Roundtable: When Is a Company Ready for Venture Capital?

When should young companies seriously consider venture capital funding? That’s the question we posed in the first of this four-part series on working with VCs. In part one, venture capitalists John Greathouse, Andrew Parker, Alex Taussig, and Sarah Tavel discuss the key factors every founder should consider when deciding if venture capital is right for them.

Next week: How do VCs value startups?

How do you know when a company is ready to take venture capital?<

Andrew Parker, Principal, Spark Capital

This question is highly dependent based on the VC firm being pitched. Seed stage firms just need to see two good people, a compelling idea, and a case of Red Bull to fuel initial development. Later stage firms need to see more progress.

I think the optimal time to raise initial capital is when you as a founder have enough evidence (typically an initial product prototype with exciting, but small, engagement) to convince people beyond just your friends and family that you have an exciting product that’s worth investing time in.

Alex Taussig, Principal, Highland Capital Partners

The easy answer here is ‘when it has achieved product/market fit,’ but that’s almost never a discrete transition. What is easier to measure is the degree to which a team is resource-constrained in the face of considerable growth prospects. The decision to raise capital (and tolerate the dilution that comes with it) should be made when the founders feel they have gone as far as they can without external resources.

It’s worth mentioning that venture capital isn’t right for every business. Not every business can grow large enough and fast enough to warrant raising venture capital to fund short-term operating losses. If you’re running one of those businesses, you should never take venture capital.

Sarah Tavel, Senior Associate, Bessemer Venture Partners

There are two important stages in validating a business. The first is proving that customers want what you’re offering (product/market fit). The second is proving that your customer unit economics are profitable (your customer’s lifetime value is greater than the amount it costs to acquire that customer).

I think a company is ready to raise its first round of venture capital when it is on track to proving product/market fit (if they haven’t already), and have at least a little bit of thinking around how the second stage will work, even if they don’t have actual numbers.

John Greathouse, General Partner, Rincon Venture Partners