I have provided capital for many start-up businesses, and raised money for a few of my own. I am often asked for advice on how or whether an entrepreneur should seek venture capital. My initial advice is simple: Don’t.
Entrepreneurs usually start businesses because they need autonomy and independence; they cannot work for someone else. As my granddad used to tell me, “no one gives you money for nothing.” That is certainly true for investors. They give entrepreneurs cash because they want to make more cash. They expect to be listened to, or at least have their financial interests regarded as the entrepreneur uses their capital to grow his or her business. Boom. Just like that — by taking outside capital — the entrepreneur sacrifices autonomy.
That’s not all. By taking outside capital, the entrepreneur is taking on legal liability. It’s a harsh realization often driven home at an inopportune time — usually after a business reversal.
In conversations about start-ups, I often hear that fundraising is a condition precedent to successful entrepreneurship. Indeed, in the lore surrounding tech entrepreneurship, fundraising is often presented as a point of validation. Consider how we read about the happy start-up CEO who just raised his $10 million Series A, or the CEO of the company with the billion-dollar valuation from its last financing round. It can lead to the impression that someone is not a good entrepreneur unless he or she can raise outside capital.
Here’s the truth. Most highly successful businesses in the greater Washington region never raise a dollar of venture capital. Our region is a hotbed of entrepreneurial activity, regularly at the top, or near the top, of companies represented on the Inc. 500 list of fastest-growing start-ups. The average amount of outside capital raised by an Inc. 500 company? Around $50,000.
If that is true, then why do we focus so much on venture capital when it comes to entrepreneurship? For certain types of start-up businesses, getting a chunk of outside financial support onto a balance sheet can be a necessary accelerant for growth. This is when a business has opportunities for rapid growth and needs more cash to act quickly.
For businesses with rapid growth opportunities, the rewards for founders are enormous. Relinquishing autonomy is balanced against the possibility of the founder owning an equity stake in a large and rapidly-growing business. And when those businesses succeed, they really succeed. Intel, Apple, Google and Facebook are a few recognized examples.
These few and large successes are important to our overall economy. By some estimates 20 percent of our overall economy is generated by companies that have received venture capital. But again, the key here is the possibility for venture capital to generate extraordinary growth in the businesses. Very few businesses truly have that characteristic. And, of those that do, most fail.
In their desire to succeed, entrepreneurs often confuse venture capital as a finance tool with a signifier of success. They seek venture capital to validate that their business idea is extraordinary. I have seen countless business proposals that assume that venture capital is necessary for the business to succeed, although the business itself is not suitable — the founders are putting the cart before the horse.
Entrepreneurs launching businesses simply need a passion for pursuing, and to know that a company’s growth path will be led by the market and customers. It only makes sense to pursue venture capital when an extraordinary opportunity arises. Venture capital is a tremendous financing tool when used appropriately. It is not a prerequisite for a successful entrepreneur.
Jonathan Aberman is a business owner, entrepreneur and founder of Tandem NSI, an Arlington-based organization that seeks to connect innovators to government agencies. He is host of “Forward Thinking Radio” on SiriusXM, a business and policy program, and lectures at the University of Maryland’s Robert H. Smith School of Business.