Know how VC works before asking for money

This post may come across as rash or maybe just useless. Your mileage may vary.

Increasingly as the startup scene continues to grow – yes it’s still expanding from where I sit in SEAsia region, but this means there is a lot of first time founders. That’s fine, everyone has to start somewhere. I am not knocking the first timers nor am I talking about age. I see young and old starting for the first time.

Let me pause for a promotional break but seriously, if you are new to being a founder and have never fund raised before – read this book :: Venture Deals.

Back to the main line.

If you want to raise money from a VC please know the basics of how VC works.

VC’s typically take money from other people or institutions and essentially are promising these people that we will take good care of the money, try to lose very little of it and return them far more than they gave us over some period of time. Generally it is considered a risky asset class that has the potential to pay back more than other places they would put that money over the same period of time.

Put it simply it is just another form of investing. We buy shares in companies in hopes that the future value of those shares is way more than we paid for them.

This should dispel any myths that VC’s are playing with money or that we don’t need to be thoughtful about where the money goes.

You will always hear the stories about how VC’s lose lots of money in some deals and then really crush it on a few deals. That essentially means that in a certain amount of deals we lose or don’t make a lot and in some deals there are huge returns. That is mostly true but that is not the goal. The goal is to consider each and every investment with the belief that it will return the fund. We never bet on a few known losers just to prove out our own statistics.

We expect every deal to do well.

I know this explanation may sound silly or stupid but why do I bring it up? I am continually floored when I meet a few startups with no angel money, no grants and no accelerator money that expect the first money into a startup to be a neat and tidy institutional round from a VC. These founders are usually shocked when I tell them they should go back to the drawing board and understand that their job is to build something first or get smaller chunks of capital to prove the business.

De-risk it a bit.

When I press these founders it is their next response that knocks me back down on the floor. They assume that since VC’s will lose money anyway why can’t they take more risk given that some companies always fail and some always win. I can assure you that anyone who thinks like this will never get funded – at least not by good investors.

We are not in the charity business. We don’t owe a founder a chance to realise their dreams. We simply look to connect with founders who have a real vision, have thought through all the permutations and would like a capital partner to see it through.

My summation of all this is most founders shouldn’t be starting companies. They should work at some startups, get some experience and read more than they do about how it all works. Not everyone should do a startup. Not everyone is a good founder.

However if you think you are then go for it but figure out how it works before going hat in hand to the VCs.

4 thoughts on “Know how VC works before asking for money

  1. Shubham Goyal

    Hey Michael, I read Paul Graham’s essays and really liked them, especially the one on fund raising – http://paulgraham.com/fr.html But it is a bit dated now (though the advice seems to be solid still). Would love to read a commentary on the essay from you, especially since your case studies will be more recent and from a different geography.

    Reply

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