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Three Misconceptions of Venture Capital

Three Misconceptions of Venture Capital

By Rita Sudheer | November 28, 2018

From Google to Uber to FedEx, we have all heard success stories of VC-backed companies that empower entrepreneurs around the world to pitch their ideas to VCs in hopes of becoming the next big thing.

Evidence shows that a fifth of all companies in the United States was provided funding by venture capitalists. As more startups become public, VCs are getting an increased share in the limelight, therefore encouraging other startups to approach VCs for funding. However, while some of the notable companies that embarked on the startup journey, such as Apple, Microsoft, and Google raised most of their early funding through venture capital, there lie several anecdotes behind the actual success of VC funded startups.

As the hype of venture capital rises, so do the fears faced by entrepreneurs. Research shows that more venture-backed startups fail than succeed. This has seemingly influenced the aversion of entrepreneurs to VCs causing a direct correlation between the VC hype and the dread an entrepreneur faces when evaluating fundraising options.

When it comes to making a decision on how to raise funds for a startup, most entrepreneurs buy into the arguments put forward by experts regarding dilution and control. While raising funds through VCs may not seem to be the one stop solution for every startup, it is crucial to make an informed decision by addressing these influential misconceptions that have been on the rise.

VCs scout for companies to steal them 

Two of the biggest fears that an entrepreneur faces while considering raising funds through VCs are control and dilution. Typical ownership percentages sit between 20-25%, and founders usually lose a considerable amount of “control” after a single round of financing as VCs gain veto rights over decisions. The startup no longer feels like your own. However, VCs are not cold-blooded. Factually, the term sheet of a venture capital firm states that once the investors get their return on investment, they do not profit until the management does. VCs are mindful that it is the entrepreneur who runs the show and ensures that they have sufficient incentive to create value for all.

VCs add money but no real value

VCs typically focus on investing in early-stage startups. In most VCs, General Partners commit a large percentage of their own capital into the VC fund which means they invest in risky startups that could largely affect their own returns. VCs are thus rooting for their startups, doing everything that will make the startup grow and become profitable. It is not too difficult to pick a company to invest in a startup, but the real work lies is spearheading it after the funding process because you believed in its potential to generate returns.

For instance, ASA Ventures provides not only monetary capital that is required by startups to grow, but they also provide professional expertise in the form of sales, customer support, marketing, strategic direction, and professional advice, acting as an Operational Partner.

Although most entrepreneurs come up with brilliant, world-changing ideas, they lack skills in terms of execution. Appropriate execution comes with experience. ASA Ventures brings in their expertise to the table in order to establish startups and develop them into successful ventures thus debunking the misconception that VCs add only money and no real value.

VCs only invest in startups with strong teams

It is true that a strong, experienced and driven team drives the success of a company even when the company is deep in the trenches or as market assumptions change. A study conducted by Stanford on “How Do Venture Capitalists Make Decisions” concluded that the abilities of a founder and management team are the most important factor driving investment decisions — often more important than even a product or technology itself. However, while team composition and strengths play a major factor in the investment decision-making process, it is equally important to have a disruptive product and a strong business plan. By serving as operational partners, ASA Ventures comes alongside all kinds of teams with the focus on their brilliant ideas, pooling in their input, thus helping entrepreneurs execute ideas beyond their capabilities.

 

Research shows that the odds of becoming a unicorn are about 1%. While this might sound disheartening, corporate venture capital investments climbed to $21.9 billion across 1,298 deals in the US alone. Entrepreneurship is still rising and while it can be easy to buy into the misconceptions of venture capital, the best way to test these misconceptions is by approaching the right venture capital firm and cooperating with them.

Rita Sudheer

rita@asa.vc

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