Why Founders Should Consider Alternatives to Venture Capital
Market volatility is ravaging the late-stage venture cycle. Venture Capital (VC) funding for startups suffered a 50% year-over-year drop in the third quarter of 2022, while median exit valuations are at their lowest in three years.
Luckily for founders, there are other ways to grow a company. More importantly, VC is challenging and risky — and the outcomes rarely favor founders. Here, we’ll discuss why to consider alternatives that democratize the funding process away from institutions and banks and improve outcomes for founders.
A one in 2000 success rate
Raising VC can be a long and arduous process. It can take months, or even years, to secure funding. This can be frustrating for founders eager to get their businesses off the ground and start generating revenue. It’s also extremely competitive.
Consider that:
- Out of 4,000 companies looking for funding each year, top VCs fund roughly 200, or 5%.
- The odds of receiving an equity check from Andreessen Horowitz are even smaller: 0.7%.
- The chances of a startup being successful after it receives funding are only 8%.
- Combined, that’s a 0.05% or a 1 in 2000 success rate.
Success for a few, neglect for the rest
The VC motto is “go big or go home.” This means that VCs expect most of their investments to fail and the few that succeed to make up for it with fast growth and sky-high returns. That’s great if you run a company that ends up “going big.” It’s not so great if your company is the one going home. And it very well may be, even if it’s successful by any other measure.
That’s because VCs consider anything less than a blockbuster a failure. Businesses that grow modestly with steady revenue from satisfied customers? Failures. Companies that take time to find market fit? Failures. Founders often feel their startups are left to wither on the vine because VCs have decided to put all their eggs in the baskets they predict will generate outsized returns.
The data backs this up. The most common reason startups fail is “running out of cash and failing to raise new money,” and frequently, the money stops flowing to VC-backed companies that aren’t one of the chosen few.
Losing control
VCs are structured to protect themselves, exert maximum control, and receive the highest returns, diluting founders’ shares. Many set their own terms and take a larger share of a company’s equity position, potentially driving the founders below 50% ownership while controlling subsequent rounds of funding and their terms.
VCs typically take seats on the board of directors and have a say in key decisions regarding the company’s direction. This can be a difficult pill to swallow for founders who value their independence and want to remain CEO of their companies.
The economic climate makes VC outcomes less favorable
The current economy and interest rate hikes have exacerbated these issues. The pullback in Venture Capital funding has coincided with boards warning founders to cut costs and, in many cases, forcing founder-CEOs to shed the latter part of their title or oversee massive layoffs.
Founders could turn to loans instead, but the interest rates currently offered by banks are high enough to hamstring a young company. It can seem like founders don’t have anyone on their side with the capitalist structures in place. Luckily, that’s not true.
There’s another way
Raising equity from retail investors can be a better option for founders because it provides access to a larger pool of potential investors, more control over the terms of the investment, greater alignment of interests, and the potential for higher valuations.
I founded Pacific Lion to guide founders through the milestones needed to increase shareholder returns through a liquidity event in 12-18 months. Our process puts the power into founders’ and ordinary investors’ hands, avoiding the VC route’s many pitfalls.
Here’s how it works: We make direct equity investments into early-stage technology startups paired with hands-on consulting to guide founders through a growth process. This includes advisement on strategic Investor Relations (IR) investments that generate large public equity financing with better terms for founders. If our clients file for a direct listing or a micro- to small-cap IPO, we guide them through their first year as a public company, providing full-service corporate strategy services, including talent acquisition and board assembly.
If you’re interested in pursuing an alternative to Venture Capital, contact us. We’ll schedule a discovery call to learn more about your company and how we can help.