3 Downsides of Venture Capital—And How to Avoid Them

Raising money for your business can be great. Many entrepreneurs see it as validation that they’ve “made it." While it is a good sign that a professional investor has kicked the tires on your company and is willing to invest their money, there are some downsides to venture capital that might mean that raising venture funds is not the right path for you.

Sure, there are many advantages of securing a round of investment from a “value-add” partner. It can open the doors to important introductions, kick-start a business into high growth, and even refocus a business for success. But not all venture funding stories have such happy endings. There are, in fact, times when a business might encounter more negatives than positives when accepting venture funds.

To avoid this path, there are potential scenarios in which venture capital is a major drawback:

1. When the money serves as a weak data point

All secured rounds serve as data points to subsequent investors about how well the entrepreneur(s) turns funded money into traction. When accepting an investment, founders must be sure that the amount is adequate to allow the business to be in a demonstrably different place when they go back out to investors for follow-on rounds.

Sometimes, teams in capital-intensive ventures will accept a round of investment that is not enough to move the business to the next stage. This will hamstring the company when approaching new investment as the question of “what was done with the earlier round” is sure to come up. A smaller-than-needed round can make your business look like it is unable to gain traction with funded money. Make sure that the timing is right for the investment to make a difference in your business.

2. When investors shape the trajectory

It’s often written that a downside of raising money is loss of control. But, this is poorly defined. For the most part, early-stage founders give up less than 50% of their company on an initial funding round—so they still technically control their companies.

The loss of control is often more implicit rather than explicit. It can be very hard for a first-time founder to ignore the advice of an active investor. This is especially true when the investor brings to bear mentors and resources that share the investor’s vision. Investors and founders don’t always want the same thing. Even a successful business doesn’t particularly help an investor seeking a seven-times return on their investment. This "swing for the fences" approach can leave a founder feeling like they may be jeopardizing what is a moderately successful company in an attempt to achieve the levels of return and growth that the investor wants.

3. Distraction from growing the business

Raising money takes time, as does building relationships with investors. There are a finite number of hours in the day, and even for a dedicated founder burning the candle at both ends, it can be hard to keep up with the tasks necessary to build a company while also seeking money. For many companies the need to raise money is inevitable, but making sure that it is the right time to raise (or close to) helps minimize the time sink.

Many founders try to raise too early and dedicate too many of their cycles to fundraising, all the while ignoring their business. When they do finally get a meeting, the business does not have the growth in traction it should have because the founder was distracted. A founder’s primary focus should always be building their company’s traction; forsaking a business’s growth for funding is never a recipe for success.

Raising money enables a high-growth company to hit the accelerator. For certain businesses and certain founders this is an exciting step in their company’s evolution. But, accepting investor capital isn’t always the best path. The downsides of seeking and accepting venture funding should be carefully evaluated before the term sheets are signed.

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