Venture Capital: The Good, Bad, and Ugly by Vivek Wadhwa

There often comes a time in the life of a startup when the founder must decide if it’s better to own a small piece of a big pie. That’s because bootstrapping can only take you so far. When you’re lucky enough to reach the stage where you have a product that customers really want, a business model that works, and a management team that is itching to take over the world, start weighing your options.

Raising millions through venture capital allows you the luxury of not having to watch every penny. You gain experienced investors who can help you focus on the big picture and plan your growth strategy. But there are many strings attached to this money—it’s practically like getting married.Let’s start with the good that comes with venture capital money.

1. Experience, advice, and mentoring. Whether you work in the tech world or the film world, the principles of building a business are the same. Those who have done it before can provide tremendous value. Venture capitalist firms are usually staffed by experienced executives who have not only been successful on their own, but have also watched dozens of startups succeed and fail. They can guide you through your journey.

2. Objectivity. What drives the most successful entrepreneurs is their vision and their determination to succeed at all costs. It’s very easy to believe your own press and lose objectivity. Having experienced partners there ready to throw cold water on you can provide a healthy balance.

3. Networking. It’s always about who you know. Venture capitalists maintain extensive contacts with other venture firms, executives of firms with whom they’ve done business or served on boards, investment funds whose money they manage, and so on. Their Rolodexes are usually worth more than their weight in gold if you don’t want to make cold calls (see BusinessWeek.com, 06/06/05, “”Ask for Help—and Offer It””).

4. Recruitment. It is hard to know what to look for when you’re interviewing for all the diverse positions you have to fill (see BusinessWeek.com, 05/19/06, “Countdown to Product Launch, Part III”). What do you ask when you’re interviewing a lawyer, for example? How can you tell if the VP of sales is more adept at selling himself than your product? Management teams are usually the top priority of venture capitalists, and they’ll help you recruit the best.

5. Credibility/prestige. During the first couple of years of your startup, you’ll feel like adding “we’ve never heard of you either” to every conversation. You can’t even get the local press to write about you. Yet everything seems to change when you complete an investment from a venture firm. It’s like joining a special club that gives you respectability. Even customers feel more assured when you tell them about your strong financial backing.

6. Shared risk. Things will go wrong. The market will tank at some stage, deals will fall through, and key employees and customers will defect. Venture capitalists usually have deep pockets and keep reserves for subsequent rounds of funding. Good venture capitalists will support you when things get tough.

7. Big picture. It is very easy to be focused on your product and market and lose sight of the forest. With the hundreds of business plans that VCs review every month, they develop a good feel for the trends.

8. Exit assistance. Nothing lasts forever. If things are going well, you will want to climb the next mountain. But the best strategy may be to cash out and start again. Your venture capitalists will watch for the best exit strategy.

All this seems too good to be true. What are the downsides?

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