this varies by company, but I’m always sure to remind them that as soon as they take VC money, the clock starts ticking.
This is true not just of VCs, but also angel investors. As soon as a founder takes on angels or VC investors, they are under certain expectations to perform and grow the business quickly.
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For instance, if you are slow on raising the next round, meeting growth targets and other expectations, it’s easy to be immediately written off as a failure. That timeline runs about 18 months at most, so if you aren’t sure you’ll be able to meet growth targets and continue on the expected funding timeline then you’re probably not ready to take on venture investors.
That pressure can change the way founders operate their business and can force them into potentially unhealthy incentive structures and mindsets. The point of venture funding is to capitalize the business in order to achieve stratospheric growth. VCs expect large returns on investment, so even a 5x multiple at the exit might be considered a failure by your investors, who may be seeking 10-100x returns.
The point of this article isn’t to scare founders away from venture checks—quite the opposite.
There are good times to take on venture capital and there are times when you might just be too early and bootstrapping makes the most sense. After all, investors love to see bootstrapped startups that have built the necessary foundation for the growth that VCs expect.
The message to founders really is this: be calculated about when you decide to pursue the venture avenue. It’s better to take your time early and enter into those deals with assurances you’ll be able to meet the demands and expectations that come with venture investors on the cap table.
Prashant Fonseka is a partner at Tuesday Capital, an early-stage, sector-agnostic venture capital firm that has made hundreds of investments over the last eight years, backing many startups that have gone on to be Silicon Valley standouts and household names, including Airtable, Airbnb, Uber, Cruise and others. He previously wrote for Crunchbase News on pitch pointers.
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Illustration: Dom Guzman
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