Should I Raise Money from Venture Capitalists?

September 14th, 2006

In the course of my legal career I have worked with a number of companies on the “venture capital track” as well as many that don’t fit the VC mold. Many clients come to me saying an infusion of capital would be a huge boost to their growth plans, and asking what they need to know about the process.For some businesses venture capital investment makes sense, while for others it doesn’t. Here are a few key questions company principals should consider before trying to raise money:

• Do we need investors or customers? Bear in mind that raising money from venture capitalists can be a 6 month or longer process, and very time-consuming along the way. If you could bring in a customer with the same effort, would this bring your goals within reach?

• Are we ready to get married? The best investors bring to a company not just cash, but also experience, business acumen and a strong network of useful relationships. On the other hand, you will be required to consider their interests as shareholders in addition to your own as you guide the company. This may sound a lot like getting married, and the analogy is quite good. Do the benefits of getting hitched to your investors outweigh the added responsibilities you will take on toward them?

• What is our exit? VCs look to get their money back, with a healthy return, in 6-8 years (more or less). For the uninitiated, this means selling the company or going public- buying out investors from revenue won’t work. Will your company make an attractive acquisition target or IPO candidate down the line?

• Can we give up control? There are companies of all stripes where the founders have retained control over the long term. At least as frequently, however, the people skilled at starting a new business are not the ones equipped to build out and sustain the company over the long term. Are you prepared to step aside when the Board decides it is time for new management?

Of course, this is only the first step in the long capital-raising process, but addressing these questions can help companies figure out if venture financing makes any sense for them. If any of the questions above give principals significant pause, then it probably makes sense to look closely at alternative ways of bringing in capital.

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