VC (Probably) Isn't Right for You
One of the greatest privileges of being a VC is that I get to meet incredible founders every day. Week-in-and-week-out, I get to hear the audacious ideas that founders from all walks of life have come up with to literally change the world. As a former founder, I take that privilege very seriously.
But if I’m being honest, it’s not only out of obligation. I really enjoy helping founders.
And I’m not the only one.
A packed house in Inverness, Scotland
Last week, I led a delegation of Silicon Valley investors on a tour of Scotland as part of a joint initiative by Panache Ventures and CodeBase in support of the Scottish Government’s Tech Scalar programme.
Together with Monique Woodard of Cake Ventures, Marvin Liao of Diaspora Ventures, startup and fund advisor Mike Sigal and Casey Lau, host of Web Summit, we met with startup founders at packed events and intimate office hours in Edinburgh, Glasgow, Dundee and Inverness, sharing stories and answering questions on all manner of topics.
The one topic we kept returning to? The fact that VC isn’t right for 99% of startups.
I’ve previously written about the fact that market matters most to VCs. In order to generate returns, VCs look to invest in companies that have the potential to exceed $1B in valuation in 7-10 years — which typically means $100M+ in annual revenue. Most markets simply can’t support that level of growth. And even if they can, most companies aren’t structured to grow that fast.
Both of these are okay. In fact, they’re better than okay. Time-and-time again, our panel of VCs found ourselves dampening the allure of venture capital funding and encouraging founders to not view VC as the end-all-and-be-all.
It was an uphill battle.
Monique Woodard, Managing Partner of Cake Ventures, shared that as part of her diligence process she asks founders to describe in detail how they plan to get from where they are today to $100m in annual revenue. 9 times out of 10, the founders she meets haven’t thought through what this means in terms of the growth trajectory for their business.
Monique Woodard dropping knowledge 💣s in a trendy Glasgow brewery
The reality is that the vast majority of businesses cannot possibly support the type of super-linear growth required to go from zero to $100m+ in annual revenue in 7-10 years. Marvin Liao of Diaspora Ventures noted that companies whose revenue grows linearly with the number of employees, like consulting firms, will never be able to achieve this. That doesn’t mean those aren’t incredible businesses — it just means that they’re not a fit for VC funding.
Unfortunately, many founders aren’t ready to hear this.
Between the deafening hype of VC in the media and the encouraging yet often misguided notion that all founders need to do is find “just one investor” who sees their vision, too many founders get caught up on an endless quest to find mythical investors that simply don’t exist.
I was a wonderful father.
The real shame is that many companies have all of the raw materials necessary to build solid, sustainable businesses if the founders simply focused on generating revenue instead of searching for external investment. One of the greatest disservices of the VC hype machine is that it’s convinced many founders (and ecosystem supporters) that VC funding is the only way to build a tech company.
The vast majority of founders we met during our week-long trip were building businesses that are fundamentally not VC-backable. Of the 200 or so startups we met across Scotland, only one or two were companies with the potential to be VC scale. Not only is that to be expected, it should be celebrated. Those numbers are exactly what they should be!
As VCs, we need to do a better job of educating our ecosystems on what is / is not a fit for venture capital as an asset class. Think about how many founders spend hours in search of capital without realizing that it’s fundamentally not there for them. What if those founders instead focused on searching for early customers and revenue? Our ecosystems (and economies) would all benefit.
There are entire categories of companies that need to be built but will never be a match for VC funding. Opportunities such as:
Non-profits
Small businesses
Startups servicing niche markets
Startups servicing geographically constrained markets
Consulting/services businesses
We need to encourage and celebrate all manner of tech businesses and help make clear which ones are / are not a fit for VC. One piece of feedback I received from a founder in Dundee summed up exactly why this is so important:
Thank you! I’ve been wasting my time going after VCs without anyone explaining why it wasn’t for me. That’s not the type of business I’m building. Now I can focus.
To me, that’s a win.
A Canadian, an American and a Scottish VC walk into a bar…