Vijay Anand | The Startup Guy.

Why You Shouldn’t Go after Venture Capital

Posted on: August 13, 2007

There are about 33 VC firms in India and more than 70 Angels who are focused on technology and technology-based companies here in India. From the way things are heading, I can almost count about ten new funds that will possibly start here in India. The average fund size of a VC firm is somewhere between 200 – 800 million dollars. All of this is the usual numbers that people throw at you. Just because the presence is there doesn’t mean a rash decision to invest in every company that comes their way.

If you are a technology startup, or any company for that matter and wouldn’t classify yourself to be in the “growth” stage, I would strongly urge you to stay away from Venture capital.

Let me give you my reasons:

1. Timing: The minute you take money from a VC, the inherent statement you have just made is that you have sold your company. No VC is interested in a company that doesn’t have a clear-cut exit. If there isnt one, there are some firms who would create one. They call it liquidation. It’s better not to get into that position.

The right time to look for Venture capital is when you have already built a company, it is revenue-generating and even maybe profitable and you want to expand.

2. Liability: Until you’ve seen a term sheet and have read through all the clauses and understood them, you will not realize how loaded VC money really is. It’s not even in the slightest manner something that should be taken lightly. I would urge you to go find a sample term sheet, go through all the clauses, find their meanings and come back to agree with me on this.

3. Pressure: A seat on the board is great. An experienced board member will bring along with himself tremendrous experience, value and networks to tap into along with him. He will also keep you and your team focused – that said, you also lose a little bit of freedom to do what you want to do or to do radical strategy changes. You’ve already sold the company, remember?

4.Acceleration: I don’t think I could explain this without borrowing/stealing my mentors words on this. “Venture capital is very much like Nitro. It really makes you car go vroom. But you also want to be very careful about which vehicle is receiving this, because if the internal structure of the car isnt ready to handle the extra speed, everything could crumble in half a meter into the road.”

Build your core team first. Build your product. Identify and clearly focus on your market segment. Be profitable and when there is no other option but to grow and you are 100% sure about it, drop a note to a VC. That’s the best time to have that coffee discussion.

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7 Responses to "Why You Shouldn’t Go after Venture Capital"

Hi Vijay, An excellent article, precise and to the point.
What are your thougths on seed / angel investing. A lot of people do not have money to bootstrap and need some sort of funding to start building the company.

Is there a way to find a list of angel investors in India.

Cheers
Tarun

Tarun,

There is definitely a case where one would absolutely require capital to move forward. I would say that in most cases, this money will either come from your own bank account, from family, or from a circle that your mentor is quite well aware of. Even angel investing doesnt happen without due deligence and a fair bit of credibility – I will write more on it soon.

As for the list of angels, The band of Angels, Mumbai Angels are the bigger and well known groups who are quite well organized as well. There are also the funds such as The Chennai Fund, which is put together by the charter members of TiE Chennai, and i believe there is a similar fund in Bangalore.

For the record, most angels keep a very low profile, so i doubt that you would be able to find a list. Also those who do actively invest are those guys who have possibly built a company – like Narayana Murthy. So, its the guy who’s gotten into entrepreneurship a couple of decades ahead of you, rather than someone with white wings 🙂 – that makes the definition simpler.

HI Vijay,

I am an alumnus of IIT, Madras and am interested in getting in touch with you. Will you be interested too ?

Since this is a pubic page, I am not writin my mobile number. I am in Chennai.

Bye.

Vijay , its an eye-opener article for those who were to step forward in this section of Angels.
But let me know, my dear friend, if somebody wants to open an business, and that too when he is not having adequate money…then how is he going to survive.
I am trying into BPO, as a service provider, from last 6 months i am searching for a projects,but all ended in vain,, i have even lost lot of money thru Consultant’s who turned out to be Frauds. Still i have not lost my hope, i still beleive that i will get some projects, but now i don’t have money to start any…………

Anthony,Its quite unfortunate about your case,but I only said dont go after Venture Capital. There are plenty of other alternatives.

Vijay, Its a good article. Can you email me about angel funding?

Vijay eye opener for startup entrepreneurs do write more

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