📝 usncan Note: Should Startups Seek Alternatives To The Funding Round Hamster Wheel?
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Tom Glason says founders should think carefully about what they want to achieve and their preferred timelines
Scalewise
VC funding is growing again in the U.K.. According to data published by HSBC Innovation Banking and Dealroom, British startups and scaleups raised $8 billion in the first half of this year, representing an increase of three per cent from the same period in 2024.
That ought to be good news, and by and large, it is. However, much of the funding activity is heavily weighted towards sectors that are currently hot. As you might expect, startups developing or utilising AI did particularly well, raising $2.4 billion, while health and fintech emerged as the most popular industrial sectors, each raising around $2.3 billion.
But no one would pretend that it’s easy for everyone. Venture capital may be in relatively plentiful supply, but its gatekeepers remain cautious. Over the past couple of years, the most obvious manifestation of this has been a tendency to focus later-stage investment on a relatively small number of mega deals. As a result, many companies that have successfully made it through Series A struggle to secure further funding.
So perhaps a change in funding strategy is required. That’s the view of Tom Glason. He is co-founder of Scalewise, a consultancy that specialises in helping scaling companies to unlock growth and, thus, put themselves in a better position to negotiate higher valuations when the time comes to raise more capital. A typical client would be a startup, led by a technical founder, that has secured equity investment and needs help with a go-to-market strategy.
So, perhaps surprisingly, he argues that the majority of tech startups should consider an alternative to the VC route.
The Rocket Fuel Problem
“VC finance is often described as the rocket fuel for startups,” he says. “My view is that many startups don’t need a rocket, and even if they do, maybe they aren’t prepared for the ride.”
As he sees it, the VC model means that investors are looking for outlier outcomes. As such, they push founders to pursue hyper-growth and billion-dollar exits. The model allows for the fact that a high percentage of portfolio companies will fail to achieve those outcomes. Nevertheless, founders are put under tremendous pressure to deliver.
And there is, he argues, often a misalignment between the potential of the business and the expectations of the investor.”A business that might be growing at a healthy clip – maybe even 60% 70% – but that could be considered a bad bet by a VC, simply because it isn’t on the unicorn trajectory.”
Venture funding, he says, makes most sense when there is a huge market and a lot of people competing for a winner-takes-all outcome.
In Glason’s view, only a fairly narrow band of startups are operating in that kind of marketplace. Many have the potential to exploit a gap in that market that will deliver respectable revenues and profits in a relatively short period of time. Left to their own devices, the priority might simply be to create sustainable, long-term businesses. A VC’s priorities may be very different.
“They might chase unnatural growth, chase growth at all costs, and, of course, dilute ownership,” Glason says “There is a lot of hype around VC, but founders shouldn’t think it is their only path.”
It has to be said that the allure of VC finance is strong. Founders tend to be ambitious people and the CEO of a company that is growing modestly today might think that a further round of funding will build on progress thus far to supercharge revenues in the future. Yes, maybe a company that is already making profits doesn’t need additional capital to stay afloat but without a further injection, the opportunity to, say, expand rapidly and internationally would not be available.
As Glason sees it, founders should think carefully about what they want to achieve and over what time horizon. “Founders should ask themselves the question, would I rather build a $30 million company where I own 90%, or would I rather build a $90 or $100 million business where I own 30%. For the founder, in a way, it’s a similar outcome in terms of net worth, but there is pressure and stress. You may be under pressure to produce growth rates that are not sustainable in the longer term. Chasing growth at all costs will mean burning a huge amount of cash., You are on a hamster wheel and you might not be thinking about the fundamentals of a proper business – things like customer retention and net revenue retention.”
Looking At Alternatives
One way to avoid the pressures and dilution associated with VC funding is to bootstrap the business. For tech businesses, this often means starting with a product that can be developed and taken to market quickly, enabling the company to begin pulling in revenues at the earliest possible moment. However, even that usually requires some investment or support, whether from a bank, or an equity arrangement involving “friends and family,” crowdfunding or angels.
But equity investment doesn’t need to involve lots of subsequent rounds. “What I’m seeing more and more is “seed strapping,” says Glason. “Businesses take some seed funding, but then they look to fuel their growth through customer revenue. That can be a good way of keeping control. You have early capital but you’re not locked into further rounds.”
Another emerging alternative is Venture Equity – blending elements of VC and Private Equity. “They are not looking for businesses that are doing triple, triple, double, double, double, double, (annual growth figures). They are happy to invest in businesses that are growing at 30% or 40%,” says Glason.
Leaving A Legacy
So what are the advantages of eshewing VC cash ?
Having already sold a business (The Cocktail Man) British entrepreneur James Vyse had enough capital to fund the development of prototypes for his tech company DeltaH Innovations, creator of Cool Can, a beverage cooling device.The remaining funding came from friends and family and a crowdfunding campaign that far exceeded its target.
“I made the decision early on not to rely on venture capital because I wanted to retain full control over the business,” he told me in answer to emailed questions. “I’m proud to be British and want to build a legacy for my children. Handing over control through VC funding would risk losing that vision, and that’s something I couldn’t imagine. Instead, we turned to crowdfunding, which was a huge success.”
As a result of his decisions, Vyse holds 90% of the company, meaning he has full control over its future direction. He is currently focusing on the U.S. market.
There is a caveat to this. Bootstrapping may be fine, but it requires a focus on getting the product to market, finding and holding on to customers while operating as efficiently as possible. There won’t be any spare cash to burn simply to drive growth.
And it has to be said that VCs – some of them at least – are making efforts to look after the portfolio company founders. For instance, last year, I spoke to Suranga Chandratillake, a partner at Balderton Capital, about a program his firm is running aimed at taking the pressure off founders. It includes the provision of business coaching, wellness and mental health provisions and measures to reduce money and salary pressures. It’s also worth noting that since Covid many VCs focus more on business fundamentals rather than growth at any cost and are considering longer timelines.
But before going down the VC route it might be worth considering the alternatives.
