All too often, I read or hear about a company receiving angel or venture capital financing as if the new funding were an end in itself – an accomplishment indicating success. Stories in the popular press and casual observers might remark that a company has been “funded,” as though its future is thereby secure. To be sure, fundraising requires a significant amount of work for most companies, and I have been known to use the occasion as an excuse to raise a glass with a new member of the family of DFJ Gotham entrepreneurs. But as any experienced entrepreneur or investor knows, the close of a new round of financing is much more of a beginning than an end, and is a wholly unreliable indicator of anything that could be defined as success.
More than one entrepreneur I have come to know, given even a little space of time after taking in fresh capital, has remarked on how much activity was kicked off with the close of the new financing. Dan Huttenlocher, the Dean of the new Cornell Tech campus in New York City and former technology entrepreneur, has referred to the “holy shit moment” that he experienced soon after taking in his first outside investment. I think this moment is analogous to pushing a small train up a steep hill only to realize that, upon hopping in at the top to ride the train down the other side of the hill, you realize you are on a roller coaster.
I think it is important for entrepreneurs to see capital for what it is – a means to an end. The end, success, should have nothing to do with financing in one’s thinking. Success might be broad user adoption, long-term profitability, or the realization of a company mission; for financial investors like us part of ultimate success is an exit that provides a sufficient return. Before you raise capital, you should think about how you define success. Think seriously about whether or not you can achieve success without raising angel or venture capital; many great companies have been built through friends and family investment, customer financing (revenue) and, once positive cash flow is established, debt. Furthermore, venture capital is the most expensive capital you can raise, as you will need to sell a sizeable portion of your company to get it.
If you determine that an equity investment from outsiders is required to achieve your goals, look for investors who share your definition of success. Most angel and venture investors will expect you to seek an exit – or at least to help them find one – within a defined period of time, and to pursue an aggressive growth plan along the way.
The right venture capital or angel investor will be a partner to an entrepreneur and a catalyst for a company’s success. That partnership is based at its most fundamental level on a shared definition of success; the investment is only the beginning.
