If you think about going down the venture capital route for funds for your young business, I recommend you read this blog post from Fred Wilson of Union Square Investments.
Why Early Stage Venture Investments Fail
It’s always good to understand the situation from the other side since it makes their demands seem more reasonable. You may not like them, but at least you understand why they are made.
It’s well worth reading for how the business plans are changed between the venture capital investment and exit and how success seems to improve when the business plan is changed.
I hope Fred Wilson doesn’t mind if I pull out a few quotes I particularly want to emphasise.
Dick Costolo, co-founder of FeedBurner, describes a startup as the process of going down lots of dark alleys only to find that they are dead ends. Dick describes the art of a successful deal as figuring out they are dead ends quickly and trying another and another until you find the one paved with gold.
This may not sound like the rational, straight line planning model you want to use for your new business but I think it’s a remarkably astute way of looking at business planning in a start-up. The planning helps you to think about the options and focus on those that you think have the best chance of success.
But the true test happens in the market.
Either customers buy… or they don’t.
You can go down lots of blind alleys if the cost of doing so is low. But if you are spending a million dollars on each blind alley, you’ll be out of business in no time.
Testing small is good… failing early is good when you learn what doesn’t work. It gets you closer to what will work. See The Lean Startup book by Eric Ries.
Most venture backed investments fail because the venture capital is used to scale the business before the correct business plan is discovered. That scale/burn rate becomes the cancer that kills the business.
This is interesting because it makes it clear that money isn’t the panacea to business start-up problems that many entrepreneurs think.
The answer lies in finding a winning strategy and proving it in the market.
Only when you are confident that you are right and you have the evidence that will stand up to third party scrutiny should you look for the finance to scale up your business.