I thought others may also have this question. On Friday on my podcast I interviewed Brad Feld, the co-founder of Foundry Group and TechStars and it was very enlightening. He authored a book called Venture Deals. I love the subtitle, which suggests that you can be smarter than your lawyer and your VC.
Does anyone have experience that would indicate why the VC route is not a good one for early stage companies to take, even if you find a VC like this one that focuses on early stage companies?
Thanks for the post. I am getting close to the funding stage and this information is helpful. I did want to say thanks to Arthur particularly. He has commented on a few of the threads that I am active on and I have found his advise to be insightful and well informed.
Arthur, thank you for chiming in. Royalties are certainly one option. It really depends on the cost of that option.
I see your point on the potentially mis-match of goals with a VC. The upside as I see is to also be able to work with the VC's other portfolio companies.
VC's are different from Angel investors. VC's invest someone else's money not their own, therefore when they set goals and milestones, they have a fiduciary duty towards their own investors, as a result they need to be pretty strict about outcomes. If startup's results do not materialize within a set amount of time they cannot be very flexible about keeping the startup going. For an early stage startup which needs some trial and error time to find the right strategy to scale, VC funding can mean early death. For early stage startups I suggest angel investors and crowdfunding instead.
The question is broad, so I'll take a it down a path and see what happens...
First it's really the path the founders want to go down, and now driven they are to drive towards specific results/revenue. Some embrace the path towards changing the world while some attack (with laser focus) to push an MVP for a quick ride. Many start with an idea and see where the results of their MVP take them while others...well, you get the idea. So first I think founders should align their interests and be comfortable with a style.
What I have been learning is that many start-ups, even if focused and comfortable with who/what they are, they are not clear on how/why they want funding in the first place. Goals/benchmarks/vision/business specifics. The less clear, the less palatable a VC option should be as they will want a return on the investment *of others*. (For me, dialing in product specifics, growing paid subscriptions and driving profitability makes me giddy, but that's another post I think.)
Perhaps if someone wants a looser reporting structure and longer runway (to me a dialing in a new technology or really different way of doing a thing is the most common angel investment, but please correct me with data if someone knows more than I do on this), or even for someone/s to 'donate' with their heart over their mind on a issue (let's say, solving world hunger) as an angel and are OK with a moonshot, that may work better for them.
Again, I would circle back to answering the question, "What do I want the money for?" If it's not how you'd spend your mama's money, it may be worth dialing in no matter what way you go.