Venture or Angel Capital Isn’t the End—It’s the Means
Prashant had no choice but to bear the loss and to coach the founder.
I know that many Silicon Valley investors will be able to relate to Prashant’s frustration. With the attention that new investments receive and the fanfare for business-plan contests, it is easy to believe that once you’ve raised capital, you’ve made it. So fledgling entrepreneurs often spend the majority of their time developing sexy PowerPoint presentations and pitching to investors rather than building their business.
The reality is that the vast majority of startups never receive any angel or VC financing. Harvard Business School professors William Kerr and Josh Lerner researched the investment decisions of one of the largest angel-capital groups—Tech Coast Angels. They learned that 90% of the 2000+ ventures that approached this group garnered the interest of fewer than 10 angels. That meant that they had no chance of receiving financing. Two percent of the ventures received interest from between 35 and 191 angels—giving them, on average, a 40% chance of getting funded. In other words, most entrepreneurs simply wasted their time pitching to these groups. Most of those startups were probably still working out of their garages. My team researched a sample of 549 that had made it beyond this stage. We learned that only 9% had raised any angel capital and 11% percent had raised venture capital at the later stages of their growth. Such funding isn’t, then, a prerequisite for success.
So startups that raise angel or venture capital are the exception rather than the rule. And, as I’ve written, having too much money may actually lead to bad habits. No doubt, most entrepreneurs who raise capital are a lot more sensible than the one who bought the Corvette. But in my experience, companies on tight budgets usually perform far better than those that are well capitalized. And they have the freedom to do what is best for them rather than focus on an exit for their investors.
After crossing the 70,000-download mark and getting positive customer reviews for their Boomerang e-mail–reminder product, Alex and Mike decided to approach investors. It didn’t take long for Dave McClure, an angel investor, to write a check and agree to lead a $300,000 financing round. Alex and Mike plan to use the funding to grow their user base and perfect their business model. They will go for venture capital once they get this right.
Some entrepreneurs decide not to raise capital, even when they can.
His firm grew slowly at first, but he kept investing every cent of revenue in the business. Today, ShareFile has 40 full-time employees, is #104 on the Inc 500 list (#8 in the software industry), generates over $10 million in revenue, and is highly profitable. Jesse says he has VCs tripping over each other to offer him money. But he has no interest.
The point is that entrepreneurship isn’t all about raising money. The money is something you should use to help build traction for company growth, not to alleviate your personal risk. Angel capital can help you get the business model right once you understand customer needs. Venture capital can rocket your company’s sales once you have a solid business model—and not before.
Editor’s note: Guest writer Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. You can follow him on Twitter at @vwadhwa and find his research at www.wadhwa.com.