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How Venture Capitalism Destroys Startups, Many at A Time

Venture capitalists were the saviors and mentors for startups. They were often experts with deep pockets who could provide money and mentorship to startups and give them a steady launchpad too. However, this kind of startup funding became obsolete with time. The reason was simple. Venture capitalists had hawkish views of the startups that did not help all startups.

Do you want to know what went wrong with venture capitalists? Let’s understand it today.

The venture capitalist model

If you witnessed the startup culture boom 5 years ago, you may remember the outrageous funding ideas of these new businesses. They were doing something new and interesting and asking for never-heard-before funding for their new businesses. Venture capitalism means getting equity investment for your startup through high net worth individuals or venture capital funds that want to invest in a wide portfolio of businesses.

Now, there are a few things that come along with huge money. First, venture capitalists are known to interfere with the startups. Mentorship often turns to micromanagement which could have drastic impacts on the staff. Some founders think that they are unable to work freely and work on the ideas that impressed their investors in the first place.

Some venture capitalist funds do not invest because they expect you to succeed. Instead, they have a wide variety of companies and they expect at least a couple of them to succeed and give them good returns. It is because of this that you could experience the opposite of micromanagement- lesser interest in your growth. Venture capitalist funds have to care for a lot of businesses and they might not be particularly interested in your business alone.

Another problem that happens because of such funding is related to valuation. Many startups these days have completely different business models that what is traditionally seen. As a result of this, measuring them on the traditional scale is almost always a bad idea. In fact, it is highly likely that the startups create entirely new industries.

However, traditional funding models value them on the old methods because of which valuations could be crazy high. This makes the startups work harder than ever before to live up to equally magnanimous expectations. The expectations of returns could also be very high which could be detrimental to the business or the basic idea of the startup.

Is venture capital all bad?

Of course not. Venture capitalism has helped many startups realize their dreams. In order to ensure that you don’t land in tense situations with your investor, don’t jump on the first offer. As investors value your business, you should also qualitatively value investors. You must check whether they are bringing anything good to your business or not.

Ideally, you must only bring in investors who understand your business. If they don’t understand your business well, you might end up in sticky situations. This will happen a lot, especially in very critical situations. So, make sure you search for the right investors and discuss your plans in great detail, along with their plan for your business. This will help you succeed.