Starting a Company Is WAR – Here’s How You Fight Back
Mr. Wonderful here –
This might be painful to hear: but if you’re a founder, it’s time to kiss your dreams of a giant VC check goodbye. Why? In the best of times, funding through venture capital is no cakewalk. Now, the Nasdaq is down over 5000 points YTD, and venture firms are running for the hills. That means by and large they’re only doing inside rounds, and on the off chance you do get a terms sheet, well…it’ll make your eyes water.
Let’s step back and look at the market a year ago, shall we?
You can put away the rose-colored glasses. Whatever you may think, even at its peak, venture capital accounted for remarkably few funding rounds. In 2021, there were just over 1,200 successful venture-backed raises. Compare that to the more than 1.3 million small businesses formed in the US during that time, and you start to see what I’m talking about.
Let’s just say, though, that you were one of the lucky 1,200. So now you have your check, and la-dee-dah? Wrong. Odds are your new venture pals wanted a proprietary position on top of your shares (good luck explaining that to your early backers by the way). And maybe it took the form of preferred shares or a special liquidity covenant. That wasn’t necessarily the end of the world in 2021, but then the Nasdaq hadn’t dropped 5000 points yet, had it?
See, venture backing isn’t like getting a check from your rich uncle. VCs have strict time horizons – generally 36 months – and you’d better believe they’ll want to see a return on capital when time is up. Market downturn or not, if you’re not careful, you can find yourself pushed into a liquidity event before you’re ready.
Don’t Cede Control of Your Company
No doubt, you’ve heard me say: business is war – and it’s true. So why would you cede ground when it comes to something as important as control of your company? Well, many founders think it’s the only way to secure funding, but they’re dead wrong.
Enter equity crowdfunding. This is something I’ve been talking about for years because it lets you as the founder set the terms of the capital raise. No being bullied by a pair of golden handcuffs across the table.
Say you go with the crowd to fund your seed round. On a regulation crowdfunding offer, you can raise up to $5 million – so it’s competitive against just about anything you’d get from a VC at this stage. You can also issue exclusively common shares. And on a platform like StartEngine, all those small investments (think $100, $200, $1,000) can appear as only one entry in your cap table. Basically, you set the terms of the game.
By the way, investors from the crowd tend to be your early customers. That means they like your product or service and want to see it succeed. So they’re more liable to take the long view than a venture partner.
Don’t mistake me – the venture route does work for some companies. But as a founder comparing funding sources, you have to look at the features and control provisions or you’re dead in the water. After all, sharks like me don’t start swimming unless the odds are slanted in our favor.
Kevin O’Leary is a paid spokesperson for StartEngine. View the details here.
