Member-only story
Startup Funding Always Comes With This Catch
And it’s the one big reason why you shouldn’t seek venture capital too early
In this week’s issue of Teaching Startup (#67), I answered a question from a second-time entrepreneur about accepting venture capital funding that would ultimately put his product on a different path than the one he believes will make his startup a billion-dollar company.
While I was answering the question and laying out some negotiation options, I noted that this scenario was not unusual. Far from it, in fact, I’m hearing this more and more from entrepreneurs who are seeking outside funding. The general consensus is that seed money is cheap right now, but I don’t think we realize how much investor expectations have ratcheted up as the cost of money has come down.
In this post, I want to talk about those expectations.
There’s Always a Catch
Well, for sure, there are always several catches when it comes to accepting outside investment for your startup, but there’s one I see more often than the others and it’s usually the most problematic.
Here’s what I wrote in the middle of the answer:
“I can tell you this. With the exception of repeat founders who already have credibility that they know what the market wants, this is how most VC deals work. There are outliers of course, and no VC will tell you that they want five years worth of progress for one year of funding, but then you’ll get three or six months into the deal and realize it. You’re just realizing it early.”
It’s happened to me. It’s happened to me at the seed stage, at Series A, at acquisition, at private equity infusion — the entire lifecycle of funding. The vision I believed was being invested into was not exactly the vision the investors believed they were investing into. Over time, that crack in expectations turned into a schism and then a chasm.
Look, I’m not trying to paint investors in a bad light. Far from it. Chances are, your average experienced venture capital investor knows more about how well your product will perform in the market than you do. What I am trying to warn you about is this:
