The Case Against Early VC money

The Case Against Early VC money

Venture capital and the risk capital it deploys is found nowhere else in the world. It has funded America’s most vibrant and successful tech companies like Apple, Google, Meta, and Twitter. The industry continues to grow at a rapid pace. According to Venture Capital Investment Global Market Report, the venture capital market is expected to grow from $208B in 2022 to 533B in 2028—over double in six years!

Much of this capital will arrive at startups that aren’t ready for it. They will lose their shot at unicorn status because the dollars masked deficiencies in their networks and business models.

Downsides of Early VC money

The Reg CF portal MicroVentures has posted a series of blog posts related to venture capital. They explain both the up and downsides of this funding method. The downsides are exacerbated by startups without sufficient leverage bootstrapping and Reg CF can provide.

Downsides include:

Loss of control: Founders accepting VC money give up equity, these are voting shares that rise or fall during the negotiation. Usually included is a seat or multiple ones on the board. With this power, VCs can change force a change in company direction, or steer the company toward short-term results at the expense of long-term growth. In fact according to the Harvard Business Review, between 20% and 40% of founders are sidelined or forced out altogether.
Equity Dilution: Even if the founders survive, they are giving up substantial equity to a VC. This may set up showdowns for years to come. VCs may be distracted by the next shiny object. Founders to wilt on the vine without the promised support, but with much less ownership.
Grueling Process: The process of being selected for VC money may involve several rounds and rejections. Founders may also end up with the wrong VC. He may not match with the industry or have compatible leadership dynamics with the founders.

The Case Against Early VC money, Reg CF first

Founders can solve some of these issues by building out a customer and investor base before seeking VC money. This provides leverage for later negotiations when they already have the ‘social proof” of a successful Reg CF round. At that point equity, company direction, and vision shift to the founders .They walk away and do another Reg CF round, of nonvoting equity or interest. Because of this, VCs are changing their tune toward Reg CF.

Other advantages of Reg CF

Broaden your investor base: Unlike other funding models, Reg CF can diversify your investor base from both a financial and geographical standpoint. Reg CF portals can accept investors from anywhere in the US, giving your business a potential foothold in all 50 states.
Turn your customers into marketers: Reg CF allows your customers to become financially invested in your business and see their investment grow as your business grows. This provides a free marketing campaign for your business with every new investor.
Incentivize your investors: Reg CF allows you to provide perks as part of the investment. Depending on the product this could include the product itself, ‘founder’ status on your website, access to events, or anything else that may induce an investment.
Prove value to institutional investors: A successful Reg CF raise can show larger, institutional investors your business is ready for the big money. Many larger investors are now requiring “social proof” of a company’s business model. Your business can show larger investors value and momentum and provide your business “bridge money” while larger investors evaluate your model.

By Jossey PLLC