The True Cost of Capital: What I Learned After Saying Yes to Venture Funding
By: Brad Pedersen
In 2019, I made a decision that went against everything I'd learned after 30 years of building companies. I took venture capital money.
For three decades, I'd bootstrapped my way through 7 different ventures. Most had lackluster results however one provided a path to an exit that created a life-changing level of freedom.
All of them taught me the same lesson: When it’s your own capital on the line, discernment sharpens; every dollar spent and every person added carries weight. I'd watched friends take VC funding in an attempt to scale fast. Some succeeded spectacularly however others crashed with as much or even more spectacle.
My history of growing businesses through major challenges meant I liked staying lean and I also wanted to ensure that I never lost control.
That changed when the “right” circumstances came about.
The Shift
After I left the toy business, I co-founded Pela Case, a DTC company focused on making eco-conscious protective accessories for mobile devices. We were growing faster than we could keep up with. The product was awesome, the demand was real and for the first time in my career, bootstrapping our way through it did not seem like the right thing to do.
At the time, DTC companies were in vogue and everywhere we looked, the signals from the market were that we should raise money. So my partners and I sat down and contemplated raising to fund our growth.
Initially everything in my gut said no. That said, we had aggressive growth targets that would need capital in order to meet. We also had a significant amount of interest and it felt good to be the “beauty at the ball.”
So while my gut was uncertain, in my head I knew we needed fuel for what was ahead. So we said yes.
What I have learned since, has changed how I now think about growth.
Two Types of Growth
There are two ways to grow a company and they couldn't be more different.
The first way is unbridled fast growth. Here the focus is to meet topline goals, and as a result you hire quickly and launch new products without hesitation. You expand into new markets and channels and quickly build out a large organizational chart. From the outside everything looks impressive, with revenue and headcount going up.
Having done this a few times, I will be the first to tell you that this seems like a fun ride while everything is up to the right. The problem is that this often results in the business getting fat instead of strong. Fat means bloated with complexity you don't actually need. It means people who aren't sure what they're supposed to be doing. It means systems that break under pressure when things get hard. It means growth that feels exciting in the moment but isn't sustainable over the long haul.
The second way is controlled strong growth where you build with intention and discipline. You stay focused on the right metrics (which rarely includes the topline), and hire only when the pain of not hiring exceeds the pain of adding complexity. You build systems that actually work under pressure, and you stay lean even as you scale. Strong growth doesn't look as impressive in the short term, but it's the kind of growth that puts your enterprise on a path to becoming durable and enduring.
What I didn't know I had agreed to
When we decided to take VC money, the game changed in ways I didn't fully anticipate. Here's what nobody warned me: When you accept VC money, you’re not just raising capital, you’re aligning with a playbook that prioritizes speed and exit over sustainability. Raising money is not an accomplishment but rather an obligation.
Your investors aren't bad people trying to ruin what you've built, but they have a job to do and that job requires getting a return on their investment. In the world of VC, it is a game of numbers. One in ten, that is the expectation. Of the bets they place, most are going to fail and one is going to provide the outsized returns to pay for the rest. The key indicator of those returns is fast top-line growth, not profitability. To get asymmetrical returns, VCs are looking for exits driven by revenue multiples, not earnings. At the time of our fundraise, valuations were primarily driven by revenue growth, so the path to a high-value exit was clear: achieve extraordinary top-line growth at any cost.
Nobody tells you what to do in explicit terms. There are no demands or ultimatums in the early days. But the expectations are always there hovering in the background. You begin to feel the pressure in every board meeting and at every quarterly update. You sense them in every conversation about the next milestone or the next round.
The Lesson I Should Have Known
So with the VC funding in the bank, the pressure to use the capital to grow became palpable. So grow we did and chased the topline numbers
From the outside looking in, it appeared like we were absolutely crushing it. But inside the company, things felt fundamentally different in ways that were hard to articulate to anyone who wasn't living it. We had more people on the team, but somehow we had less clarity about who was actually responsible for what. We had more revenue coming through the door, but our margins were getting thinner because we were spending aggressively to fuel growth.
We looked successful in presentations to prospective new investors but we felt bloated as we had lost the bootstrapping edge. Here's the truth I wish someone had pulled me aside and told me before we ever took venture capital into the business: Money doesn't actually solve problems; it temporarily sugar coats them while amplifying your insecurities.
Reid Hoffman is famous for saying “Starting a company is like jumping off a cliff and assembling an airplane on the way down.” It is humorous but true. In that context what money does is gives you more time for assembling the airplane. In other words it buys you time to solve those problems and if you don't address the underlying issues during that precious window of time, the money eventually runs out.
When you're bootstrapped and every dollar counts, you have absolutely no choice but to solve problems head-on. You can't hire your way out of hard situations and you can't buy your way out of difficult challenges. You simply have to roll up your sleeves and figure it out through creativity and grit. That constraint is painful in the moment and feels limiting when you're in it. But that pain and limitation is exactly what makes you strong and resilient and which will later provide the ability to survive anything the market throws at you.
A Different Path Forward
I want to be clear about something important: I'm not against venture capital as a funding mechanism. It absolutely has its place in the business ecosystem and can be the right choice for certain companies at certain times.
Some businesses genuinely need that fuel injection to capture a market opportunity before someone else swoops in and takes it. Venture capital has a place and serves a purpose in those specific cases. But here's the hard truth I've learned after experiencing both sides of this equation: I believe the majority of businesses would see more harm than help by taking VC money.
Venture capital comes with an obligation; not just to return the money, but to deliver a return that justifies the risk. That means chasing aggressive growth targets, often independent of what the market supports or what your business truly needs. Furthermore in doing so, you create a high hurdle rate that makes a meaningful exit increasingly difficult. Many founders who have a thesis that does not work out exactly as they hoped, eventually find themselves facing a paradox: the size of the required outcome is enormous, but the odds of achieving it are slim. This erodes motivation, undermines morale, and makes it harder to attract or retain the kind of leadership that the company needs.
If you do decide that venture capital is necessary for your business, the single most important thing you can do is pick the right VC partners who have aligned interests and be brutally explicit about the expectations that will provide for strong healthy growth rather than just fast growth.
What This Means Moving Forward
Fast growth feels good in the moment and gets your adrenaline pumping. It looks impressive on your profile and in your pitch decks. It makes for great stories at conferences and on podcasts where everyone is comparing growth rates and valuations. But strong growth is what actually compounds over time in ways you can't fake or manufacture. It lasts through market downturns and competitive pressures and economic uncertainty. It builds something you're genuinely proud of when you look back 10 years later and see what you created and how many lives you impacted.
Most importantly, it is about picking your partners well and being explicit on growth and outcome expectations from the very beginning. I'm deeply grateful for our VC partners who have been through “the mud, the blood and the flood” with us over the past few years of tumult in the DTC world. They initially backed our fast growth trajectory, but as reality set in, they proved to be extremely accommodating to revise our plans. They understood that fat growth isn't sustainable and that strong growth is ultimately what drives lasting value. They gave us permission to optimize for building something strong instead of just something fast. That flexibility and alignment has made all the difference.
The real question to ask yourself before taking any funding isn't about valuation or growth rates. It's this: what kind of company are you actually trying to build? Are you building something fat that looks good on paper but feels hollow inside when you're honest with yourself? Or are you building something strong that might grow slower but will stand the test of time and create lasting value?
The money you raise and how you use it will shape that answer in ways more profound than you think possible.
So this week, ask yourself:
- Am I building for speed or for strength, and what's driving that choice?
- What problems am I avoiding by throwing money at them instead of solving them at their root, and what would change if I had to solve them with half the resources?
- If I had to build this company with the discipline I had when I was bootstrapped, what would I do differently starting tomorrow?
P.S. When you're ready, there are three ways you can access more of our teachings:
- Visit our website for blogs, quick videos and key teachings. Click Here to access.
- Read the book Start Up Santa and discover non-obvious business lessons revealed by timeless toys. You can get it HERE or HERE.
- If you are curious about what it means to live your life to the full, then we invite you to apply for the Full Spectrum Mastermind. This is a curated experience for accomplished leaders ready to move from striving to understand how to truly thrive in life. Register now to be considered - this isn't for everyone, and that's by design.