Introduction
When you’re an entrepreneur or indie hacker, venture capital can seem like a shiny golden ticket. The promises of big funding, strategic advice, and valuable connections make it easy to believe that VC is the answer to scaling your business. But here’s the reality check: venture capital comes with strings attached—many of them hidden. Before you rush into any deal, let’s talk about the ‘dark side’ of VC funding. Here are five things every startup needs to know before jumping into the venture capital game.
Overstated Promises
VCs Often Overpromise and Under-Deliver
Venture capitalists (VCs) love to paint a picture of how they’re going to transform your startup. They’ll offer you everything: strategic advice, access to their network, help with finding buyers, future capital, and maybe even a graceful exit. But too often, these promises are nothing more than window dressing.
In reality, many founders find themselves feeling abandoned after the deal is done. Sure, they got the funding, but where’s the strategic advice? Where are those high-powered connections? Where’s the active promotion they were promised? For many, the promised support never materializes, leaving them to figure things out on their own.
What You Can Do:
- Be Realistic: Ask potential investors exactly how they plan to support you and get it in writing.
- Vet Their Track Record: Talk to founders they’ve previously funded and find out how hands-on they were (or weren’t).
Returns Over Everything
VC’s Real Motives
At the end of the day, venture capitalists aren’t investing in your startup out of the kindness of their hearts. Their main goal? Returns. They have commitments to their Limited Partners (LPs), and they’re competing with other VC firms for performance. This means they care most about one thing: how quickly and profitably they can exit your company. That pressure to deliver returns can force you into decisions that aren’t in the best interest of your startup. Maybe they’ll push you to scale too quickly or force you into an early exit just so they can cash out.
What Can You Do:
- Understand Their Priorities: When meeting with VCs, ask how they view exits and returns. Make sure their goals align with yours.
- Don’t Lose Sight of Your Vision: Keep control of the narrative and push back on decisions that only serve investor interests.
VCs Are Risk-Averse, Despite What You Think
It might seem like VCs are all about taking big risks, but here’s the truth: they’re actually very risk-averse. Protecting their capital is their top priority. This is why they rely heavily on strict governance, detailed monitoring, syndicating investments (getting other VCs to invest alongside them), and demanding constant referrals to minimize risk. This can lead to some frustrating scenarios for founders. VCs may push for overly cautious strategies or weigh down your startup with layers of oversight that slow down decision-making.
What Can You Do:
- Prepare for Oversight: Be aware that governance and monitoring will likely come with VC money. Understand the level of control they want before signing anything.
- Maintain Your Agility: Fight for operational flexibility, even if that means negotiating fewer oversight measures.
The Jargon Trap
VC Terminology Is Confusing
Ever heard of “Pari Passu”? Or how about “Ratcheting,” “Stacking,” “DPI,” or “IRR”? Venture capital is full of jargon that can make your head spin. And here’s the kicker: a lot of this terminology is confusing. Why? Because the more complicated the language, the harder it is for founders to truly understand the deal they’re signing. This can result in signing agreements that aren’t favorable for you but heavily favor the investors—like “Participating CPS with a Cap,” which could impact how much you actually take home during an exit.
What You Can Do:
- Learn the Lingo: Don’t sign anything until you understand what every single term means. Consult a startup lawyer if needed.
- Simplify Your Deal: Push for simpler terms and transparent agreements. You don’t have to accept the convoluted language.
Questionable Competence
Are All VCs Actually Qualified?
There’s this myth that all venture capitalists are these super-smart, experienced business minds who know exactly what they’re doing. The truth? Some are. Many aren’t. Some VCs have never run a business, and yet they’ll want a seat at the table, giving you advice on how to run yours.
In some cases, their lack of real-world experience leads to bad advice, poor decision-making, and even damaging strategies that put your startup at risk. It’s not uncommon for founders to find themselves shaking their heads at the recommendations they get from investors who have never been in the trenches of startup life.
What Can You Do:
- Vet Your Investors: Before taking any VC money, research the experience of the people you’ll be working with. Have they ever built a company?
Final Thoughts
Venture capital can be a great way to scale your startup, but it’s far from the magical solution many entrepreneurs think it is. Understanding the dark side of VC funding—whether it’s overstated promises, relentless pressure for returns, confusing jargon, or questionable competence—is key to making an informed decision.
Before taking on venture capital, weigh the pros and cons carefully. Know what you’re getting into, and don’t be afraid to push back on terms that don’t align with your vision for the company. In the end, remember that no one cares about your startup as much as you do.
More Useful Resources
- If you’re navigating the tricky waters of VC, make sure you understand how fund management works in the VC world in Fund Management in Venture Capital: A Beginner’s Guide.
- Before you dive headfirst, brush up on key VC terms that could catch you off guard in Beware the Venture Capital Terminology Trap.
Disclaimer The views and information presented on this blog are intended solely for informational and educational purposes. They are based on general industry observations and should not be interpreted as critiques, endorsements, or representations of any specific individuals, firms, or organizations within the venture capital industry. Any opinions expressed are those of the author and do not reflect the views of any affiliated entities. This blog does not intend to harm, discredit, or offend any parties in the industry, and the author assumes no responsibility for actions taken based on the content provided. Readers are encouraged to seek professional advice tailored to their specific circumstances.