I have heard many VC’s speak on how they evaluate investment opportunities and what their criteria for investing is. What I really appreciated about these two talks was that these VC’s spoke very honestly about the types of investments VC’s make and the value they bring to a company. What follows is my attempt at an accurate summary of the two talks.
Many entrepreneurs believe if they raise venture capital they will become successful. VC’s do not increase your chances of success. In fact they help:
- Increase your burn rate
- Re-shuffle your management team
- Speed up your sales process
While these might seem like good things, they can work against your objectives as an entrepreneur.
When companies are self-funded, people tend to be much more prudent with their money. Venture backed companies tend to spend money more quickly and less carefully. VC’s like to bring in their own personnel to steer the ship. Even though this seems like an effective strategy, success is more often driven by those most passionate about the business. Due to the nature of their business, VC’s accelerate the sales process. If the recipe is not yet determined, wrong messaging can be detrimental to the companies marketing efforts.
If you look at the numbers you will find that first tier firms like Kleiner Perkins and Sequoia Capital have win percentages of 30%. That means 70% of their investments fail. What do you think the chances are of venture backed companies that were not financed by one of these firms? Startups should not focus on raising capital but focus on creating a successful company. VC’s look for investments in companies that already have achieved a certain level of success. They leverage that success in order to grow faster and create a greater exit.
Why isn’t there more investment in Korea? The people are well educated, hard working, and willing to work for less. We believe that since there are only 50 million people in Korea, the economy is not big enough for most VC investments. We also believe that government issues have held a constraint on the country’s ability to globalize many of their products, thus preventing foreign investments.