Nowadays, it seems like so many tech companies are aspiring for the same goal: venture capital (VC). Multiple VC companies from Canada and the US plod around searching for the next big company to infuse their money into, while local tech companies pray to be discovered.

Most tech companies are fueled by a dream of being bought out for millions, so the founders can retire on the beach or be promoted to high paying executive jobs in the big tech companies. The desire to meet the VC standards leads to exalted expectations, inflated revenue numbers and a corporate strategy that requires the company to grow at breakneck speed.

The typical VC company will only look at companies who have the ability to be generating $50 million in revenue by the 5th year. Only the companies with all the stars aligned are able to create a compelling case that they can hit this number, and they get the cherished VC dollars.

In September, we attended a California investor bootcamp in Victoria held by SVASE. According to SVASE, a reputable VC company will see 25,000 business plans each year from businesses seeking funding. Of those 25,000, only 10 will ever get funding and of those that do receive funding only about 40% go on to become profitable ventures. With odds like that, it becomes obvious that VC is probably not always the best option for most companies.

Here are some of the characteristics that a VC will look for in companies:

  1. A market of at least $500 million, but ideally $10 billion. That’s big!
  2. A working product or service that is proven and people are paying for.
  3. You and the management team have done this type of thing before and had great success doing it
  4. You need $1,000,000 and you’ll be cash flow positive within 1 year of launching your business.
  5. Strategic alliances with proven companies and identified companies who are likely to buy your company in the future

The bottom line with VC money is that it is not meant for everyone. Like anything, there are positive and negative trade-offs to getting VC money, but most companies are myopically focused on the big dreams they have for their companies. Any startup needs to realize that while bringing in VC (assuming they qualified) may bring in cash and expertise to the company, they will lose a lot of the control and freedom that may have brought them to start their own business in the first place.

There are multiple alternatives that are worthy of exploring. Many companies have found success bootstrapping and entering a slow growth mode until their sales allow them to expand. Others have used small batches of funding from friends and family until the company is able to be self-sustaining in its growth. Whatever route you decide to take, the most important thing is to develop a good business model for the company. Companies like Lumos exist to provide cost-effective options for those who are looking to get their company to the next level.

Love, Lumos.

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