I recently visited Silicon Valley to present a risk management workshop. If you are an owner of a technology company and you find yourself in Silicon Valley and you don’t explore business opportunities, you shouldn’t be in business.
Silicon Valley is the heart of technology innovation and venture capital (VC) of the world. That’s not by accident; it’s by design that has evolved over several decades. Now I’m no expert on SV after a few days, but I did learn a few things. The reason there are so many technology companies there, both established and start-up is because that’s where the VCs are. The reason that the VCs are there is that’s where the companies that they own a stake in are. So it really is a self perpetuating situation. You see, VCs want to be close to their money. They want to pop in to see how it is being spent and closely monitor the business growth (hopefully).
Companies interested in SV VC have to move there, or at least commit to a major presence there. In return for the VC you get to give up 50 to 60% of your equity and have strict benchmarks set on performance. Don’t get me wrong, I get it, I wouldn’t risk a million or so of my dollars (if I had it) without strict controls. The purpose of VC is to put your business on steroids to take you quickly to the next level. A VC will look for an exit even within 5 to 7 years where they will get at least 10 times their investment back, so the potential for growth must be great and the pressure to perform is intense.
Without VC a company can grow the old fashioned way: by using sales revenues to fund growth. This way the owners maintain control of the company but with the cash infusion up front, growth is much slower. Timing is also an issue. Established companies with traction, increasing sales trends and clear growth potential obviously have more bargaining power than early stage companies and would have to give up less equity and control.
So… the risk to assess in this situation is a strategic one. Give up a lot of equity and control in hopes of growing much bigger, much faster, or keep control and ownership and grow more slowly. There’s no right or wrong answer here, but every company has to do a careful assessment.