Venture Capital (VC) funding is a hot topic in the tech industry. It takes a lot of capital to launch and grow a business, but there are many myths about venture capital funding that can make it seem out of reach—especially if you don’t live in Silicon Valley. In this article, we’ll debunk ten common myths about VC funding (and one bonus myth), helping you better understand how it works and whether or not it’s right for your company.
Myth #1: Only startups in Silicon Valley receive venture capital funding
You may have heard about the great deal of venture capital funding that goes to companies based in San Francisco and Silicon Valley, but this is only a small portion of all the money invested by VCs into startups. While these areas do receive a lot of attention due to the amount of VCs located there and because many large corporations are also located nearby, VCs invest in companies all over the world. In fact, according to CrunchBase data from 2015-2016 there were more than 10 million dollars invested outside of Silicon Valley per month!
While past experience gives you an advantage when pitching your idea, it’s not required! There are thousands upon thousands (and counting) start-ups that get funded without an existing track record or even much business experience at all. It all depends on how well you can sell them on what makes your company different from everyone else out there; most importantly why they should invest money into YOUR company instead of another one like yours?
Myth #2: Venture capitalists are only interested in tech startups
One myth that you can put to rest is that venture capitalists are only interested in tech startups. While the majority of VCs do invest in technology and software companies, they also have a strong presence in other industries like consumer products, health care and financial services.
Similarly, you might think that all VC firms invest only in early stage seed and Series A rounds while others only focus on later stage growth equity rounds. While there are some firms who only work at specific stages of funding, others may have different areas of focus but still work with companies at any stage.
Myth #3: You have to have a perfect pitch to receive VC funding
If you’ve ever heard the term “elevator pitch,” this myth is what it refers to. An elevator pitch is supposed to be a short and concise description of your business that can be delivered in the time it takes an elevator car to reach its destination floor.
The problem with this myth is that so many founders are afraid of making mistakes or asking questions, they don’t even try. Instead they just keep their ideas bottled up inside until they feel like they have something worth pitching (if ever). This simply doesn’t work. It’s one thing for investors not knowing about your idea at first; but if you don’t open up and share your thoughts with them—even if those thoughts are just rough around the edges—you’re going nowhere fast!
Myth #4: The more VC funding you receive, the higher chance you have of success
VCs aren’t your only source of investment and, in fact, they’re not even your best option for funding. While there are many different types of investors out there that could be interested in your startup (angel investors, accelerators and incubators), venture capitalists are often times too expensive and they take a lot of control over your business by requiring an equity stake in return for their money. If you don’t need the cash infusion right now or if it’s not worth giving up some ownership over your company just yet, then maybe it’s time to rethink how much funding is really necessary for success.
Myth #5: Venture capitalists want to control every aspect of your business
While this may have been true in the ’60s and ’70s, it’s not the case anymore. VCs are partnering with you because they believe in your vision and want to help advance it. They don’t have time for micromanaging, but they do expect some transparency about the company’s performance, financial situation, and plans for growth — which means regular updates from you on these topics.
Myth #6: The higher the valuation of your company, the greater chance you’ll succeed
You’ve heard the saying “it’s not about how much you raise, it’s about how much you can actually use.” This is especially true for startups.
Rarely do companies go out of business because they didn’t raise enough money; but they frequently die because they raised too much. In fact, as we mentioned earlier, there are many cases where raising more capital than necessary will be detrimental to your company’s success (and potentially yours). Too much cash can be a burden on a young startup.
Too much cash can also prevent you from making decisions that need to be made quickly and without hesitation. For example: say your product has been tested with customers and shown great potential; but now that you have lots of money in the bank and no immediate need for it—you’re tempted to wait until after launch before rolling out any new features or enhancements because “they could slow down our product rollout.” This kind of thinking could result in lost opportunities and delays that cost your company money or even ruin its chances at success completely!
Myth #7: VCs fund only startups and not established businesses.
VCs are not only investing in startups. They invest in all kinds of companies, of all sizes and stages, that are disrupting industries and sectors across the globe. Their portfolios include mature businesses like Starbucks, which is considered one of the most valuable brands in the world.
If you have a business idea that could disrupt an industry or sector, then VCs would be very interested in meeting with you to discuss your idea further.
Myth #8: You need a personal connection to get a meeting with a venture capitalist.
You don’t need a personal connection to get a meeting with a venture capitalist. VCs are busy people, and they don’t have time for cold calls. They’re more likely to respond to referrals from someone they know than a cold call from someone who doesn’t.
You can use LinkedIn to connect with people who work at VC firms or others in the industry and ask them if they know anyone that would be interested in meeting you. Or, you can find out which companies are currently raising money by searching for their names on Crunchbase or PitchBook and sending an email about your project directly to the right person there (usually the founder).
Myth #9: All VCs are bad investors and don’t care about the companies they fund.
What you should know:
Some VCs are bad investors, and some aren’t. Just like in any other profession, you’ll find that some are better than others at their jobs. To make sure that the VCs you want to work with will be helpful and supportive of your company’s success, it’s best to look for ones who have a track record of being good partners to entrepreneurs.
Myth #10 Venture capitalists fund only companies that can potentially be sold or taken public.
You may think that the only kind of companies venture capitalists fund are those that plan on being sold or taken public. But the truth is, venture capitalists invest in all types of companies and can provide invaluable experience and expertise even if they don’t plan to sell or take their company public.
There are plenty of examples of this. Some startups succeed without ever being acquired by another company; others stay private but still generate massive profits for their investors; and some startups aren’t even looking for an exit because they have a different goal in mind—like impacting an industry through social change, like TOMS Shoes does with its One for One model.
Learning more about venture capital funding will get you know what you need to know to decide whether or not it’s right for your company
• VCs are not aware of the company’s business plan: The myth that VCs don’t care about your business plan is just that—a myth! First, it’s important to understand that they are evaluating your team, not your product or service. In other words, they want to see whether or not you can execute on this idea and scale it up into an empire. They want to know if you have what it takes to make decisions quickly in response to market changes and customer feedback; how well you can manage stakeholders; and how well the team communicates internally and externally. This means that you should spend more time developing these skills than actually writing a detailed business plan
• VCs don’t care about customers: Well . . . yes, but no! You need customers before investments will be made—that much is true—but investors will only invest in companies with a proven track record of generating revenue from early adopters. So while having 100 beta users won’t cut it (unless those users include influential figures), 1 million active monthly users certainly would help convince investors that there’s something real here worth investing in because there are real customers using your service regularly
It’s important to know what to expect when seeking venture capital funding. You should have a clear understanding of how the process works and what questions to ask potential investors before making any commitments. By doing this, you’ll be able to avoid spending time pitching your company to someone who doesn’t want anything do with it—and save yourself from wasting money on unnecessary expenses like preparing pitch decks!