In the first in our regular series of articles from the leaders of successfull growth companies Gautam Sahgal from Perkbox shares his insights into venture capital. We’re delighted that Gautam agreed to write our first article, he’s overseen the growth of Perkbox from a team of 50 to 200, raising in excess of £20 million along the way.

 

Techcrunch. Your founder friends. LinkedIn. Sometimes it can feel like everyone in your social circle as a founder of a business is talking about fundraising and their success with it – and of course how great things are going (things are always going great, aren’t they?).  And then you ask yourself the questions:

“How come I’m not doing that? Should I be? What’s wrong with me?”

“Do I know what I’m doing?”

“Am I uncool or is my business unsuccessful if I don’t raise funds with a VC?”

These questions and doubts are common – in fact, almost universal. Frequently both founders and early employees forget that fundraising is a means to an end and not the goal in of itself. Its so easy, in particular when everyone out there is pushing you to give up a piece of your business. 

So how should we think about this? How can we go through a mental list that will help you decide whether to do this or not. Well, fear not dear founder friends. You are founders who won’t flounder: here are the main considerations to take into account when deciding whether this method of financing the business is appropriate for you. 

 

Scaling

First things first, just to cut through the bull….most of you do not need venture capital from a VC firm. Yup, that’s right. I just said what many think but few say. Most – in fact the vast majority even of hugely successful businesses were not venture backed and indeed should not be venture backed. 

To understand whether you need or want venture at all – remember two things: 

• Someone is trying to convince you to give up a piece of your business to enhance their returns by generating 5-10x their money. What are you getting for that?

• Venture capital is kerosene to your jet. No jet, no kerosene required. 

If you have a business that really has found product-market fit and you want to – or more importantly NEED to –  scale rapidly, venture capital is effectively kerosene. The key consideration is honestly thinking through whether product-market fit has been achieved and the speed of scaling requires this type of financing. Kerosene powers a jet. If you’re not a jet, you’ll just explode.

 If you don’t feel the “pull” of the market before having venture capital, then funding will not help and that level of funding will generally cause you to do unproductive things. In Spiderman’s immortal words: “with great power comes great responsibility”. First really assess whether you need that superpower. 

Beyond product market fit, raising venture capital can be important if you’ve founded a business that can create some sort of local monopoly whether that be through a network effect (think social media), through density in an urban area (think transport by car or food delivery) or through exceptionally powerful branding that crowds out competitors. If you have product-market fit, and creating a local monopoly is achievable then scaling fast with VC funding is again a real consideration to pre-empt competition. 

Of course, that is not the case with most businesses. Breweries don’t have the same dynamics as Uber. Bakeries aren’t Deliveroo. Most juice businesses are not Innocent Drinks. 

 

Hiring Top Talent

Tied to scaling fast is the consideration of attracting top talent. Raising VC funding can play a part in being able to attract top talent to your company. For one, its indication that you are creating a rocket (otherwise you don’t need venture capital, remember? Its kerosene!). 

Secondly, it gives you the implicit (and explicit) backing of the venture capital firm that has invested in you. They will have a network of top talent and for that matter the top recruiters will love to work for them. People will find you and want you. 

The flipside of course is that sometimes you don’t want the people who find you. Some of the best people are attracted to VC backed companies – equally well, sometimes being the belle at the ball attracts the wrong attention. It will become more challenging to you to understand the real motivations behind candidates desires to work at your company. You will find that creating options pools and plans consumes your time (and is really important!). And it will become supremely challenging to create and maintain the kind of culture you wanted as a founder as the company attracts people who interested in the mission, but sometimes also in the glitz of the VC backed company. 

 

EmergeONE helps build out the right finance talent for growth businesses, learn more via the link below. 

 

Network

 

There’s the image in your head. Now that you’ve raised funding from HotShit Ventures, you’ll be spending your time hob-nobbing with their 23x portfolio company ShitHot Corp and you’ll learn all their secrets. The partners pitched to you how they know everyone who is anyone. And that you’ll learn secret handshakes by accepting their money. 

You’re on your way to being on the cover of the FT. This is the start of the journey. 

No. Once again, control your emotions here. It is true that associates and partners at VC firms have large networks, and know companies that succeed spectacularly and others that don’t. 

The very simple truth is – if they don’t have real context in your space, most VCs bring funding and only that. And then put a junior person on your board as an observer. You have to be good at connecting the dots – don’t expect it from others. While you would think that cultivating synergy and knowledge sharing would be a big focus of most funds, the simple truth is it isn’t (with very few exceptions, mostly American). Most VC firms tend to worry about their problem, not yours. Their problem is deploying capital quickly into a number of deals that have potential. And then waiting for you to do your job. They are along for the ride. You are the driver. 

That doesn’t mean the networks they have are not useful. They absolutely can be. But you are going to have to find out how to leverage that. Connecting the dots is your responsibility and will be part of your workload. 

 

Time Investment & Pound of flesh

 

Raising funds is – for an extended time – a full time job. All that time could alternatively be spent on the business itself. It is really difficult to manage the process of fundraising and day to day management. Generally, one side suffers a bit. Sometimes more than a bit. 

Given that point, remember the tradeoffs before embarking on the journey:

• You will be asked to give up a portion of what is yours and frequently an enhanced portion of future returns, for the sake of that much bigger tomorrow. Ask yourself how big that tomorrow has to be to justify the decision. 

• You will invite someone into your family for a long period of time. If its the right person, that can be fantastic. If its the wrong person, dramatic. Either way, it changes the dynamics of your company and with your close employees and / or co-founders. 

• You are promising someone to give them a return. In the case of VC, very frequently a 5-10x return. By doing that, you have already promised some sort of exit today. The business was beautiful when in your head it was forever. By raising money, you have promised an exit. Think that through carefully and what it means for your culture, your expected growth and how you feel about the business. 

As ever in life, the greatest strengths can be the greatest weaknesses. Venture capital financing is powerful. Great companies have been built on the basis of VC money. But when making the decision, realise that most companies do not require that mechanic. It is a useful tool in certain situations. And it is a tool that you coldly need to assess. 

 

Remember at all times why you are an entrepreneur: it needs to work for you. You should not work for it.