Raising venture capital is glorified in the news and blogosphere resulting in many entrepreneurs believing that they too need to raise venture capital. Well, 99% of entrepreneurs shouldn’t raise capital, and here are a few reasons why:
- Limited Exit Opportunities — As Eric Paley outlined, the more capital you raise, the fewer the exit opportunities. Generally, the size of the VC fund is the size of the required exit, and less than 20 in 1,000 companies that raise venture capital sell for $100M or more.
- Market Outcomes — Most markets aren’t winner-take-all or winner-take-most, such that while quality companies are built in many new areas, the size and scale won’t be large enough to warrant institutional capital (ensure a better business model).
- Cash Flow Businesses — Almost all startups are better served as cash flow businesses, not venture-backed business, and everyone involved can still do well.
- 5x Value Multiplier — For an entrepreneur to be better off financially after an exit, the company has to sell for at least 5x more than if they didn’t raise money, which isn’t the case for most entrepreneurs.
99% of entrepreneurs shouldn’t raise venture capital. Think that doesn’t include you? Think again.
What else? What are some other reasons that 99% of entrepreneurs shouldn’t raise venture capital?