When (and When Not) to Consider Venture Capital

On discussing why he and his co-founders are seeking venture capital funding for their programming question and answer site (StackOverflow), Joel Spolsky provides a number of scenarios for when a company should give consideration to VC funding:

  1. There’s a land grab going on.
  2. There is a provable concept that’s repeatable.
  3. The business could benefit from the publicity of getting an investment from someone who is thought of as being a savvy investor.
  4. The investor will add substantial value to the business in advice, connections, and introductions.
  5. The business can potentially have a big exit or become a large, publically traded company.
  6. The founders are happy to give up some control to make the business more successful.

And when a company should not consider it:

  1. The founders are risk-averse and are willing to trade a much smaller payout for lower risk.
  2. The founders are technical without substantial business experience and wish to maintain absolute control forever.
  3. If the investor is mostly “dumb money.”
  4. If you’re going into an established field with a lot of competition.
  5. If the product is immature and unproven.
  6. If the founders don’t have enough of the right kinds of industry connections, or the idea is not compelling enough, so that raising VC would take months or years
  7. If there is any other way to raise the kind of money you need.

A number of pieces have been written disagreeing with Spolsky’s article, suggesting that either StackOverflow does not fit these criteria or that the reasoning is just plain wrong. 37signals’ post covers both.