David Richards: Venture Capital -- A Word of Warning

Venture capitalists are often viewed as the heroes of the entrepreneurial Wild West.

Without their willingness to gamble on the future success of unproven companies and products, the world would surely be a much poorer and less innovative place. Right?

This is certainly true in part -- I'm not about to argue that venture capital has no role to play in the development of successful enterprises. Established companies, for whom the capital outlay needed to expand outstrips other sources of funding, rightly rely upon it to take their business to the next level.

But venture capital is not such a sound and viable option for small companies looking to expand. The simple fact is that most start-ups simply don't need venture capital to become successful, established businesses.

There are other sources of funding out there, bank loans chief among them, which satisfy the same purpose without the crucial cost associated with venture capital -- the loss of control of your own business.

One of the major motivations for starting a business in the first place is the desire to be your own boss, to be in control of how you grow your business. The entrepreneur is the real hero of the economic tale, forging a defiant and disruptive path through the marketplace, and he should be wary of signing over that prized thing, ownership, for a quick buck.

Why do I say this? Well, in 2000 I founded Insevo, a company that provided the infrastructure to connect enterprise systems such as SAP to the Internet. We were doing well and growing fast, and looked to venture capitalists to help us grow faster.

The result could not have been worse. It soon became abundantly clear that the fund managers to whom we had signed over a controlling share of the company had little to no understanding of our product, our market or our business model.

Instead, they chose to change the logo, the color of the carpet, and the company letterhead, as money was channeled into an ill-advised re-brand that added nothing to our value and served only to hurt the balance sheet. When we came to move on and exit the business, it was worth far less than we might have hoped.

The problem with venture capital is that the luxury of money affords bad decisions. We -- or rather the managers that were forced upon us -- had too much money to know what to do with.

I believe necessity is the mother of invention, and the pressure of putting bread on the table leads to the development of better products and better businesses.

And so when starting my current business, WANdisco, my co-founders and I took a different path, avoiding venture capital and instead adopting an organic, bottom-up approach to growth.

This allowed us to build a company that is customer-focused, whose overriding interest is creating products to suit the market, and where every cent is channeled into product development -- not spent on bringing in a carpet with a slightly deeper pile to satisfy an as-yet undeveloped client base.

We have managed to create a flourishing business without venture capital that pleases the market and pleases us. In a position of comfort and strength, we can now look to outside investment.

So, my advice to those in the early stages of growing a business? Look to other forms of capital. Beg your friends, borrow from your bank -- but steer clear of venture capital.

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Source: http://www.huffingtonpost.com/david-richards/venture-capital-a-word-of_b_1323816.html

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