Trouble Fundraising? Businesses Don’t Raise Capital Like Startups

Paul O'Brien
6 min readJul 14, 2023

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Aaron Dinin, who teaches entrepreneurship at Duke, wrote a wonderful piece on Medium this week, “Apparently, Most Entrepreneurs Don’t Understand the Real Purpose of Venture Capital” and I couldn’t help but be struck by his article more substantially than most, because I find myself increasingly helping entrepreneurs not by teaching them HOW to do things but first what words mean and whether or not people are even spending their time on the right possibilities.

“But we have ‘hockey stick growth’,” he wrote, referring to a frustrated founder in a conversation with him. “Isn’t that what investors want? Why aren’t any interested in investing? What more can we do?”

Just this week myself, I sat with 3 different founders, with frequently heard cries of frustrations of their own, each of them, a sign that they’ve been misinformed about funding rather than having genuine frustrations, “I have a great idea but they just won’t make time for someone like me,” “we have a profitable business and yet they aren’t interested in investing,” and “I’m afraid they are going to steal my idea since others have before, we’re not ready to talk to investors.”

And it was the mention of profit that resonated with me in reading Dinin’s article where he too had heard, “from a VC’s perspective we’re not an attractive investment since we’re too profitable.” And if you don’t appreciate why Dinin replied as he did, you’re severely off track as a founder; Dinin’s reply? “I laughed. ‘Those might be some of the stupidest ideas in the history of startups.’”

Harsh? Maybe. But I’ve written frequently before about how profit isn’t a positive to a venture capitalist; if you’re profiting, that means you’re earning revenue to be taxed by the government rather than re-investing in the company… and yet you want investors to throw more in??

How and why are founders so significantly being misled? Why does society continue to perpetuate bad advice, by supporting the advisors that mislead entrepreneurs?

Before Asking How, Ask If

Most of what misleads business owners and founders is that we allow the misuse and repurposing of words that define aspects of the ecosystems in which we work, words which serve to better clarify IF what we’re hearing is valid, relevant, experienced, or credible.

Just a couple months ago, I had the opportunity to share some thoughts about entrepreneurship and marketing with BOLD Community, tune in for just a few moments, because I want you to hear an example of my point; how the words Entrepreneur, Marketing, and even Bold, are used to mean different things to different people. Appreciate how misuse of those words causes different expectations and experiences.

An entrepreneur is not necessarily a business owner; is not necessarily a startup founder.

What did I mean by that? What does that premise have to do with the thread we have ongoing here about venture capital and fundraising?

Businesses Don’t Raise Capital Like Startups and Startups Don’t Raise Capital Like Startups

Let’s start from a simple premise on which I hope we can agree: Investors need their money back. No one gives you money. Even Grants come with strings attached so stop expecting that you just get capital — what matters is what and if you can return more value to that source of capital.

C-Corps (Corporations established in the United States) have shareholders and with shareholders, such entities are able to serve Venture Capital investors because those investors are buying shares of the company; shares that that will be sold/acquired — giving the investors their return.

No C, no VC. Well, let me correct myself so you’re not misled by the C in LLC (another business entity available in the U.S.). If you’re not a C-Corp, venture capital doesn’t apply to what you’re doing. That’s not a matter of right or wrong, and it isn’t a question of how well you’re doing, how much growth you have, that your customers love you, or that you’re solving a problem, startups are generally set up as C-Corps so they are ABLE to raise venture capital (if appropriate to what they’re doing) and as such, hopefully how you can appreciate how NOT being a C-Corp, such as say, being an LLC, typically associates you more with being a business and EXCLUDES venture capital as a source of funding.

It’s not about preferences or dislike of what you’re doing! Business entities and sources of capital are set up and operate the way that they do on purpose. Most of the misleading advice and misdirection you get, frustrating you about raising capital, is because what you hear is MEANT for a different circumstance — either the source of your advice, your expectations, or your business entity is wrong, and that’s resulting in a mismatch of focus on from where you might find capital resources. This is why various sources of capital exist and why different business entities are available.

Venture capital isn’t seeking profit nor even customers in your company because what a venture capitalist requires is ownership of a company that can and chooses to EXIT (get a acquired or Go Public — referring to when a company becomes available to others on a stock market — the shares of the privately owned company are sold to others — this is how venture capital investors get their return — if you won’t, or can’t do that, then you’re just not raising VC.

An LLC is a business more than a company. More or less. People will mince words as we’ve already explored, but essentially that’s what to keep in mind — do I have a business or am I starting a company? Businesses technically can get Angel Investors, but that’s also kind of mincing words because what’s happening is that you’re getting a “business partner” who calls themselves an Angel Investor. For the most part, “Angel Investors” are individuals of exceptional disposable wealth, startup experience, and a portfolio of startups in which they’ve invested; if the “Angel” with whom you’re speaking doesn’t have that, it’s fair and pragmatic of you to question their advice and their expectations.

LLCs, and indeed overwhelmingly most businesses, don’t trade in “shares” in the same way that we do through Companies/Corporations/C-Corps/Startups. I’m listing the breadth of those words on purpose so that you might start to appreciate how the use of words can get confusing and how you, in your position, MUST question first not HOW but IF, relative to what you’re doing. In a business or LLC, yes, everyone might have a percentage of ownership, but it’s not like a startup or company; your percentage of ownership is rather fixed, and you’ll likely stay that way, unless you take on another business partner.

Let me cut to a quick rule of thumb, to get you on a better track:

Sources of capital when starting a business are typically, in this order:

  • Personal funding
  • Business partners (which might be investors)
  • Debt
  • Grants
  • Customers
  • Friends and family

Startups tend source capital in the following order:

  • Personal funding
  • Friends and family
  • Angel investors
  • Customers
  • Venture capital
  • Debt

The distinction between small business and startup are in innovation and intention

The sources of capital available to you are more than a question of how well you’re doing, they’re a question of WHAT you’re doing, WHY, the potential, the opportunity, and the outcome. Only when you are clearer about those intentions can you get clearer direction about how to start a venture with capital in mind.

Look, none of this is easy. I spoke with the City of Austin recently, where I’ve had the honor of teaching their ongoing education program about fundraising, and I spoke to them because through that class, these distinctions and disparities became painfully clear — painfully, because those classes had business owners, startup founders, and even non-profit directors, all in one room, trying to learn how to raise capital, and more often than not, I found myself teaching but having to caveat on an individual basis, “well, that isn’t how it works in your case.”

Thanks to that work with and my conversation with the City, I’m excited to share that MediaTech Ventures’ startup fundraising curriculum, that which we teach in our incubators, will now be available to founders in Austin, as a distinct class through the city; not generically “Fundraising,” but Finding Funding for your Startup. I hope you’ll check it out if that’s meaningful to you as an Austinite, and if you’re not in Austin, we’re constantly starting cohorts for founders and would love to have you join us as we’ll work with you throughout all of your earliest stages as a startup -> Apply here

Originally published at https://mediatech.ventures on July 14, 2023.

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Paul O'Brien

CEO of MediaTech Ventures, CMO to #VC, #Startup Advisor. I get you funded. Father, marketer, author, #Austin. @seobrien & @AccelerateTexas. https://seobrien.com