{"id":2394,"date":"2013-12-02T17:09:33","date_gmt":"2013-12-03T01:09:33","guid":{"rendered":"https:\/\/masonmyers.com\/?p=2394"},"modified":"2015-01-28T12:58:39","modified_gmt":"2015-01-28T20:58:39","slug":"venture-capital-myths","status":"publish","type":"post","link":"https:\/\/masonmyers.com\/venture-capital-myths\/","title":{"rendered":"Venture Capital Myths — Not the Answer for Many Companies"},"content":{"rendered":"

Venture capital has been tremendously successful in the United States.\u00a0 In some ways, it has almost been too successful in that many entrepreneurs think traditional venture capital is the only path to success.\u00a0 That is not true.\u00a0 This article in the Harvard Business Review by Diane Mulcahy of the Kauffman Foundation<\/a> helps explain some of what is good and bad about venture capital.\"Raising<\/p>\n

Six Myths about Venture Capital<\/h2>\n

These six myths are from Ms. Mulcahy while the commentary afterward is mine.<\/p>\n

    \n
  1. Venture Capital is the Primary Source of Start-up Financing.<\/strong>\u00a0 Fewer than 1% of US companies have raised capital from traditional venture capitalists, and it is probably dropping.\u00a0 It costs less to start a company today than twenty years ago, so fewer entrepreneurs are forced to seek capital from VC’s.\u00a0 More companies are able to finance their growth from their customers<\/a>.\u00a0 Angel investing and crowd-funding are now entering the picture as well in a bigger way; these will probably evolve to be capital sources with promise and with pitfalls.<\/li>\n
  2. VC’s Take a Big Risk when They Invest in Your Start-Up.<\/strong>\u00a0 Venture capitalists are looking for home-run investments and they do not care if they have investments that return nothing or very little.\u00a0 Partly, this is because of their financial incentives at play.\u00a0 Ms. Mulcahy mentions how little of the money comes from the VCs themselves versus the institutions and endowments that invest through such venture firms.\u00a0 Every company founder should ask himself or herself whether taking on a partner with different motivations that is going all-in all the time is the best answer for his or her company.<\/li>\n
  3. Most VC’s Offer Great Advice and Mentoring.<\/strong>\u00a0 Sometimes this is true, but it is often not true.\u00a0\u00a0 Every situation is different and founders should pay close attention to their exact circumstances.<\/li>\n
  4. VC’s Generate Spectacular Returns.<\/strong>\u00a0 For over a decade, venture capital returns have been negative or close to zero, not even close to what could have been achieved through public market investments.\u00a0 The top-tier firms perform consistently well (please see this post on consistently persistent performance<\/a>), but many others have returns worse than zero.\u00a0 At a VC firm, this will put tremendous pressure on them eventually to get good returns or close up shop.\u00a0 And that pressure will flow downhill to company founders.<\/li>\n
  5. In VC, Bigger is Better.<\/strong>\u00a0 Investment returns often decline when a flood of money enters the field — this was the case in the last twenty years in venture capital.\u00a0 And, there are studies that show that the larger the VC fund, the lower their returns.\u00a0 It can help a small entrepreneur to be with a big, well-known venture firm, but it doesn’t help the big firm’s investment returns.<\/li>\n
  6. VC’s Are Innovators.<\/strong>\u00a0 The industry has grown, but I often hear the investors in venture funds complain about the lack of innovation that Ms. Mulcahy explains.\u00a0 So, don’t try and break the conventional ways of doing things when you are working with traditional venture capitalists.<\/li>\n<\/ol>\n

    Founders should consider all of their options when looking for investment capital.\u00a0 Venture firms are the perfect answer for many founders.\u00a0 For many others, there are other sources of capital that are better suited to their company and their particular situation.\u00a0 Like many things in life, finding the optimal investor for your company is often about putting in the hard work to find the investor that is best aligned with you and your company.<\/p>\n

    Related Posts<\/strong><\/p>\n