The Hidden Costs of VC Funding

The Hidden Costs of VC Funding

Fundraising is a sexy topic.

And understandably so.

Because when executed properly, raising capital affords you the opportunity to scale up your startup with speed.

To build a global sensation, reach billions with your product, and create mass-scale impact.

The very moment you accept VC funding, you’re instantly fueled by increased access to:

  1. Top-level talent
  2. Experienced advisors
  3. More press than you can handle
  4. And the cash to carry out your most ambitious plans

But there is a dark side.

One that many entrepreneurs sadly miss when asking for capital.

And unless you’re willing to take an examined look at the HIDDEN agreements you’re implicitly accepting when taking on VC or angel investments, then you’re setting yourself up for a long, frustrating journey.

So let’s get into it…

Exclusive Training: Download an in-depth training webinar that goes over my complete step-by-step fundraising process.

Now this isn’t to say that raising VC is a good thing or a bad thing.

But it is totally context dependent.

And your decision to pursue venture capital MUST match up with your goals and entrepreneurial makeup.

So if you’re not willing to bleed a little (agreement 1)…

… and the idea of giving up control of your startup (agreement 3) scares the crap out of you.

Then I’d recommend you think twice before going down that path.

But if you’re playing the startup game to create hyper growth (for both yourself and your startup), and are willing to accept the implicit demands of VC, then it might just be the next step you need to take to start playing a much bigger game.

So go ahead and watch the video now.

And if you still feel like raising venture capital is right for you, then leave a comment below and let me the VERY FIRST thing you’d do with the large cash infusion.

Look forward to hearing it.

To scaling up (and staying sane),

Dan

  • kilico

    Hey Dan, Im discussing with venture debt firm about a financing. Terms are 1 million at 12% interest, 24 month term, they also want 30% royalties on sales, and the possibility to convert debt into equity.

    We have no sales or customers yet, but we feel we need money to start in the right way, but we don’t necesserly need that much. For a start, we feel 200k would be enough.

    What’s your advice?

    • http://twitter.com/danmartell Dan Martell

      Kilico,

      I’m not a fan of venture debt in the early days … I would try and fund it by pre-orders from customers… that’s my approach.

      It also doubles as a way to test real customer verification vs. just general feedback about the product/idea.

      DM

  • Derek

    Dan, great input. I would have no problem with each of the terms that you listed in your video. Sure I don’t want to be removed from the business. Who does right? But as for control and so forth, I don’t have that issue. If I was granted funding, the biggest obstacles I’m running into are show products. Please check out my website at gnulegacy.com to see what we do. If you have any recommendations for VC firms or Angel Investors, I would be glad to hear them. You can reach me through the contract us portion of my website. Thanks again.

    Derek DePauw

  • ciprianimike

    it was the first newsletter i received, firstly i thought “ok it’s just another useless inbound marketing video” but you said something true so welcome inbound marketing with useful contents.

    If you are a green entrepreneur you must watch it.

    • http://twitter.com/danmartell Dan Martell

      Thanks 🙂

      “Do onto others…” … that’s my approach to content.

      If I wouldn’t watch/read then I don’t send.

      Appreciate the kind words.

      DM

  • andrew

    Good stuff, Dan. First move after a capital raise would be to add to my dream team — an operations person, a business development person, 1-2 more developers, and 1-2 more support people. Continue to invest in our technology; we’re currently building out version 2.0 of our platform. Timeline is 8-12 months… could easily cut that in half with the right resources.

    • http://twitter.com/danmartell Dan Martell

      Andrew, solid plan!

      DM

  • http://www.vinishgarg.com/ Vinish Garg

    Another great post.

    I will hire right people, including a product manager, a seasoned growth hacker with experience in SaaS, and will invest in content marketing strategy. The plan is to formulate a 18-month growth strategy. A small pie goes into cultivating an awesome work culture (facilities, vacations, foods, and passion flowing all over) where team rewards itself. Yet another small pie goes into securing small and useful tools such as for metrics, design and online learning from the community!

    • http://twitter.com/danmartell Dan Martell

      Vinish,

      Nice! Way to take action.

      DM

  • Casey_W

    Hey Dan, could you explain a little bit more what you meant by the fact that you should be prepared for no return and that the only way that you make a return is if you get 100,000 fold growth? Do you just mean that in terms of dilution of equity?

    • http://twitter.com/danmartell Dan Martell

      Casey, great question.

      What I mean is the odds of a venture backed business generating a return ($$$) for the founder is very low as the failure rate is low… and even when companies succeed over the long run, if the company goes through a tough spot, their equity could be wiped out by new investors.

      If you’re life goals is to have a lifestyle you love and some extra money to give back and support your family, venture is not typically the best structure.

      DM

  • Jesper Lodahl

    VCs swing for the fence, but plenty of other investors are ok with a lower risk, lower return strategy. It’s about aligning expectations up front.
    Love your videos by the way. Sharing it with the Entrepeneur community in China. Keep going! 😉

    • http://twitter.com/danmartell Dan Martell

      Jesper, totally agree… it’s VC portfolio issue, less a general investor belief.

      Appreciate the kind words!

      DM

  • Haresh Patel

    Of course VC’s are gonna see first what is the game plan for the development. But yes if I get VC funding than I would make sure the terms are appropriate or say match up with what we are trying to achieve and be digested by the growth of the business and not fall short on cash flow.

    • http://twitter.com/danmartell Dan Martell

      Haresh, in the beginning everything seems aligned, it’s when things go off track that you see true colours.

      Just wanted to ensure everyone know what they were getting into.

  • https://ericelliottjs.com/ Eric Elliott

    We’re doing really well with content marketing on our blog. We’ve more than doubled our already impressive blog reader numbers from July (it’s October as I write this).

    We’re pre-selling our product, and earning enough money with those sales to be sustainable. We’re producing tech education software and content. I’d use the money to grow our team:

    * UX designer to lead our product design and user bliss efforts
    * Video editor & motion graphic designer (for video lesson content)
    * 1 Senior JS hire to help me with the software
    * 2X mobile devs to help with Android and iPhone native apps
    * 2x B2B sales experts to help us grow to $1MM ARR
    * VP of sales to help us grow from $1MM – $10MM ARR

    That’s just the short-term goals. Lots more where that came from.

    • http://twitter.com/danmartell Dan Martell

      Eric, that sounds like a solid plan… have you thought of getting venture debt financing or a tradition line of credit.

      You should always find ways to get access to capital to scale if you have your Growth Engine defined and well tuned.

      DM

  • U Drift

    What would I do with the funds? Easy: #1: upgrade provisional patents to utility patents.

    #2: Build and demonstrate prototype (already peer-reviewed by the engineering world).

    #3: License the tech to major automakers: https://angel.co/sled-brake-venture

    • http://twitter.com/danmartell Dan Martell

      Nice!

      Thx for the comment.

      DM

  • Roman Krem

    Hi Dan! I just want to say real quick – I was at your MaRS Entrepreneurship talk in Toronto in 2013 and it was the reason I left my career to start my company to “solve my own problem” so to speak.

    Question about raising funds in Canada vs US!

    Fast forward to today and my food startup here in Toronto is doing a million in yearly revenue completely bootstrapped with no outside investors.

    Now we’re feeling the need to expand and considering venture capital but I’m curious – can a Canadian food startup provide a big enough return for investors? Or is the Canadian market just not there yet like SF or NYC.

    I ask because I saw you invested in Sprig so wished to hear your thoughts on food startups in Canada as someone who’s been on both sides of the border. Much appreciated, and loving these videos.

    • http://twitter.com/danmartell Dan Martell

      Roman,

      Congrats on taking the leap and building your company – huge accomplishment!!!

      As for Canada vs. US… I typically look at Canada as a great place to test ideas, but typically (not always) the big market (10X) that’s easier to get distribution in is in the US.

      So, you can stand by and perfect your plan in Canada but risk the chance someone will jump to the US market and take it over, then set their sights on Canada OR go their soon enough to lock it down.

      My preference is always US, then the rest of the word… but it all depends on your vision for your life and mission for your business.

      Hope that helps.

      DM

  • http://www.trijetset.com/ James Balcer

    Hey Dan Awesome post!

    In your recent video on the 4 challenges entrepreneurs face, a question I have is; When building a tech company how do you work through “customer financing” in the SaaS industry? After the value proposition was validated to both B2B and B2C how do we execute pre sales (basically knowing how much to charge pre launch if we can’t find a similar model during market research)?

    • http://twitter.com/danmartell Dan Martell

      James,

      Create a sales funnel and sell… most software can be pre-sold before building. Just try… might sound simple, but it’s true.

      See if they have the problem, tell em’ you have a solution (coming) and that you’re taking early orders at a discount for the right customers that are willing to co-create with you.

      DM

  • Steve Gardality

    Never had VC funding, however having previous partners in JVs have many advantages. They do bring their own experiences to the table that are extremely valuable. My horizons have opened up immensely. The downside of having OPM is that they do call the shots when things don’t go their ways. Must admit, they do have a good reason for it. Not only because it their money, but have gone trough many things a novice hardheaded person haven’t

    • http://twitter.com/danmartell Dan Martell

      Steve, this is true… normally as you scale they do gain control… but sometimes it’s a blessing, because it’s important to have someone to hold you accountable.

      I’ve had boards for my past two companies and it’s been great (but I also chose my investors wisely).

      DM

      • Steve Gardality

        Dan Martell, one of the biggest hurdle to overcome for any entrepreneur, recognizing our limitations. It took me some time, but I learned that whatever I can do, some else can do better. To be successful, one must hire people who are good. With that, positive attitude that is important.

  • http://www.garageskins.com Rick Medlen

    I’ve always been told that at some time the business will outgrow me, look forward to that as bringing in someone else with better experience at that time will be a great learning experience! What’s best for the biz in the long-term is best for me. Rick M – GarageSkins.com

    • http://twitter.com/danmartell Dan Martell

      Rick, it’s a powerful move if you can pull it off!

      DM

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