Opinion: Beware the big bucks from venture capital. They aren’t for every startup

venture Capital: A Wise Choice for Every Entrepreneur?

Venture capital (VC) firms play a crucial role in the growth of startups in Canada, providing the capital needed to scale rapidly adn achieve high market penetration. Though, the path to explosive growth through VC funding can be fraught wiht challenges, as exemplified by the recent collapse of Vancouver-based Bench Accounting.

Daryl Ching, founder and owner of Vistance Capital Advisory, highlights the potential pitfalls of relying solely on institutional investors: “For a startup, an institutional market of investors exists for companies that are looking to hit home runs seeking explosive revenue growth and fast exits. However, the trade-off is often loss of control over the business.”

The collapse of Bench accounting, a company that raised over US$100-million from investors including Shopify Inc., serves as a cautionary tale. Following the firm’s implosion in late 2022, founder Ian Crosby stated he was terminated by the board of directors as they sought to “take the company in a new direction” that he disagreed with.This ultimately resulted in catastrophic business failure, leaving over 11,000 small businesses scrambling for new accounting services.

While the specific circumstances surrounding Bench Accounting’s downfall remain unclear, the incident underscores the importance of aligning with investors who share your vision and long-term goals.”On any capital raise, due diligence should be a two-way street,” advises Ching. “Business owners should take the time to investigate potential key stakeholders and speak to other businesses that have received capital from those investors to gauge their experience.”

Canada’s relatively strong ecosystem for tech startups and other rapidly scalable industries offers entrepreneurs a wealth of resources, including the Scientific Research and Experimental Progress (SR&ED) tax-incentive program. This program encourages innovation and development, further fueling growth in the tech sector.

However,the current market surroundings,characterized by a focus on revenue growth above all else,can lead to unsustainable business practices. “whether the businesses were actually turning a profit was a secondary concern,” explains Ching.”During COVID-19, there was a shift in focus back to profit, but the pendulum has certainly swung back the other way to focus on revenue. This incentivizes small businesses to generate sales at all costs, even if it means incurring ample losses.” This can result in a culture of prioritizing rapid expansion over operational efficiency, ultimately increasing the risk of business failure.

Choice Funding Options:

For entrepreneurs seeking to maintain control of their companies or pursue a more enduring growth trajectory, alternative funding options exist:

Smaller Equity Investments: Accepting a smaller equity stake from investors who align with your long-term vision can provide capital without compromising control.
Debt Financing: Loans provide capital without diluting ownership, although they require repayment with interest.
Friends and Family Investments: Utilizing personal networks for seed funding can offer adaptability and avoid the complexities of institutional investors.
Bootstrapping: Utilizing personal savings or revenue generated from initial sales to fund growth can lead to stronger financial control.

Choosing the right funding strategy is a critical decision for any entrepreneur. While venture capital can be a powerful catalyst for growth, it’s essential to carefully consider the potential trade-offs before accepting an investment. Exploring alternative options and conducting thorough due diligence can definitely help entrepreneurs find a funding path that aligns with their vision and goals for their company’s future.

Given the current market focus on revenue growth, how can entrepreneurs ensure they’re maintaining sustainable business practices?

Venture Capital: A Wise Choice for Every Entrepreneur?

The role of venture capital (VC) firms in fueling Canadian startups’ growth is undeniable. However, their influence also presents challenges, as exemplified by Vancouver-based Bench Accounting’s collapse. We explored these aspects with Daryl Ching, founder and owner of Vistance Capital Advisory.

Daryl Ching is a seasoned financial advisor with 15+ years of experience helping entrepreneurs navigate funding options and make informed decisions about their businesses.

interview with Daryl Ching

archyde (A): Daryl, thank you for joining us today. Let’s dive right in. What are the potential pitfalls of relying solely on institutional investors for startup funding?

Daryl Ching (DC): Thanks for having me. Essentially, it’s about the trade-off between growth and control. Many institutional investors want to see explosive revenue growth and fast exits,which can lead founders to prioritize rapid expansion over operational efficiency. This can sometimes come at the cost of the founder’s vision and control over the business.

A: The recent collapse of Bench Accounting serves as a cautionary tale. What lessons can entrepreneurs learn from that incident?

DC: Bench’s collapse underscores the importance of aligning with investors who share your vision and long-term goals. It’s crucial to conduct thorough due diligence on potential investors, speaking to othre businesses they’ve funded to gauge their experience. It’s a two-way street – investors are also assessing the entrepreneur and the business.

A: Given the current market focus on revenue growth, how can entrepreneurs ensure they’re maintaining sustainable business practices?

DC: It’s crucial to strike a balance between focusing on growth and profitability. While VC funding can provide a catalyst for growth, entrepreneurs should also explore alternative funding options to maintain control and pursue a more enduring growth trajectory.

Choice Funding Options

A: What alternative funding options do entrepreneurs have to maintain control of their companies?

DC: Smaller equity investments from aligned investors, debt financing, friends and family investments, and bootstrapping are all viable options. Each comes with it’s own pros and cons,so it’s essential to carefully consider the best fit for your business goals and growth plans.

A: Daryl, given the complexity of funding choices, what’s your thoughts on the best approach for entrepreneurs seeking the right financial path?

DC: My advice is to explore all potential funding avenues and conduct thorough due diligence. Consider what funding source best aligns with your vision and goals for your company’s future. it’s a critical decision, and taking the time to weigh your options can lead to more informed and accomplished entrepreneurial journeys.

What are your thoughts, Archyde readers? Have you had experiences with VC funding or considered alternative options? Share your insights in the comments below!