So, DEMO Africa began with much ado yesterday with an angel investor bootcamp…lots of budding and veteran investors in one place with one goal. Figuring out the smartest ways and places to put their capital. Speaking with a few friends, while chatting about the issue of funding and startups, I couldn’t help but noticing that several misconceptions exist about what exactly venture capital (VC) is.
To the more experienced eye, they might seem pedestrian, but the following misconceptions are actually more common that you would think.
1. Venture capital is a debt
A debt is money that is owed and is to be returned at a later day. With debts, sooner or later, you’ll have your creditors banging on your door asking for their money back. Not so with venture capital, which is (ideally) a calculated risk on the part of the investor. If the venture fails, well, the entrepreneur says sorry, and everyone goes home.
That is not to say that you can piss your investors’ money away. Unlike creditors, venture capitalists expect their money back many times over. Else, they would not invest in the first place. And once you get the reputation for losing money, you’ll probably never raise again.
2. Venture capital is a grant
Grants are non repayable funds usually handed out on a project by project basis for typically philanthropic purposes. VC on the other hand is business oriented. And while grants can be granted (pun intended) for any specific project with a tilt towards non-profits, VC is mainly for high growth businesses. Simple version – if your project or business isn’t going to yield huge profits, it’s best to not hold your breath waiting for VC.
3. Venture capital is your birthright
Just the fact that you’re a startup doesn’t entitle you to VC. Neither does the fact that your startup looks good on paper. For one, prospective businesses/startups are never evaluated in isolation. There are indices to consider – the founder’s experience, skill competence of the team, milestones already met, vision etc. Even if you do well in all these things, there’s still something called investor instinct. You can’t force anyone to give you money. You could try, but that’s why we have prison.
4. Venture capital is for every venture
Venture capital is typically for young, high growth businesses. However, all startup journeys do not have to go through VC street. Your business may be bootstrapped from day one. You also have the other option of crowdfunding. Basically, you don’t have to run around for VC if you can help it. If you do decide to, make sure your business fits the profile.
5. Venture capital is your ticket to Tahiti
Sometimes, venture capitalists are convinced a business is the next unicorn and proceed to invest millions of dollars in it. But then the founder gets greedy. Or foolish. Rather than doubling over on efforts to make sure the business delivers on all its potential (see my next point) he/she relaxes and starts to spend some of that money on things that would be considered excesses. Some even go as far as buying ferraris and exotic real estate. Or they build edifices. In my opinion these are the worst set of people in the world.
Listen, venture capital is for building the business and making sure it scales and maxes out all its potential. How hard can this be?
6. Venture capital is #winning
Let’s say you successfully scale the investment hurdle and receive funding. You’re out of the woods, right? Wrong. Read this.
See that? You have far more to do and far more to prove after you raise money, than you do before. It’s when the real work begins. The records show that despite receiving VC and mentorship from some of the industry’s finest minds, a sizeable number of startups, close to 50%, fail. Ah, I see some of you running for the door. Good. The rest who are still here can go on looking for VC. You just might have what it takes.
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