5 Biggest Misconceptions About Raising Venture Capital

2021-07-21

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5 Biggest Misconceptions About Raising Venture Capital

Relax, you can raise money.

I remember as a college freshman the thought of venture capital terrified me. After all, venture capitalists are these wise businessmen with billions of dollars who can predict the next Facebook or Snapchat in an instant, right?

Wrong.

The more I interact with venture capitalists, the more I realize they’re just like us entrepreneurs. General Partners of their own VC funds typically start their investment funds just like an entrepreneur starts his or her journey. Only difference is as a venture capitalist, unless you have a lot of money, you have to fundraise to get your venture off the ground.

Venture capitalists can be cold and intimidating. Those are the people you don’t want to work with. Good venture capitalists knows how important their reputations are and will do everything they can to maintain a good reputation. They will treat entrepreneurs with grace and respect. If a venture capitalist comes off arrogant and mean, stay far away.

And now I will share the largest misconceptions that I had as an early founder and that I’ve seen in the hundreds of entrepreneurs I talk with through Karleki.

Misconception 1: I’m too early for venture capital

There’s a little secret in Silicon Valley that all experienced founders know. That secret is that, there is no such thing as too early. Every venture capitalist, when given the chance, will want to wait. It is the duty of a founder to create an environment where the venture capitalist feels like if they don’t invest now, the metaphorical boat will soon sail away.

Fear of Missing Out is one of the most powerful forces in the industry. It is completely created by the entrepreneur and does not have any objectivity to it.

Remember, venture capitalists are basically rich people trying to make a x1000 return on their investments. They don’t operate by any hard or fast rules. There’s no government body to regulate them. If they think something is a good investment, even if it’s just 500 words on a page, those 500 words could raise $20M.

Random fact: More often than not, when companies raise an enormous amount of money before even launching, the company fails. One great example: Quibi that raised $1.75 billion before imploding.

Remember, at the end of the day, you as the entrepreneur are in control. If you can create an environment and really believe that you are worth $5 or $10M right now, go out and raise.

Misconception 2: This is my one chance to raise money

Too often, early first-time founders operate in a very fixed mentality, where all outcomes are binary. They think that their startup will either fail or succeed. In reality, life is never that black and white, usually you have about an infinite shades of gray in between.

When raising money, they carry over this mentality. Lots of entrepreneurs, though they’ll never admit this, doubt whether they can raise funding. They think there is a magical bar that an entrepreneur and startup must reach in order to be venture backed. There is no such thing.

Michael Siebel, the head of YCombinator, says this (paraphrasing):

The biggest difference between experienced founders and first-time founders is that the experienced founder realizes fundraising is a task that must be done, rather than an hurdle to be crossed.

Fundraising is a grind that requires a lot of rejections to get a yes. Typically, if an entrepreneur endures, they will succeed in raising.

Misconception 3: Venture capital has all the power

Similar to the previous point, experienced founders realize the power that entrepreneurs have. At the end of the day, every entrepreneur needs to realize that entrepreneurs are the ones who change the world. Venture capitalists are just along for the ride and supply the money.

Most first-time founders get very intimidated by venture capital. Just know, that when you’re the hottest startup in Silicon Valley, you’ll have venture firms bashing down your door. Funnily enough, these startups usually aren’t the ones that succeed. So if you’re only hearing crickets chirping, don’t give up!

Misconception 4: Venture capitalists know a lot about business

This point is the culmination of all the previous misconceptions. Venture capitalists love to display their past investments and most venture capitalists really believe that they can and will identify the next unicorn. The unfortunate reality is that practically always, none of the best companies of our last few decades (Airbnb, Uber, Instagram, Facebook) had great venture capital reception. Look at Airbnb rejection emails.

A countless number of VCs passed on every single one of those companies in the early days. Doug Leone said this best:

I have no idea what’s hot. But I’m certainly always listening. Big Dumbo ears. Just listening.

— Doug Leone, Founder of Sequoia Capital

Bessemer Venture Partners has this fantastic anti portfolio of all the companies they passed on. Take a look and you’ll be amazed.

Misconception 5: I need to do the right thing

If I could only say one thing to every entrepreneur, it would be this: there is no right path, trust yourself. Every entrepreneur cares an incredible amount about their business. That’s always the case. The downside is that most founders that have gone through decades of schooling get a bit bewildered when suddenly they are thrust in a world where there just are no right answers.

The real world is very different from school. At MIT, I always knew there was a right answer for my exams. I didn’t like cramming useless material to pass a class, but I did it for the degree and it honestly probably made me smarter. As long as I got the right answer, even if I forgot everything the very next day, I passed.

As an entrepreneur, you no longer have exams but you have far more challenging tests. You will be tested, not on your knowledge but on your heart. There is no faking nor cramming that will get you past this test. You have to learn, learn, and keep learning. The day you stop learning will be the beginning of failure.

On the flip side, if you put your mind, will, and soul into your company and keep a humble heart, you will succeed.

Good luck and visit us at Karleki.

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