Illustration by Peter Arkle

Illustration by Peter Arkle

Sandra Oh Lin (MBA 2003) has raised enough venture capital for now, thank you very much. Lin is the founder and CEO of KiwiCo, which designs and delivers science and art project kits for kids. It’s the kind of direct-to-consumer operation that requires a significant initial capital investment, and she raised just over $10 million in seed and series A funding to get it up and running in 2011. Since then, Lin’s had plenty of opportunities to raise more capital. But the company’s growth margins have doubled since launch. It’s been profitable since 2016 and grew nearly 70 percent in 2018, with revenues of $100 million. As a result, she sees no reason to take on more funding.

“We have a really sustainable business at this point,” Lin says. “We’re growing at a nice rate, while maintaining profitability.” And while she concedes that raising another big round of venture capital might have fueled even faster growth, using other people’s money to get as big as possible as quickly as possible was never her goal.

She is not alone. Even as the amount of venture capital sloshing around the economy continues to rise, many entrepreneurs and even some investors—including Eric Paley (MBA 2003), managing partner of seed-stage fund Founder Collective—have been speaking openly about the downside of venture capital, cautioning that it should be regarded as only one of many possible funding sources, rather than the be-all and end-all of startup financing.

To be sure, venture capital offers many benefits, including the networks and insights that experienced investors bring to the table. But all of that comes at a price. Most obviously, a founder who takes venture capital gives up equity, effectively shrinking their own share of the pie they worked so hard to bake. If the company becomes the next Facebook, says Professor Josh Lerner, that’s all well and good. If not, “you might be better off with 100 percent of the smaller pie.”

In addition, says Lerner, the standard VC playbook involves pushing companies to get very big, very fast. Meridith Unger (MBA 2010), founder of Nix, a startup that is developing a single-use, wearable sensor to determine a person’s real-time hydration status, says that this stems directly from the risky nature of venture capital. (Unger should know: Before founding Nix during a Blavatnik Fellowship in Life Science Entrepreneurship in 2015, she worked for several venture capital firms specializing in health care and technology startups.)

In order to satisfy the limited partners that supply their capital, Unger explains, venture capitalists must seek out and aggressively develop startups with the potential to return their entire fund through acquisition or IPO. In the process, she says, VCs can be “forced to make investment decisions that don’t benefit the company, the entrepreneur, or the entrepreneurial landscape.”

For example, Unger notes that the search for outsized returns has led today’s largest venture capital firms to focus “almost exclusively [on] chasing unicorns,” leaving companies that boast lower valuations and more modest risk/return profiles out in the cold. Indeed, data suggests that more money is pouring into fewer deals. According to a recent report by PitchBook and the National Venture Capital Association, the volume of capital flowing into startups in the first quarter of 2019 was up by 10.5 percent from the previous year, but the number of deals was down by 22.5 percent.

As a result, says Alper Bahadir (MBA 2012), entrepreneurs who see venture capital as an end in itself may prematurely rule out all kinds of businesses that could otherwise prove successful—businesses like his own Mesken, a direct-to-consumer website that sells custom window treatments manufactured in Bahadir’s native Turkey. The startup has been profitable since it launched in early 2019.

A single-minded focus on attracting venture funding can be deleterious for other reasons, as well. “The emphasis on growth changes what you focus on and the problems you solve as you go,” says Bahadir, who got Mesken off the ground with minimal seed money from an HBS classmate. Assuming that profitability will come with a venture-fueled increase in scale can also lead to the all-too-familiar scenario in which a startup exhausts its capital without ever achieving sustainable growth.

Emphasizing profitability and financial discipline from the outset, as Bahadir did with Mesken, may not be sexy. He has called in plenty of favors from friends and staffed up by cobbling together a team of freelancers spread across Turkey, India, Greece, the United States, and the Philippines. But like Unger and Lin, he believes it can lay the groundwork for a healthier and more durable business in the long run.

Fortunately, says Lerner, the opportunities for entrepreneurs have probably never been better, in part because the cost of starting a business has never been lower and in part because the mania for investing in startups has led to all kinds of funding options. Technological advances such as cloud computing and open-source software allow bootstrapping entrepreneurs like Bahadir to do more with less. And funding sources are more diverse than ever. Unger, for example, has raised seed money from sources of so-called patient capital: family offices, “super angels” such as pro athletes and other ultra-high-net-worth individuals, and micro-VC firms whose relatively small size translates into a willingness to proceed at a pace and scale that are sustainable over time. She has also won a fair bit of grant money and is currently considering other funding sources that won’t dilute her stake in the company, such as corporate partnerships.

In the end, none of these entrepreneurs are opposed to VC in principle, and all would consider raising it in the future—just so long as they are able to do it at the right time, for the right reasons, and with the right partners. And that’s precisely what they would advise anyone else to do as well. “It really depends on what your aspirations are, what your market is, and, ultimately, what you’re trying to achieve,” says Lin.

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