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: Andy Birol emailed me a link to his article on venture capital. His advice? Get customers to fund your business, rather than venture capitalists.