💰 Is venture capital right for you?

Toby Egbuna
January 18, 2024

Hello! Welcome to my newsletter - Finessing Funding💰. Each week, I’ll be sharing stories, strategies, and ideas about funding for your startup. Get Finessing funding delivered to your inbox every week 👇🏾

Introducing: CREAM!

Not to be confused with Wu-Tang’s 1993 song, CREAM is a framework that founders can follow through every step of the VC fundraising process - from deciding if they should raise in the first place to maintaining relationships with investors that pass.

1. Consider if VC fundraising is for you ← today’s newsletter

2. Ready your documents

3. Establish an investor pipeline

4. Activate your fundraising round

5. Maintain relationships

It’s everything that’s worked for myself and for other successful founders I’ve spoken to, and nothing that hasn’t. My goal is to help other early-stage Black and underrepresented founders more easily access what is, unfortunately, the most available source for us.

There’s more out there than venture capital

Because it’s the only thing that makes the news or Twitter headlines, it may seem as if venture capital is the only source of funding for tech startups. That just isn’t true.

Here’s how I’ve funded my company, Chezie to date:

• $20k of our own money

• $275k from grants

• $160k from friends and family

• $110k from a venture pitch competition

• $100k from an accelerator

• $470k from venture capital

• $125k from revenue-based financing loan

As you can see, there are several alternatives to venture capital to fund your startup. We’ll be diving into how to approach each of these funding options in the coming weeks, but if you’re reading this and looking to raise VC because it’a all you know, think again!

Who should raise venture capital?

VC is best for two types of founders:

1. Founders building capital-heavy businesses

2. Founders who want to build a big company

Ideally, you are both, but you need to fit into at least one of these categories to raise venture capital.

Founders building capital-heavy businesses

Venture capital is intended for ventures. Big bets that, if successful, will have a significant impact on the world. These are companies that have become a central part of how we operate; so much so that if they one-day disappeared, people would notice.

Examples:

• Coinbase

• Airbnb

• Stripe

These companies needed VC because without it, they wouldn’t have reached the scale required to make the level of impact they’re making today.

To make it easy, here are a questions you can ask yourself to determine if you need venture capital:

• Am I building something that requires significant upfront capital to start?

  • Ex: a rocket ship company like SpaceX or an electric car company like Rivian - you can’t build these products without billions of dollars in the bank.

• Am I building something in a space where the current players have deep pockets?

  • Ex: DraftKings and Fanduel - each spend hundreds of millions of dollars on marketing each year, so a new company would need as much money to compete.

• Is my customer acquisition cost (the amount of money you have to spend to acquire a new customer) very high?

  • Ex: Uber had to subsidize the price of rides for the first several years to hook riders on using the app.

• Is my business dependent on not making money for an extended amount of time?

  • Ex: Fathom.video is an AI note-taking tool that, for the first 2.5 years, made its product entirely free (assumingly to build the user base and improve the AI model). They only recently started offering a paid plan.

Founders who want to build a big company

A year ago, I spoke to a founder who’s raised more than $380M (!!) for his company. He told me that when he first started, he raised $2M and burned through it in nine months because he wanted to quickly figure out if his idea had growth potential.

Some people just want to build big businesses. They want to go public and have boards and employ thousands of people and be featured in magazines and everything else that comes with running a full-scale enterprise.

If that’s you, then VC is the right path. Venture capitalists want to back ambitious founders with aspirations to create companies like these.

When should I raise venture capital?

You should raise venture capital only when you:

1. have paying customers that love the product and a path towards more

2. you don’t need the money

Get paying customers first

This is wrong. You should look at venture capital as fuel for the fire, not the tinder to get the fire going.

Especially if you’re looking to create a software product, please know that it has never been easier or cheaper to build software. Plus, for Black and brown founders, [it’s already difficult enough for us to raise venture capital](https://techcrunch.com/2023/10/20/black-founders-received-0-13-of-capital-this-q3/#:~:text=Black founders raised 0.13%25 of,venture dollars%2C around 1.2%25.); you won’t do yourself any favors by going out to fundraise without a product and at least a few customers to show for it.

Once you have a functioning product, customers who are willing to pay for the product, and a sense of how you’ll get the next 10, 100, or 1000 customers, only then should you try to raise VC.

Raise when you don’t need it

A founder friend once told me that you want to raise like this 🖕🏾 (middle finder), and not like this 🫴🏾 (with your hand out, begging). This means that you aren’t out begging investors for money; instead, you’re taking money on your terms and not dealing with any investor’s BS. You can only raise this way if your company is default alive, or if it will grow with or without outside funding.

These are the types of businesses that VCs want to fund.

Understand this: Investors can smell desperation. The worst place to be as a founder raising money is to be fundraising when you actually need the money. If this is the case, there are only two outcomes:

1. No investors will give you money

2. Investors give you money on terrible terms (i.e. selling 30-50% of your business) because they know you will go out of business without it

Ideally, you raise because you see a path towards faster growth than you’re already seeing, and you have your pick of which investors you want to take money from.

The cold-hard truth

🚨The following will be controversial and slightly contradictory to the above. Sorry 🤷🏾‍♂️.

I know a founder who, based on being one of the early employees at a company that eventually IPO’d, met a bunch of VCs and raised a $3M seed round from a top tier VC off of one phone call.

Raising venture capital is often about your network.

Most Black and brown, early-stage founders don’t have this type of network, so raising VC is especially difficult. However, alternative sources of funding are even less attainable:

• Loans - we can’t afford to risk putting up personal collateral and our business hasn’t been around long enough to warrant the loan

• Angels - we don’t have the network of people willing to invest $10-25k of their personal money

• Venture debt - we don’t have existing VCs on our cap table to take on venture debt

So, despite the low percentage of venture capital dollars that go to underrepresented founders, the truth is that VC our best option.

I spoke about this in an upcoming episode of the Living Corporate podcast with Zach Nunn.

So, even if you are reading this and thinking to yourself, “wow, maybe venture capital isn’t for me,” take some time to really think about how else you’ll fund your startup without it. If you have a team and you need to make payroll, venture capital is might be the only path to the $500k-1M that you need.

Summary

Deciding whether or not to raise venture capital is not something you should do on a whim. VC is best for founders taking very big bets who are willing to take on the pressure of outside investment.

With that being said, VC might be the best option for founders who need the money, so keep that in mind.

In next week’s newsletter, we’ll discuss how to ready your documents in preparation from your fundraise.

Okay, if you’ve made it this far, I have two favors to ask:

1. Please share this with people in your network that you think would benefit from it.

2. Please reply to this email with questions you have about any part of the fundraising process, and I’ll try to address those in future newsletters!