To VC or not to VC

Capital. Capital can be likened to life giving blood of any business. Like any body, in order to become strong, a business needs capital to foster growth. Without it, the business may simply become weak, continuing to shrivel up until it dies.

However like a living body, you simply can’t keep pumping capital and expecting that same type of growth. There is a point when you will reach critical mass where any further injections will do little for sustainability. If you feel that you continually need to pump more cash into your business to sustain it, then the model is fundamentally flawed.

Capital needs to be treated simply as a means by which to get to a stage where your business is self sustainable. With the exception of expansion, where a business is run correctly, with a sound business model and a product or service that adds great value, should in most cases not require continued injections of capital in order to keep it going.

So back to the issue at hand here, do you VC or not VC? Are you happy to go through the the process of searching and working with a venture capitalist, giving up much of the autonomy that attracted you to getting into business in the first place. I am not against using a VC to raise funding however I look at it a different way. If a VC gives you $300k in funding I guarantee you that you will spend every cent and may or may not achieve your desired outcome. But even though you spent every cent I don’t believe you really needed the funds you thought you did.

How much do you think you need? Again lets try using Pareto’s Principle (the 80:20 principle mentioned in previous post) and apply it to this scenario. If you are after $300k to get a product from concept to something fully functional and marketable, according to this principle you will use $60k to make 80% of the final outcome. So out of that 300k, 240K of it is used to make up 20% of your final outcome. For example you may spend 20k on a decent office fit-out however only really use your phone and PC (roughly $4k?) to make you your money. Sure impressing prospective clients and feeling comfortable in your environment helps but I’m guessing its effect would site around that 20% mark. This is a broad example but it does put the concept into light.

If you are after a VC’s money first ask yourself if you really need it now and determine whether you can raise your own start up capital. By doing the calculations you will be very surprised how far a bit of frugality will take you. The great bi-product of this approach is that if you find you need the assistance of a VC later down the track, your previous signs of efficiency and discipline would certainly not go unnoticed by any potential investor, further increasing your chances of getting someone on-board.

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