Ask @StartupCFO: When should you get on the VC train?

I think we can all agree that the startup industry pays too much attention to VC. Our conferences, press, and tweets are dominated by VC-related news. Which fund just raised more capital? Who got funded? Who’s the latest unicorn? I contribute to that fixation in this blog all the time.

With the rise of accelerators, the holy grail for young startups these days seems to be to get into YC as early as possible and then go on to immediately raise from VCs post demo day.

“The later you get on the train, the more leverage you have, allowing you to work with who you want on the terms that you want.”

There are certainly some massive successes that have followed this hype-laden path: Airbnb, Dropbox, and Gusto are some of the biggest winners that come to mind. Closer to home, YC grad Vidyard is crushing it. But they passed on the hype in the Valley. They came back to Canada and took their time. I can’t help wondering if there’s a better, more patient way.

Venture capital is not patient. It is long-term, but it wants constant progress. It doesn’t want you to slowly and deliberately find product-market fit. It knows you will pivot but really wants to invest post-pivot.

Above all else, VC wants to invest when you have traction. For most startups the true purpose of VC is to invest in and accelerate a flywheel business (i.e. one that has figured out a scalable way to grow quickly). That’s when the magic happens.

Some of the most successful businesses took a long time before raising VC. Shopify’s co-founder and CEO Tobi captures this when he talks about the evolution of his business:

“Shopify was 100% committed to be the world’s best 20 people lifestyle company until we switched 100 percent to be the fastest growing growth company, until we 100 percent switched to be the most trusted public tech company.

You don’t have to get on the VC train on day one. Also, the VC train only goes one way – up. Either you grow or you die. You die because VCs won’t continue to fund you if you’re not growing. Or you die because you can’t keep up with growth.”

Zenefits is probably the poster child of this approach. Less than 2 years post YC demo day they had raised over $80M in capital. As we now know that growth was artificial, unsustainable, and apparently illegal. They’re not dead, but they have suffered a serious blow.

To be clear, I’m a big fan of VC. I’ve made a career out of raising VC and have been one. But, there’s a time and a place for it. The later you get on the train, the more leverage you have, allowing you to work with who you want on the terms that you want.

Good things take time. And the VC train is one way. Make sure your business is mature enough that you can control which way that train goes.

Syndicated with permission from Mark MacLeod’s StartupCFO blog


Mark MacLeod

Since 1999, Mark MacLeod has been helping fund, grow and exit venture-backed startups. Mark has over 14 years of experience as a CFO for leading companies such as FreshBooks, Shopify, Tungle, and many others. In addition, Mark spent three years as a General Partner for Real Ventures. Mark now runs SurePath Capital Partners the leading investment bank advising the SMB software and commerce markets.

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