Why You Shouldn’t Go after Venture Capital

by Vijay Anand

There are about 33 VC firms in India and more than 70 Angels who are focused on technology and technology-based companies here in India. From the way things are heading, I can almost count about ten new funds that will possibly start here in India. The average fund size of a VC firm is somewhere between 200 – 800 million dollars. All of this is the usual numbers that people throw at you. Just because the presence is there doesn’t mean a rash decision to invest in every company that comes their way.

If you are a technology startup, or any company for that matter and wouldn’t classify yourself to be in the “growth” stage, I would strongly urge you to stay away from Venture capital.

Let me give you my reasons:

1. Timing: The minute you take money from a VC, the inherent statement you have just made is that you have sold your company. No VC is interested in a company that doesn’t have a clear-cut exit. If there isnt one, there are some firms who would create one. They call it liquidation. It’s better not to get into that position.

The right time to look for Venture capital is when you have already built a company, it is revenue-generating and even maybe profitable and you want to expand.

2. Liability: Until you’ve seen a term sheet and have read through all the clauses and understood them, you will not realize how loaded VC money really is. It’s not even in the slightest manner something that should be taken lightly. I would urge you to go find a sample term sheet, go through all the clauses, find their meanings and come back to agree with me on this.

3. Pressure: A seat on the board is great. An experienced board member will bring along with himself tremendrous experience, value and networks to tap into along with him. He will also keep you and your team focused – that said, you also lose a little bit of freedom to do what you want to do or to do radical strategy changes. You’ve already sold the company, remember?

4.Acceleration: I don’t think I could explain this without borrowing/stealing my mentors words on this. “Venture capital is very much like Nitro. It really makes you car go vroom. But you also want to be very careful about which vehicle is receiving this, because if the internal structure of the car isnt ready to handle the extra speed, everything could crumble in half a meter into the road.”

Build your core team first. Build your product. Identify and clearly focus on your market segment. Be profitable and when there is no other option but to grow and you are 100% sure about it, drop a note to a VC. That’s the best time to have that coffee discussion.