Raising Venture Capital: Big Headlines Hide the Ugly Truth

Dataminr, Inc. is celebrating. The company just announced a feat that a lot of small business owners would love to claim: a new $130 million investment from leading angels and VC… on top of $50 million raised since opening their doors in 2009. The latest investment values the company north of $700 million.

Dazzled? Jealous? Stories like this make you think that raising venture capital is the easiest, fastest – and sexiest – option for funding your small business.

Think again. Behind the headlines are 4 tough truths about raising venture capital and private equity.

Raising Venture Capital is as Rare as a Winning the Lottery

Dataminr is not the norm. In reality, the odds of small businesses receiving VC funding are painfully low.  In fact, according to Fundable, just one in 200,000 start-ups are funded by VC firms. And, somewhat counter-intuitively, the likelihood of funding decreases with the age of your business.

According to author Dileep Rao, the probability of an existing small business obtaining VC funding at a later date is 0.00068 out of 100 – that’s just a 0.07% chance.

As he says in his Forbes article Why 99.95% of Entrepreneurs Should Stop Wasting Time Seeking Venture Capital “Hardly any of you will ever get VC. Actually, most of you may never see the inside of a VC’s office. So, if you want to build a major business, learn to build it without VC.”

So how did Dataminr manage to raise $180 million?

I posed that question to people I know in the finance area. They agreed that a small business has almost no chance of gaining VC funding unless they have the three keys: (1) innovative technology; (2) an experienced team; and (3) a scalable solution for a big market.

Of course, Dataminr meets all these criteria. The Wall Street Journal quoted John Mack, a former Morgan Stanley CEO and a Dataminr investor as saying, “I was impressed by how they used social media to get news faster to people than waiting on newswires or television.”

  • Key Takeaway: Before you start chasing equity funding, consider whether or not you are likely to get it. The answer is probably no unless you have leading edge technology, a ready market, and a history of business success.

Raising VC Money is a Full Time Job

Dataminr did not walk into a room, give a short pitch and walk out with funding. The process was more like this:

  1. Identify investors who are qualified and interested
  2. Get an introduction and a short phone call
  3. Submit an executive summary, then a business plan
  4. Have a conversation and then an introductory meeting
  5. Enter a Due Diligence Phase
  6. Analyze and Agree to a Term Sheet

In fact, in another blog post, we mapped out 173 steps to raise just $1 million from private investors.

So even if you sprint through the door of a great VC firm, the process will slow you down. Count on three weeks to three months of intensive due diligence review by each investor, and another month for legal documentation.  Answering endless questions from investors and lawyers requires full-time work. You will deal with phone calls, emails, management interviews, strategy evaluations and producing customer references.

Dataminr had to deal with all of this while also running the day-to-day business, and you will too.  There’s no sympathy for a company that falters while it pursues funding.  You’ve got to be able to do both – and do them both well.

  • Key Takeaway: Can your business continue to grow while you give your attention to the VC funding process? Consider getting an intermediary or a CFO to help you keep all the balls in the air.

It Takes Money to Raise VC Money

Businesses spend a lot of upfront money trying to obtain equity capital. Expenses like travel, legal fees, consulting and accounting can consume a small round of investment all by themselves.  Many companies have spent $50,000 to $100,000 on the pursuit of VC, only to be shot down in the end.

There’s no way around it – VC expect you to be prepared, and preparation takes money.  Investing in a hard-hitting business plan, clear financial projections, and the legal framework for taking investment is going to cost you. Save your pennies before you go out looking for mega-bucks.

  • Key Takeaway: Lots of money is sunk without guarantees of getting a payback. If you cannot afford the upfront investment, equity funding is not for you.

But Raising VC Money is Just the Start

Let’s assume you find investors: you’ve negotiated a great deal and the company is set to grow like mad … but are you really prepared to live with a new set of bosses?

Investors have the right to know what is going on in the company – and often they will form a board of directors to tell you how to run the show! That means you’ll have to provide all sorts of reports including, but not limited to:

  • Weekly/monthly/quarterly sales & profits figures
  • Performance charts mapping actual vs. budgeted figures
  • Impact of marketing/advertisement expense reports
  • Business intelligence reports
  • Major events/happenings

As the business owner and operator, you’ll also have to attend board meetings, present reports to the board, and take investor phone calls in the middle of the night.

  • Key Takeaway: Does your company have the accounting staff needed to handle reporting and compliance issues? Bake additional staff into your budgets and forecasts because investor relations will not be a one-man job.

Alternatives to Raising VC Money

There are few places in this world where a young company can find $130 million to finance its growth in the way that Dataminr did – and few companies will qualify. So what’s a growing company to do? The best alternative is to set a path that will not require Venture Capital.

Fortunately, few companies really need the kind of money that makes VC headlines. Most can be re-tooled to succeed on very little; and those that need money for development and growth have more and more places to look.  Careful planning can help you grow by using grants, crowdfunding, factoring, asset loans, personal savings, and good old-fashioned sales revenue. There are any number of other financing options out there. With a bit of research you can find one that works for you.

But given the difficulty, the time involved, and the other headaches, VC should not be the first place you turn for growth capital.  Unless and until you understand what’s really going on, you can waste a lot of time looking for a big investor when the funding you really need may be right under your nose.

Dedicated to your success, Tracy Bowens

Guest blogger Tracy Bowens is a Visiting Professor at DeVry University in Orlando, Florida. She has an MBA from Duke University’s Fuqua School of Business. She serves as a small business consultant and has been privy to the activities of small businesses attempting to obtain equity funding. https://tracybowens.wordpress.com/

photo credit: standard-issue via photopin (license)

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