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Pick A VC’s Brain: When Is It a Bad Idea to Take Funding?

brain pick

The latest edition of our Dear Abby for startup founders looks at what sort of companies should stay away from accepting VC dollars and alternatives to fund your business.

By Renee DiResta (Principal, O’Reilly AlphaTech Ventures)

Does every startup need venture funding? Sometimes I wonder if founders think they need funding because it is said so often that they simply start believing it. Do you think if a startup has a true solution and an effective story, venture is needed?

- Female founder, health startup

There are definitely situations in which venture funding is not needed. The primary things to consider are how competitive your market is, and how quickly you are likely to reach a point where your business is bringing in cash. If the market is competitive and a first-mover has a clear advantage, outside funding may be a good idea.

If your true solution and effective story yields results – meaning you begin to gain widespread adoption during the early bootstrapped phase – the dilution you’d take from venture funding may not be worth it. Venture capital is for scaling more quickly than otherwise possible and not every company needs (or wants) to do that. GitHub is one example of a company that became successful without venture funding; they provided a service that their customers loved, and they grew organically. While they did eventually take VC funding, their first round – $100 million - happened when the company was four years old and needed some cash reserves and capital to continue to scale.

From the investor perspective as well, some companies are better suited to be “lifestyle businesses”; they can feasibly reach profitability at a level that makes the founders comfortable, but will simply never be the sort of huge business that generates returns appealing to venture investors.

If you aren’t in a financial position to bootstrap but are adamant about avoiding venture funding, you can look into government grants. SBIR and STTR grants are an option for some types of startups – particularly those doing innovative research – but they are highly competitive and may take a long time to apply for. Crowdfunding is also a possibility, particularly for hardwar companies.

Good luck!

Have a question you’d like a VC to answer? Email it to [email protected] and we’ll get it answered anonymously.

picAbout the guest blogger: Renee DiResta is currently the Principal at O’Reilly AlphaTech Ventures, where she researches emerging technology trends and supports portfolio companies. Prior to OATV, she spent six and a half years as a trader at Jane Street Capital, a quantitative proprietary trading firm. Follow her on Twitter at @noupside.