TL;DR: It’s Low
Starting a SaaS or technology business is hard enough. You have to come up with an idea and establish the company itself. You have to identify and research the market need for that idea. And then you have to build it up to a useful, functional form, even piloting it with only a few clients with minimal revenue and even less profit while working through feedback.
But coupling those challenges with the difficulty of raising venture capital — and perhaps just as difficult, using that funding in a tempered way — is adding fuel to the fire. If you’ve raised venture capital before, you’ll know how difficult and time consuming the process was. Conversations, meetings, presentations, and paperwork — it was a lot. Yet despite the difficulty of the process, the real challenge hadn’t even yet begun. That challenge?
Venture capital success rates aren’t often publicized. There are a couple reasons for this, and we’ll get to them. For now, you’ll find that venture capital success rates are quite low. According to Shikhar Ghosh, a senior lecturer at Harvard Business School, as many as 75 percent of venture-backed startups don’t succeed in that they never return cash to their investors. His research also shows that 30 to 40 percent of those 75 percent liquidate assets, with their investors losing all of their money.
Why You Don’t Hear About It
Venture capital firms utilize a portfolio approach to their relationships with startup companies. They invest in many businesses in a number of sectors and markets with the expectation (and statistical understanding) that only a few will be able to score big wins. Others will struggle to pay them back (if at all), and others will simply go out of business.
If you consider their business model, it makes sense. VCs are in the business of taking risks on businesses that they believe will have success potential early in their lifecycle when the business isn’t fully formed, is still developing their niche and position within it, and so on. They have the opportunity to invest early because they’re taking these risks — but that means many of the companies they invest in won’t make it.
Rand Fishkin, the founder of Moz and Sparktoro, recently blogged about VC funding and why startups should consider alternatives to that funding model. He argued that it’s glorified — that we often hear about those who got funding, but not those who actually did something with it despite their profitability (and certainly not anyone who didn’t make it). And that’s why so many business leaders and founders opt for venture capital despite the availability of other options and the low venture capital success rate.
What You Should Know If You Use VC Funding
You’ll Lose a Portion of Your Ownership
Part of the venture capital agreement is giving up equity and likely a board seat in exchange for the funding. While this might sound acceptable since you intend on growing the business and gaining that equity back at some point…what happens if you don’t? The investor can do what they want with that equity. Furthermore, their voice must be heard and included in both the daily and long-term decision-making of the business.
You Accept Risk That You Otherwise Wouldn’t Have
Remember what we said about the pressure of venture capital funding? You’ll likely feel the same unless you develop a steady plan for how the funding should be used. There’s a reason that 75 percent of startups don’t succeed. Give this some consideration and research. And remember, this isn’t the only option.
You Have Far Fewer Exit Options
Finally, when you accept venture funding, understand that the options available to you as a business owner are drastically reduced. When you own a business, it’s a blank canvas. You can do whatever you want: sell it to a third party, sell it to an investor, gain a partner, stay in it the rest of your life, or shut it down. There are limitless options. But with VC funding, you have only a few: sell, go public, raise more money, or outright fail.
Ready to Weigh the Risks?
Remember that other funding options are out there. With debt financing, you own 100 percent of your business and get the funding you need to focus on growth and profit. Whether you already have a VC sponsor or are researching your options, we’re here to help. Even a simple, no-obligation conversation could point you in the right direction.