Misconceptions of Entrepreneurs About Venture Capitalists

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Misconceptions of Entrepreneurs About Venture Capitalists

An interesting article for both entrepreneurs, venture capitalists (VCs) and Corporate Finance specialists is "6 Myths about Venture Capitalists" by Diane Mulcahy (HBR, May 2013). Mulcahy, a former VC and now director of private equity at the Ewing Marion Kaufman Foundation, says that entrepreneurs often feel "as if they are in the back seat" when dealing with VCs. This is caused by six myths or misconceptions about VCs and what they are offering:
1. Venture Capital is the Primary Source of Start-up Funding - In reality, especially for smaller new ventures, 'angel investors' (affluent individuals who invest smaller amounts of capital in earlier stages, fund more than 16 times as many companies as VCs do. Also 'crowdfunding' (very small online investors, for example see Kickstarter) is a new possibility that's growing quickly.
2. VCs Take a Big Risk When They Invest in Your Start-up - In reality, they do take a lot of risk, but not with their own capital, but with capital they received from associated investors. On thus committed capital, VCs typically charge an annual 2% fee, plus a success bonus.
3. Most VCs Offer Great Advice and Mentoring - In reality the level and quality of advice given varies tremendously. Entrepreneurs are well-advised to do some thorough due diligence before they sign up.
4. VCs Generate Spectacular Returns - Some do, some don't. Overall as a group they don't perform better than the markets.
5. In VC, Bigger is Better - In reality, the smaller funds tend to outperform the bigger ones.
6. VCs are Innovators - The VC industry has not been very innovative over the last decades, new initiatives such as mentioned Angelist came from outsiders.

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		1 Paramathmuni srinivas Kumar India
	Development of Entrepreneurs is Needed about VC Steve Jobs, Mark Zuckerberg and Sergey Brin all developed a level of awareness which led them to be successful. How can that level of pointed and sustained awareness be developed in entrepreneurs before a VC is approached to invest in their venture?

		1 Steven Cooke, Philippines
	VCs as a Source of Capital Very good points! It is important for any entrepreneur to recognize that VCs are just another possible capital source. BUT, they have their own particular applications and constraints, as any other source of funding. One thing that is important to note is that most VCs are looking for a substantial and rather speedy return on their investments (although their overall record may not be much better than the general market). They will usually look for a clear "exit plan" within 5 years - e.g. how you will get to an IPO position and how it will be profitable. They are not usually into "long term" investments, so if your "plan" is to start and run your own business simply as your livelihood, keeping it as long as practical, then you will likely get little interest from VCs in the first place. Furthermore, ANY investor will want to see the level of YOUR personal investment in the venture, as well as a solid business plan with REALISTIC market analysis and earnings potential.

		1 VENKATESH Manager, India
	The Reality of VCs Thanks Jaap for bringing out these realities of VCs. Also thanks to the others for their additional revealing comments. To me one actual advantage of VCs is that they are more easily accessible than regular bankers.