There’s been some interesting discussion on Twitter recently about venture capital. Specifically around how most companies should not be taking VC at all.

What often follows is the familiar ‘VC is evil’ discourse, which seems to forget a few fundamental truths.

VC is a very specific investment type.

• As a company accepting venture capital, it’s important to understand you are part of a broader system of fiduciary responsibility. VC firms raise money from LP’s which include pension funds, endowment funds and family offices. This will influence the dynamics between a VC and individual company.
• VC is often part of an LP’s high risk investment buckets. These high-risk-high-reward investments have binary outcomes - most investments will fail to realize any returns, but the ones that hit will more than make up for those failures. This binary outcome is baked into the deal - for both good situations and bad. In the latter, there is specific protection for VC’s to recoup any value if a company is sold for parts.

VC is not one size fits all.

• Venture is appropriate when a sudden influx of cash has a high likelihood of accelerating a business’ chances for succeeding in it’s goals, most often capturing a market or creating a new line of business. This is when a business has found product market fit, is ready to scale, and there is significant room for growth (i.e. the market is big). It goes without saying that founders also have to want to capture that entire market.
• This combination of factors is rare and most companies don’t fit this criteria. When it does happen a company likely doesn’t need technically venture capital to survive - making it the best time to raise. When it doesn’t, a company likely isn’t ready and probably shouldn’t accept VC as a forcing function. An influx of cash almost always leads to poor decision-making when it’s not focused.
• You cannot blame VC when founders are going into deals with their eyes wide open. No one is forcing anyone to take their money. When it is taken, there is a value exchange and expectation. This value exchange in the form of equity (percentage ownership). It comes with well established governance structures that also may not be appropriate for all companies.
• Tech companies and VC often go hand in hand, mostly because of the high leverage and distribution potential of the Internet. But just because it’s an internet company, doesn’t make it venture scale.

VC is a phase vs a continual mode of operating.

• Startups should think of the period that they are taking VC as a temporary period of rapid acceleration. It’s not possible nor desired to stay in this mode. Exits have a very specific purpose.
• When a company raises, a board and governance structures are established to guide the company through its growth phase.
• The best VC’s know how to make this long term relationship much more than a financial transaction. They understand this is a people business first.

VC has a very specific role to play in the ecosystem.

• Venture has played a critical role in developing the most valuable companies on the planet today. The availability of venture capital in an ecosystem can motivate founders to start companies that swing for the fences.
• In an ecosystem, too much capital and not enough companies means that the dollars and expectations of a VC investment are poured into companies that are simply not ready for it yet. This leads to higher than expected failure rates especially when financial markets are unstable. It seems we may be heading this way.

VC has a lot room for improvement, but too often jump to blaming the financing structure without understanding it. There are many other models of financing and acceleration often more appropriate to realize a company vision.