4 problems that venture capital cannot solve

As technology As the industry declines and venture capitalists tighten their ranks, savvy founders must consider the opposite question: even if my vision is compelling enough to get funding, should I take it?

Today’s marketplace is littered with companies that simply grew too fast, aided and abetted by their VC partners, and are now suffering rounds of pain, cost-cutting, layoffs, and retreats from their bold strategic gambles.

Would many of them have been better off not taking on excessive amounts of capital in the first place?

This may seem like a strange question coming from me. As an investor, my job is to put capital to work. But the truth is, every day I see founders looking for money for the wrong reasons. They – and to some extent we as investors – have lost track of when venture capital can be fast and when it can accelerate the failure of a potential business.

In recent years, the increasing pressure to invest ready capital means that investors were not as prudent as they might otherwise have been. In the year In 2021, VCs invested a record-breaking $329.1 billion in startups. The allocated capital was not properly utilised. This calculation shows a 63% reduction in funding in the fourth quarter of 2022 over the same period in 2021.

Add in inflation, reduced corporate costs, and market volatility, and it’s understandable why so many investors and founders are bullies.

For an entrepreneur looking to raise money, the current landscape can be difficult. But even for founders who can still attract capital, it’s time to be careful: You could end up destroying your business that’s deploying that money.

Consider some of the wrong reasons to raise money:

To accelerate business with negative unit economics

Imagine that a founder is looking to grow a same-day delivery service in a market with negative unit economics. They need funding to increase sales and marketing. But the business is not based on contribution margin, only the variable costs of the product or service.

Their assumption – perhaps wrong – is that perhaps new money for sales and marketing will solve the company’s problems. In fact, what is needed is a deep dive into the company’s fundamentals. Usually, the difference between the company and its ability to achieve balance is not a lack of funds.

Better to ask: Do we have urgent problems? Product problems? Process problems? Human problems? Is my business model fundamentally flawed?

More money will not solve these issues. Without a clear picture of your risk of bankruptcy, venture capital will accelerate your demise.