TBIT / Pixabay

Over the past several years, I’ve noticed a trend emerging in the tech world: Startups have been taking early-stage venture capital, whether they need it or not. Instead of startups building something and then asking for money, we now have companies that are asking for money to build something.

Venture capital is universally seen as a good thing in the tech space, and it’s easy to see why. More money is always better, right? But the blanket statement that venture capital is “good” for your business ignores not only the fact that there are many distinct types of funding, but also that taking early-stage funding from VCs may harm your business. And I’m not the only one that thinks this; Y Combinator President Sam Altman also warned startups that taking too much funding will hurt your business if you’re successful. As a serial entrepreneur and angel investor, here’s why I think early-stage VC funding—and taking too much funding in general—sucks.

Don’t sell yourself short

When you receive funding, you’re trading something for that capital. With venture capital, you’re trading a percentage of ownership of your company. But how can you decide what’s a reasonable amount of control you should give up if your company hasn’t even gotten off the ground and shown its potential?

Typically, when you’re first starting out, your team is small and scrappy with low overhead. Do you really need to take millions to get your product off the ground? Most times, the answer is no. Anyone selling 6% of their company for $100,000 or 25% for $1MM is selling themselves short and much too early, except if they’re a Shark Tank contestant and they get massive exposure on top of it. And it’s a crapshoot if that’s even worth it.

By only taking the amount you need, you can easily pivot or change fundamental things about your business rather than having to convince a VC that the pivot will still net them the returns they expect. Having full ownership of your business early on means you can make these tough decisions without being distracted by the future returns for a VC.

Probably one of the worst case scenarios is Box. While the company raised a reasonable $350k in angel investment for its seed round, it also took a lot of early-stage money and then continued fundraising for a decade, which diluted the CEO Adam Levie’s control each time. Today, Levie maintains just 4% ownership of the company. It’s noble for founders like Levie to give up control to help their companies be successful, but giving over the reigns to investors, especially early on, may not be the best way to ensure the longevity of your company that you’re working so hard to build.

Dropbox CEO Drew Houston fared better, maintaining 25% control of the company for its recent IPO. This 25% ownership was lauded as a win, but I see that as setting the bar far too low. Houston could have held onto more control of the company if he didn’t take venture capital so early. Did Houston need to take $1MM for a $4MM valuation for a seed round? Within months of growth, they would’ve been able to unlock $6MM for a $25MM valuation that would have allowed him to keep a higher percentage of ownership at the time of his exit. It’s hard to argue with success, but Dropbox probably could have survived without its Series A round.

Most entrepreneurs start their businesses because they can’t fathom working for someone else, or because they have a specific product or idea they want to pursue. But when you decide to give up substantial ownership of your company early on, you’re setting yourself up to inherently work for someone else: investors. This won’t happen overnight, but you’ll go through years of giving up control of your company in exchange for investment until one day, you realize that you’ve given up your company for funding you may not have even needed.

How to get your company off the ground without venture capital

Your business will inevitably need investment to get off the ground, but there are better alternatives to early-stage venture capital. Of course, if you have the ability, you should bootstrap it early on—but that only works to a point. Beyond that, I recommend seeking angel investment, as it’s better suited for early-stage funding. Angels will provide you with better terms than VCs, as they may end up taking some equity, but they won’t usually take board seats or assert themselves into your growing business. Additionally, angels often prove useful for networking and making connections at a customer or partner level.

As your company naturally grows, your valuations will ramp up just as fast, and you’ll be in a better position to negotiate. A good rule of thumb is to raise as little as you can to get a minimum viable product off the ground and to continue growing rapidly. This means you and your early partners and employees will have to work for next to nothing in exchange for equity to minimize dilution at this stage of your startup. As you scale, be frugal with your money, hire intelligently, and automate your workflows as much as possible. Use the funding that you’ve gathered to build a runway for your company so that when it’s time to raise your Series A and beyond, you’re in a position where your valuation is higher with reduced dilution.

There are plenty of examples of companies that found success without heavily relying on venture capital. The founders of Atlassian raised one round of funding, and they only took that one round to get Accel Partners’ Rich Wong onto their board. They never took venture capital after that. Today, they own 75% of the company, it IPOed in December 2015, and it’s now worth $10 billion. Similarly, MailChimp has always been against taking outside investment because its founders believe the future of the company is better in their own hands. It’s hard to fault them for thinking this because VCs don’t even take their own advice. Instead, take the fate of your company into your own hands and surround yourself with people you trust who share your vision.

Throughout my years of founding my startups and investing, I’ve seen too many instances of founders selling themselves short for questionable amounts of money before they know the true potential of their business. The typical cycle is to raise, spend it fast, grow, and raise some more while diluting more and more. In other words, “grow at all costs.” My advice to new startups is to hold out on funding as long as you can while focusing on finding a great market fit and building a kick-ass product. Additionally, you must maintain a high corporate IQ by hiring people selectively, automating as much as possible, and scaling your business organically. This way, you’ll own a larger share of your business when you eventually exit.