Author: Sergei Revzin and Vadim Revzin / Source: Forbes
There’s no denying that the prospect of raising millions of dollars from investors can be very exciting for a first time entrepreneur. But you can save yourself a lot of time and headache if you understand that only certain types of businesses should even attempt to pursue venture capital investment.
Since the probability of raising money successfully is so low, you can spend years trying to pitch investors only to realize that your business isn’t really fundable.
You don’t have to spend a lot of time talking to early stage entrepreneurs and investors to hear someone say that it’s easier than ever today to raise money. Those who were in the industry in the nineties before the 2001 tech bubble burst will tell you that the amount of money floating into venture deals of questionable intrinsic value is about as high as it was in 1999. This was a time when companies like Webvan and Kozmo raised $396 million and $250 million in venture dollars respectfully, only to go bankrupt by 2001.
But, even though there are a few founders who successfully raise capital at crazy valuations with little real technology or revenue behind their businesses, the reality for most founders is that the bar actually keeps rising. According to a report by Wing Venture Capital, more than 50% of companies who raised a seed round in 2017 were generating revenue by the time they went out to fundraise, compared to only 10% of companies in 2010.
But whether or not you’re generating revenue, how do you know if you should raise money from venture investors without having to spend 1-2 years learning about it the hard way?
Here are some basic guidelines you can use to make your decision.
Can your venture become a $100 million dollar business at minimum?
Most entrepreneurs would be ecstatic to run a 5, 10, or 20 million dollar business. But for venture capital investors, that’s simply not enough. Sure, there are plenty of companies that raise venture capital and end up selling for single or double digit millions, but considering that most investors know that about 70% of their investments will either lose everything, or breakeven, they need to at least believe that every single investment they make has the potential of returning 10 times their money or more.
That’s why VCs want everyone who pitches them to be thinking big. Big markets, big outcomes. If you think that it would be very difficult for your business…
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