The Warning Label That Should Come With Venture Capital

Founder Collective
4 min readJan 7, 2019

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In one of Eric Paley’s previous blog posts, he suggested that venture capital should come with a warning label.

So we at Founder Collective made some and also a brochure warning about the risks of toxic VC.

We’ll be sending these to the founders of our new portfolio companies to emphasize that capital raised is a vanity metric and comes with many toxic side effects. We also want to use this moment to explain a common misconception that crops up whenever we write about efficient entrepreneurship and use phrases like “Toxic VC” or “Overdosing on Venture Capital.

We’re not urging our founders to bootstrap their growth or avoid raising venture capital.

While we respect the “Bootstrapped, profitable, and proud” concept popularized by the Basecamp team and think Bryce Roberts is providing a unique and valuable service with alternative funding mechanisms at Indie.vc, we remain believers (and funders) in the power of traditional venture capital to help entrepreneurs get leverage at key points in their company’s growth and encourage investment in “hypergrowth” when justified.

To be sure, there are dozens of examples of companies that have put off raising material amounts of capital and some notable outliers, like Atlassian, were able to go public with effectively no VC-backing at all. However, the overwhelming majority of successful technology companies use VC as a tool somewhere along their journey. And that’s exactly what it is, a tool. A tool to have sufficient capital to run efficient experiments and a tool to have meaningful capital to scale confident investments that are demonstrated to work. Startups need sufficient capital to achieve rational goals, but run into trouble when they have too much capital focused on growth at any cost.

In the right hands, venture capital is a powerful tool that helps accomplish goals faster than customer funding would allow. Often it is used improperly and becomes a destructive distraction that enables bad habits, perilous expectations, and shallow thinking that sinks startups. Steroids can help adults recover from injury faster, but we would be horrified by stories of dosing teenagers in an attempt to kickstart an Olympian. The same should be true of venture dollars.

Venture capital isn’t bad, but it is dangerous. Capital itself has no insights and doesn’t solve problems in a business. It can destroy a good business in the often improbable and unvalidated aspirational assumption that it can become a great one. Easy capital, along with encouragement from misaligned investors, often leads founders to burn excessively. To look down on life-changing exits that are less than unicorn dreams. To focus on competition rather than customers. Entrepreneurs shouldn’t be fearful of venture capital, but they should be fully aware of the risks, hence our warning labels.

Venture capital can be deadly. Burn responsibly.

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Founder Collective
Founder Collective

Written by Founder Collective

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