The venture capital industry almost doubled in size between 2020 and 2021, resulting in $643 billion worth of investment into fledgling companies last year. Thousands of top-tier companies like WhatsApp, Facebook, Groupon and other transformative businesses were launched with the help of venture capital investment, but many are still wary of an industry that can, at times, seem too good to be true.
Many venture capital firms, like global group Dale Ventures, pair financial investment with personal growth opportunities for entrepreneurs and their teams, allowing for new businesses to not only get off the ground, but soar long term. Navigating common misconceptions is critical for both investors and entrepreneurs in order to fully realize the benefits of partnering with a reputable venture capital firm. Here are the top six things you’ve probably heard about the world of venture capital investing – and why they’re wrong.
1. Venture capitalists are quick to fire founders after launch
A small group of highly-publicized restructurings have led to the misconception that venture capitalists commonly push to fire founders immediately after initial investment. This is simply not the case. Most venture capitalists will choose to invest in a company because they believe in the vision, leadership and future of the entrepreneur themselves, not just the idea.
Investors often prefer to work closely with founders and CEOs to achieve the vision and growth for a company that both the venture capitalist and founder have agreed on all along. Dale W. Wood, CEO and founder of Dale Ventures, said trouble most commonly arises when founders insist on micromanaging as the business grows or has trouble releasing control to qualified executives.
“Founders are generally given two to four years to make the necessary shifts,” Wood said. “If they can’t, we need to make the tough call to let them go to allow the startup to grow to its full, unrestricted potential.”
2. The equity stakes of founders are diluted by venture capitalists
When venture capitalists infuse money into startups, there is often an equity trade off. Giving up a portion of equity in a new company may seem like a dilution of shares, but that is not entirely true. Many company founders fail to fully understand the beneficial impact venture capital contributions have on a new business. Without that investment, many startup businesses wouldn’t see rapid growth.
If a venture capitalist invests $500,000 into a business, they expect to see that business grow to at least 5 times that amount, Wood said, adding that open lines of communication between founders and potential investors about growth, value and equity need to be had prior to investment and routinely as the company continues to operate.
3. Entrepreneurs work harder than venture capitalists
There is often a disconnect between what entrepreneurs see venture capitalists doing and what goes on behind closed doors. Entrepreneurs want their investors to pour just as much work into a new company as they do, and often become discouraged when they don’t see that happening.
Despite what entrepreneurs physically see, venture capitalists are constantly grinding to help the startups they’ve interested in and continue to grow their portfolio. This misconception creates problems within the startup that can easily be avoided through a simple conversation. Both entrepreneurs and venture capitalists got to where they are through hard work and dedication, and neither should be quick to judge the work ethic or effectiveness of the other.
4. Former entrepreneurs are the best venture capitalists for startups
Founders often believe that the best venture capitalist for their startup is someone who has gone through the same journey, but some former entrepreneurs turned investors struggle to evaluate the whole situation. Instead, they focus on what worked for their startup and are unable to implement successful change or give strong advice tailored to a new business in a different time.
“A great entrepreneur and a great venture capitalist need two different skill sets,” Wood said. “A successful venture capitalist needs to be able to understand and evaluate your startup from an unbiased point of view, provide you with constructive criticism and guide you on the path to success. A great entrepreneur needs to pour their heart and soul into this single venture, be open to guidance and foster strong leadership skills.”
5. Investment is easy to come by
Many entrepreneurs start a business on the premise that finding a venture capitalist will be easy when the time comes, but that’s not always how the situation unfolds. Venture capitalists don’t just hand money out to every startup that approaches them, but instead focus on value-added investments they believe will be worth the return. The venture capitalist industry is very competitive with new investment opportunities popping up each day.
“After you understand that the chance of securing venture capital funds isn’t 100%, you can take steps toward making your startup look more appealing,” Wood said. “Create an in-depth business plan that showcases your growth potential and innovative strategy for gaining market share, reasonably explain what your idea brings to the table and be willing to work with investors who may know more than you. Strong leadership skills, a willingness to learn and true awareness of value are all qualities that will make you more attractive to potential investors.”
6. All startups will generate a return on investment
Despite needing growth and profit potential to attract venture capitalists, not all startups will end up like a WhatsApp, Facebook or Groupon. However, venture capitalists operate on the assumption that greater risk equals greater reward. If a startup is able to generate a high level of profit, the venture capitalist will see a strong return on investment as well. VCs don’t need entrepreneurs to take a safe position, instead they strive for entrepreneurs willing to take risks and worry about minimizing their individual risk through portfolio diversification.
“When looking to invest in startup companies, I need to have a clear picture of the growth potential by taking a deep dive into the business plan, analyzing the projected financials and understanding other quantitative and qualitative information,” Wood said. “But that doesn’t mean I’m not willing to take on risk. Some of my most successful investments have come from taking informed risks in a big way.”
Next Steps
Whether you’re a venture capitalist or entrepreneur, weeding through common misconceptions should be a priority. Understanding the assumptions that lay at the core of these falsehoods will give you a competitive advantage when building your next startup or looking for a new investment.
Industry leading Dale Ventures pairs an innovative strategic approach with a reliance on global outreach and value-added investment, which allows brilliant minds on both sides of the aisle a chance to succeed.