The VC Brand Crisis of Identity.
A discussion on the WSJ article about Venture Capital by Erin Griffith.
“The V.C. business model, on which much of the modern tech industry was built, is simple: Start-ups raise piles of money from investors, and then use the cash to grow aggressively — faster than the competition, faster than regulators, faster than most normal businesses would consider sane. Larger and larger rounds of funding follow.
The end goal is to sell or go public, producing astonishing returns for early investors. The setup has spawned household names like Facebook, Google and Uber, as well as hundreds of other so-called unicorn companies valued at more than $1 billion.” - WSJ Article by Erin Griffith
The thing that people, especially venture capitalists forget, is that we are in the service business. Without entrepreneurs, we have nothing.
Many people in venture either disagreed with this article by Erin Griffith or believe it’s true, Twitter is full of differing opinions on the matter. I’m not one to say who is right and who is wrong, I believe on a long enough time horizon both sides are right, and both sides are wrong, what I do think that this article is a conversation about three things:
A miss-match of expectations when Venture Financing is raised.
A certain broader awareness and self-awareness of what Venture Capital represents.
And whether a Non-VC backed startup can beat a VC backed startup.
One of the largest problems in the startup world is the brand of ‘Venture Capital’. Venture Capital means different things to everyone. It is like saying finance, or sports, or travel: These words don’t encompass anything specific, so people extrapolate their meaning based on context, and that context is where the translation has problems. The brand of Venture Capital is so strong that it encapsulates all equity based financing of startup companies, when really the business model of a Venture Capitalist, Angel Investor, and growth Venture Fund all have different business models and different incentive structures. Even inside of people who I would consider to be Venture Capitalists, their incentives are wide ranging and different, there are strategic investors, Family Offices, and Brand name VCs. It’s a branding problem, not a “VCs are evil” problem.
Now, don’t get me wrong, Venture Capital needs a shake up, and maybe this article is yet another data point. But there’s no arguing - VCs have branded their thought leadership so well that people think that all the financing business models are the same, and that venture capital is necessary to even take a step toward building a startup. I keep running into the problem of validating a business model. Entrepreneurs will pitch me and say “I’ll build it if you invest.” Which is not one entrepreneur mentality.
I was in a situation recently, where a startup had built a useful dev tool, and I thought it was so valuable that I wanted to invest in it, assuming that they would want to partner to fuel a few new hires. That is not always true, and after getting to the finish line on the deal, the founder backed out, not because it won’t be a great business, but because the idea of raising “Venture Capital” scared him. Which is a problem on the other side, where there is some expectation that a VC is going to be over your shoulder all day every day, watching. Which, every VC is different, so that’s definitely possible.
This discussion get’s to the heart of the matter: Why do VCs exist?
There is an expectation now that VCs are the king pickers of the world. Google, Facebook, Twitter, Baidu… are all venture backed. Was the venture capitalist the deciding factor of these companies? You would have to ask them. Could they have won without venture capital? Are VCs required at all?
In my mind there are three reasons for Venture Capital as a startup, and four different stages:
The three stages are:
Do you see an opportunity? Do you see a problem that needs to be solved?
This happens in college, in your current job, when you are on a walk, while you see an injustice happening.
Can you build a product that solves a problem? Can you get customers to pay to solve this problem? Is the problem you are solving even a problem?
This is 0-1. Is there a product?
How big is the market? Can you get to certain milestones? Can you attract talented people to work with you? How big is your market? Can you build a brand?
How much money do you need to acquire how many customers?
And the reasons are:
Now, the Venture Model has become something different. The evolution is happening; Funds like YCombinator and Boost VC are attempting to own the idea stage, and corporations like Softbank are attempting to own the exit. So everything in the middle is being squeezed one way or the other. You watch Sequoia raise larger and larger funds, you see Andreessen create separate funds for different sectors.
I’m realizing how much I think about on this topic, and I don’t have enough time to discuss them all in this one post. I’m fascinated with these changes. I think they are going to eventually deliver a much higher quality service to the entrepreneur.
By Adam Draper
I ponder as a VC.
It's a quick one minute read to make you think, smile, or laugh.
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