Want VC? Be Ready to Go Big

This post is a continuation of my series of key segments from my book, The Fundraising Rules.

The size of exit should also dictate whether an entrepreneur takes the VC route. Generally speaking, venture capitalists need their portfolio companies to exit for very large values in order to meaningfully impact their returns. Typically this means eight- or, better yet, nine-figure exits (tens or hundreds of millions of dollars) are required to “move the needle.” As a result, VCs may often opt to pass up opportunities to sell their portfolio companies that are showing strong potential for seven or even eight-figure valuations — they’ll want to hold out for the bigger exit. Doing so usually helps maximize returns for all parties (including the entrepreneur); however, it requires more patience and a stronger stomach for risk.

Further to this point, VCs structure their investments using liquidity preference to align incentives — compelling the entrepreneur to hold out for the big win. Taking all this into account, entrepreneurs should know that getting into bed with a VC typically means setting your sights on going big — very big. If you’re looking for a small lifestyle business or a small exit, venture capital is probably not right for you.

Other Reasons to Raise Money From VCs

If you’re starting a venture scale business, raising money from venture capitalists early in the life of the company can be a great idea. While securing capital is important, however, the money isn’t the only reason to engage in the VC fundraising process. There are a number of other benefits.

? Enhance the plan: By pitching to VCs and getting feedback, an entrepreneur receives valuable feedback that helps to refine the business model, marketing strategy and other aspects of his plan.

? Make connections: While VCs don’t make introductions for every entrepreneur they meet, entrepreneurs will likely be connected to important customers, partners and future members of their teams through the investment community.

? Learn how to pitch the company: By pitching early in the life of the company and pitching often, entrepreneurs learn how to sell their companies. From this perspective, selling in this way is not only important in fundraising, but is also critical for making key hires, securing partnerships and literally selling the company when the right buyer comes knocking.