Venture Capital: The Illusion of Easy Money
I am reading Guy Kawasaki’s The Art of the Start. For anyone who doesn’t know, Guy Kawasaki is a venture capitalist and managing director of Garage Technology Ventures.
This is a snappy book filled with street smarts about startups. It’s set up so that it is easy to read a section here and there when you have time.
In one part he offers FAQs about raising capital for startups, with his trademark blunt wit:
Q: If I do not have an IPO or acquisition as my exit strategy, will I ever be able to attract investors? Would investors ever be interested in making their return through profit sharing or a buy-out from the founders of the company in five to ten years?A: Only if the investor is your mother. If the investors are professional investors, you can forget about raising money without a shot at an IPO or acquisition.
Venture capital is an unattainable illusion for the vast majority of small businesses. Most small businesses will never be initial public offering (IPO) material. And entrepreneurs who are so emotionally attached to the business that they cannot stand the thought of selling it should forget about venture capital.
Bottom line: Guy describes key reasons that most businesses are not good candidates for venture capital. That, and minor little points such as:
(a) most companies don’t have a high growth business model with a potential market size of US$ 500 Million, and(b) most can’t show the VC that he or she will get a 10x return on their money in 5 years.
The vast majority of small businesses have more modest expectations. Their path to success lies in bootstrapping and small business loans at the right time. As Barry Moltz pointed out here on Small Business Trends, what’s wrong with having a business that’s only going to grow to $3 Million?
UPDATE November 29, 2004: Andy Birol emailed me a link to his article on venture capital. His advice? Get customers to fund your business, rather than venture capitalists.
December 20th, 2005 at 11:49 pm
Hello My name is Daniel Parish i am 18 living in a tourist rich area in Florida. My dad was a successful business man in England but lost all of his money and suffered heart problems from the stress he is doing ok now though. I feel that i could be a very successful business man and i would like to start now and retire younger. i like a lot of things but nothing really sticks out i am not sure what kind of business i would like to start. i also have medical problems nothing serious but i have to have my hip replaced this summer which is really young at my age. i have had this problem for about 7 years. Anyway that is the reason i am not working right now but i have my notory licence. and i take the Real estate state exam in a few weeks but i want something like a home business that my age won’t conflict with my customers or become an issue i live in the Panhandle of Florida in a town right on the beach called Destin. The real esate has blown up and the house have easily trippled in the past 5 years. but i need something that i can do. I am a full time student also at a local college. I have very high standards and quite intellegent but i just haven’t had an idea that i was of age to start a business with. i thought of the portable one person hammock and now you see it in Brookstone which is quite funny. but i think i have more then one million dollar idea and i would like to know how to prospore from it.
May 15th, 2006 at 4:02 pm
[...] The National Dialogue on Entrepreneurship just came out with its list of best entrepreneurship books published during 2004. Here are a few of the books on the NDE’s reading list, along with a quote of what they say about each book: The Art of the Start by Guy Kawasaki. “It is a fun read and full of useful and interesting tidbits for those starting a new business or a new organization.” I wrote a little about the book here, and plan to do a full review of the book soon. [...]