Vulture Capital: Why Early Stage VC Could Kill Your Startup

Most startups view venture capital funding as a blessing from above — eager to take it as soon as they can get it. Tempted by large sums of money and the perceived validation that comes along with being funded, founders turn to venture capitalists to accelerate their company’s growth. In exchange, founders agree to transition their company into a new phase that requires them to start catering to investors’ needs in addition to those of its customers and employees. While the rewards may be a boon to their company in the short term, the consequences of accepting outside funding too early can be debilitating.

There’s a reason why I refer to early-stage VC funding as vulture capital, and to be honest it’s pretty accurate. Realistically, VCs expect 90% of their ventures to fail, but entrepreneurs expect 100% of their ventures to succeed. The expectations are fundamentally misaligned. According to Harvard Business School researcher Shikhar Ghosh, three-quarters of venture-backed firms fail to even return investors’ capital. For investors, recovering from that dice roll is easy. For them, one success story can more than make up for three failures. Founders don’t have that luxury — for founders like me, the consequences of failure are more dire.

This is why I made the decision to bootstrap HighRadius. It took more than ten years until I felt that we were truly ready to open ourselves up to outside funding — and the consequences that come along with it. While self-funding may not be right for everybody, early-stage companies should consider taking this route if they want to keep their company on a controlled course. 

Money in Exchange for Control

You may be familiar with the phrase, “too many cooks in the kitchen.” This is often the case when it comes to VC funding. VCs provide your company money and in exchange you inevitably surrender partial control as investors will want a say in your company’s strategy moving forward. Typical startups take in multiple rounds of funding from multiple investors. Over the long term, this results in numerous partners with different expectations on returns and performance.
While that’s certainly fair, it’s worth carefully considering whether you’re ready to accept those circumstances. 

Your venture capital partners will, of course, have your company’s best financial interests at heart. Even so, an eagerness to demonstrate a return on their investment means that your funders may want you to scale up your company quickly — perhaps more quickly than you would like. 

As a founder and CEO, the most important gift that bootstrapping gave me was the ability to slow down, speed up and pivot when and where we knew we needed to. Innovation is a result of serendipitous research and we literally bought ourselves time. During that time, we were able to refrain from being driven by outside business goals, and charted our company’s course on our own terms. Our organizational culture encourages a philosophy to fail fast and recover faster. This approach is not possible when venture funded.  

Focus on Product Development First

Venture funding isn’t real validation – market traction and continued profitability and revenues are. We prioritized validation from our customers by listening carefully to what our customers wanted and focusing on early-stage product development. Instead of aggressively seeking funds from venture capitalists, we aggressively sought feedback from our users. 

Without outside pressure to push forward, we were able to pause and fine-tune our product as customers needed. As an entrepreneur, the fewer external capital pressures you have, the more time you have to listen closely to the market and pivot at every opportunity to cater to the stakeholders that matter the most. Once you attain traction and proven market-fit, capital will come to you and you can be selective in choosing the right investor partners. 

During the ten years we spent as a self-funded company, we worked tirelessly on product development. As a result, we were able to build a high-quality product that had been proven in the market before taking third party money – or influence for that matter. When the time finally came to seek funding, we had already demonstrated our value and could make a stronger case to venture capitalists. Additionally, we practiced strict financial discipline as a whole making our financial approach less frivolous and geared toward pragmatism. 

Craft Your Company Culture

In the startup world, who you are is often just as important as what you make. Company culture has to be built consciously. Bootstrapping gives you the freedom that you need to define and focus on your creating your company culture and staying true to values. 

In an industry known for its high turnover, a strong and differentiated company culture can help attract and retain talent. To cultivate that strong culture, it is important to slowly and purposefully build out your core leadership team and to take a steady, sustainable approach to employee growth.

Venture capital affords companies the opportunity to hire hundreds or even thousands of people in one sweeping motion. It is a luxury, but also a danger. Just because you can afford to hire, doesn’t mean that you should. Instead of rushing to fill positions, you need to be thoughtful about not just the skills, but the values you are looking for. 

By self-funding, we were able to take a measured, calculated approach to figuring out what attributes we valued in our employees. Then, we made sure that every new employee truly exemplified those values. I am confident that if we had opened ourselves to funding earlier, we would not have been able to do so. Thanks to our independence, we were able to ensure that each and every hire was in line with our vision of what the company stood for. There was no outside pressure.

With the freedom to scale at our own pace, we’re at a stage where we have a well-defined and well-embodied culture that allows new hires to assimilate seamlessly. 

When is the Right Time?

Just because our company decided to self-fund in the beginning doesn’t mean that I reject the premise of taking venture capital altogether. At the right time and under the right circumstances, venture capital can be a game-changer. It certainly was for us.

Before opening yourselves up to venture capital, you should have enough customers to demonstrate real value and present specific numbers to support your pre-money valuation. 

However, once you can say with confidence that market opportunity exists, that your company has grown to critical half mass, that you have developed an identity among customers and employees, and that you are ready to confidently drive the growth process, then the timing is probably right to go ahead and open yourself to funding. Just remember to take it slow.

By Sashi Narahari, founder, president and CEO, HighRadius

Sashi Narahari is the founder, president and CEO of HighRadius. He has spent the last 12 years bootstrapping what began as a two-person startup into a multimillion dollar, global leader in order to cash automation technology. He holds a Bachelor’s and Master’s degree in Mechanical Engineering and began his career as an SAP consultant. Since founding HighRadius, it has grown to serve more than 200 Fortune 1000 customers and received $50 million in growth funding from Susquehanna Growth Equity in September 2017 in addition to equity investments from Citi Ventures and PNC Bank.