Before taking on venture capital, entrepreneurs must ask
themselves a fundamental question – “Do you want to be rich or be king?” As
Harvard Business School Professor Noam Wasserman explains, it’s difficult for
founders to maintain control over their businesses once they take on outside
investors. However, without them, such businesses like Twitter and Facebook
would likely have never have taken off. For those entrepreneurs who have
developed a product with a large untapped market and a potential for rapid, high
growth, venture capital (VC) funding makes sense if you’re willing to give up
some control and most likely sell your business at the end of the investment
period, or fund life-cycle (i.e. when the fund becomes due). However, if you
would like to build a generational business, an angel investor may offer more
favorable terms that will allow you to receive some equity while maintaining a
degree of control.
Looking for that big return
“A VC firm does not invest in a business,” explains
investment banker Jeff Koons of San Francisco-based Vista Point Advisors.
Instead, it invests in a company that will sell for a lot more than it’s worth
at the time of the initial investment. And such firms are looking for a big
return (up to 20 times the initial investment) in a relatively short amount of
time (3 to 10 years, depending on the fund life-cycle). “If your business is
growing just 20 to 30 percent per year, VC funding is not for you,” notes
Koons. Focusing primarily on the tech sector, Vista Point acts as a broker to
bootstrapped entrepreneurs entering the VC world for the first time. “We help
them think through the process from valuation to exit,” notes Koons.
