Go Slow on venture Capital – Tech Start-ups

Each time I interact with those involved in the Tech Start-up space I always struggle to assimilate some of the reasons they advance for not making much progress beyond romanticising about their projects. One of those reasons is the much touted one of Venture Capitalists. Many have been led to believe by their mentors, App Competition Judges and Key Note speakers that our Innovation ecosystem is being greatly hindered by the lack of Venture Capitalists (VCs) ready to invest in the various mushrooming ideas on the local tech scene.

In this article I want to share with you the tech start-up founder or co-founder why you need to seriously reconsider this school of thought. I am not entirely trashing the need for VCs, my hope is that by the time you complete reading you’ll be in a better position to make a decision in this regard.

What idea do you have and at what stage of implementation is it?

It’s common to find people with unimplemented ideas already hunting for VCs even before test running their thoughts. Others have taken time to test run their ideas and have a practical feel of what to expect. If you are in the former category, the likelihood of getting a funder is much lower than the latter category. The possibility of shortchanging yourself is also very high to the extent that when success beckons, you might be left with crumbs while the funders have a laugh all the way to the bank.

For those with already implemented ideas, most times you don’t need to be in a rush to seek funders since a good number of the challenges you face are more likely to be solved if you put much thought and time into them. Throwing money at problems in most cases doesn’t solve them.

What is your Vision for the start-up?

Do you have a clear vision for the business? Is it something you have been able to crystallise and won’t just easily shift goal posts to appease individuals? Remember when you get funders in, you definitely have to be ready to reassess your business vision. They bring in money, you are passionate about an idea. In most cases the two perspectives tend to lead to serious boardroom clashes.

An innovator is usually driven by the need to provide product or service excellence before money becomes a priority even if it means taking years to achieve. A funder is more concerned about how much their money multiplies per set period of time. If it doesn’t meet those metrics, they start pressing the panic button. This happened to a good friend of mine who set up an international business with his brother. They were so keen on innovation and quality in what they did and this quickly led them onto the runway of growth, eventually attracting investors who pumped in millions of dollars. Within two years of their entry, the investors kicked out these brothers from the business and are now trying to pursue profits over innovation and quality. The result, is a struggling business.

What is your corporate governance setup like?

From one man to team run businesses, start-ups take various forms. What is important is the corporate governance setup you have in place. How professionally do you run your outfit? You want to attract investors to inject at least 100,000 US Dollars, what are you doing to achieve that when you don’t even have any books of accounts for the past few months that you have operated?

Sometimes we spend so much effort and time trying to set up these corporate governance structures in order to appeal to these funders but is it worth it? Could that time, effort and money be better spent on growing the business in the short-run? There are things which evolve with time in business and corporate governance is one of them.

Why did you choose to be an entrepreneur?

The path of entrepreneurship is motivated by many drivers. From the unending desire to innovate, being self employed, self accounting or working one’s way out of employment, the reasons are inexhaustible.

Attracting venture capital brings with it some positive and negative changes. One of the most obvious negative changes is the loss of overall influence. The new partners with the money always want to take control especially of the key functional areas of the business like financial management, strategic planning, Operations and any other they deem of interest. This is likely to relegate you to just another employee. Are you ready for that?

How much of your equity are you ready to give up?

How much of the business ownership are you ready to give up and for what level of investment? These things matter a lot. Most times people with stellar ideas tend to underlook the value of their ideas and end up glorifying the investors with the money simply because they are led to believe that the money is the most important thing for them to achieve success. When the success trail is reached, they then realise that actually it took much much more than the money to get there and discontent creeps in because the ideas person feels shortchanged in the entire arrangement.

If you can get money through other sources other than VCs, well and good even if it means altering your growth projections to spread out over a much longer period. It doesn’t help you to build a fascinating brand in one year and yet be eaten up with discontent internally because you feel you settled for less.

What are your work ethics?

Work ethics are key to the success of any enterprise especially if it is going to bring together people from different backgrounds. Changing someone that is used to strolling into their work place at any time of the day into an 8 am to 5 pm worker can be a pain. Having to work with people who believe in using kickbacks to gain key accounts yet you don’t believe in a similar approach will definitely give you the worst headache. Many other aspects of ethics at work are key here and it is essential that as you consider VCs this can be one of the filters to be used.

Ensure that there is proper alignment of work ethics between you and the funder.

When the quest for money supersedes the desire for innovation

This time always comes and it comes sooner than you expect it. While you’re still romanticising on how beautiful you want that next product to be, the demand for generating finances crops up. This is usually from the funders who want to ensure that something is earned as soon as possible. While they may have bought into your dream, they ted to change goalposts once on board and crystallisation of your dream into income is what they end up pursuing like hell.

This is definitely going to happen, what will you do? Do you exit from the business? Do you try to edge them out and regain control? Do you bow to the pressure and become another headless chicken focusing on mere survival?

VC’s understanding of target market

Does the VC understand your target market? Will they be of much more value than merely availing the money? If they cant help you much beyond raising funds, you will most likely be better off avoiding them since when the demand time for returns comes, they are likely to heap unrealistic expectations on you.

What promises did you make?

Sometimes it’s us the startup owners that make all sorts of unrealistic promises and build these clouds of hope. Any funder once strategically mis-informed at the time of entry is likely to mess you up big time in the future because of the kind of projections they end up making. If you have to promise, under promise, over deliver.

James Wire is a Business and Technology Consultant based in Kampala

Follow him @wirejames on Twitter

Email – lunghabo [at] gmail [dot] com

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