like technology As industry cuts and VC firms tighten their standards, savvy founders should consider this counterintuitive question: Even if my vision is compelling enough to secure funding, should I take it on?
Today’s market is full of companies that simply grew too fast, with the help and complicity of their VC partners, and now find themselves facing the pain of negative rounds, spending cuts, layoffs, and a withdrawal from their strategic bets. bolder.
Would it have been better for many of them not to have taken on excessive levels of venture capital in the first place?
This may seem like a strange question coming from me. As an investor, my job is to put capital to work. But the truth is, I see founders every day looking for money for the wrong reasons. They, and to some extent we as investors, have lost sight of when venture capital can be an accelerator and when it can hasten the demise of what could have been a viable business.
In recent years, increasing pressure to invest available capital meant that investors were not as discerning as they might otherwise have been. In 2021, venture capitalists invested a record $329.1 billion in startups. It is evident that part of that capital was not used to the maximum. This calculation supports the 63% drop in funding in the fourth quarter of 2022 over the same period in 2021.
Without a clear picture of what is fueling the losses, venture capital will only hasten their demise.
Add in inflation, cutting corporate costs, and market volatility, and it’s understandable why many investors and founders are spooked.
For an entrepreneur looking to raise money, the current landscape could prove difficult. But even for founders who can still attract capital, it’s a time to be careful: You could very well destroy their business by deploying that cash.
Consider some of the wrong reasons to raise money:
To accelerate a business with negative unit economics
Imagine a founder looking to grow a same-day delivery service in a niche market with negative unit economics. They seek venture financing to increase sales and marketing. But the business does not make money on the basis of the contribution margin, only the variable costs of a good or service.
Your assumption, probably incorrect, might be that the new sales and marketing money will solve the company’s problems. In reality, what is needed is a deep dive into the fundamentals of the company. More often than not, what stands between a business and its ability to scale is not a lack of money.
It is better to ask: Do we have hustle problems? Problems with the product? Process problems? People problems? Is my business model fundamentally flawed?
More money will not solve these problems. Without a clear picture of what is fueling the losses, venture capital will only hasten their demise.