For venture capitalists, a high failure rate – although 95% is a higher rate thanthe industry generally acknowledges – is par for the course. It is an integral partof the venture business model.

Venture is a numbers game, and only one or two companies in a fund need tohave a big return for the fund to be successful. Think of it like this: the venturefund owns a fleet of racehorses. If one or two horses win, they win. albania . As anentrepreneur, you are one of the horses. You only win if YOU win.

Venture capital makes big bets and wants big outcomes. BILLION dollarcompanies, not companies that pay an annual dividend of a few million dollars tothe owners.

The odds against creating a BILLION dollar business are a lot greater thanbuilding a MILLION dollar business. Think about how many people have donethe former versus how many people have done the latter. To quickly determinewhich companies will succeed and which companies will fail venture investorswill accelerate the growth of your company (the growth of its burn rate at least).This is like adding a nitrous oxide boost to your car’s gas tank – you will definitelygo faster although it is more likely that you will crash.

So taking venture capital puts you on the fast track – to succeed OR to fail as thecase may be. It increases your risk as it increases the reward.

 

1. WHAT DO YOU WANT DO BE WHEN YOU GROW UP?

The most important question is what is your “end game”. If your goal is to builda cool, profitable company that can pay you and your investors millions individends and let you do what you want to do in life, you can do that withoutventure capital (maybe not without investors but without venture investors). Thisgoal is incompatible with the venture model.

On the other hand, if you want to build a billion dollar company, although theodds against you are greater, the odds of doing it WITH venture capital are a lotbetter than doing it without.

2. WHAT IS YOUR RISK TOLERANCE?

The “lean” approach of methodically build a company, proving your businessmodel step by step, maintaining a low burn rate until you get it right, and onlyscaling things that work lowers your risk substantially; you will be a small teamfor a longer time, no “hired gun” executives, low burn rate, just the basics, nofrills.

You will have a sense of urgency about getting to cash flow positive, and you willonly be able to increase your burn rate as cash flow allows.

You will be forced to prove your business model sooner rather than later,because you can’t rely on venture capital to pay your bills.

The bigger risk with venture capital is that it may pay your salary for three, four orfive years only AFTER which you find out you couldn’t get to profitability.

Also keep in mind, once a lot of capital has gone into your company, that is a lotof people who need to get paid back before you or your team see a nickel. It’scalled Liquidation Preference.

3. WHAT IS THE TIME WINDOW?

Sometimes there really is an opportunity where you need to “use it or lose it”. Ifyou have a head start, but the time window is closing, you may need to executesuper fast. language translator Venture capital makes it possible to do that.

BUT: the vast majority of startup businesses are not really like that. Manycompanies who went for the so-called “First Mover” advantage ended up as “FirstLosers” instead.

In most cases the real competition you face is non-adoption by customers – notother startups.
Check out this blog post by Steve Blank on “first movers” before you decide youneed venture capital to become one.

http://steveblank.com/2010/10/04/why-pioneers-are-the-ones-with-the-arrows-in-their-backs/

So when it comes to venture capital, be careful what you wish for. It is right forsome of the people some of the time, mainly when you have a business modelthat works and is ready to scale.

 

By Jeff Snider, US MAC Mentor