Lesson Learned: Venture capital is frequently a trap and incentivizes bad habits.

This blog post is part of a series of leadership lessons that I have learned from 40 years in tech.

I understand why venture capital exists, and I have participated in both sides of the equation. When applied to the right companies, in the right way at the right time, it has fueled incredibly innovative, successful, world-changing companies. Uber, AirBNB, and Apple are canonical examples, and there are so many others. Some companies need a financial jumpstart or they will never get off the ground (though less so with SaaS businesses and today’s pay-as-you-need-it infrastructure). Not to mention the expertise and support systems that the best VCs bring to fledgling startups. And some companies need a boost to reach that tipping point where they become profitable and can self-sustain. So, lots of reasons why VC is a great tool to help startups achieve success.

But I believe the most successful and sustainable businesses, with the best outcomes for the people who built it, focus on profitability early, fuel their growth with profits, and use outside investment sparingly and strategically. For example, use venture investment to make a strategic acquisition or accelerate a move into a well-defined market. Focusing earlier on product market fit and organic growth over VC-fueled growth instills good habits, and ensures that when you hit the gas you will have the rocket pointed in the right direction. It also has the positive side-effect that there is more equity left for the people who actually built the company when you finally hit it big.

I never understood companies who celebrate fundraising rounds as if it is a big accomplishment, when really it is just an indication of someone’s confidence in the future, and their desire to get a piece of it. It’s not an accomplishment in and of itself.

One company where I worked based its business strategy on “what is the story we need to tell to raise the next round, and what do we need to do to make that story true?” I thought it was a good thought experiment but it also created perverse incentives, dictating priorities based on short-term venture money, rather than long-term benefits for our business and customers.

In short, VC is great to enable very specific objectives that otherwise could not be achieved in the needed time frame. But don’t let it be a substitute for taking the time to find product market fit, building your business for long-term success, and rewarding those who built it.