Venture Capital: A Means to an End or an Essential Partner? + Fundraising Fieldnotes 6.27.23
What can a VC really do for you?
Before we get to this week's post...
I’m here in Brazil!
Calling all founders in São Paulo - last Call for Thursday’s events. Join some of the best founders and investors around 🙂
1) Dawn Patrol: São Paulo Edition (morning of June 29)
2) Festa dos Founders (evening of June 29)
…and now on to this week’s fieldnotes for 6.27.23
Venture Capital: A Means to an End or an Essential Partner?
What can a VC really do for you?
In my initial conversations with founders, I’ve observed that most of them think of raising money from VC as a means to an end - an avenue to plug in financial gaps, reach key milestones, and ship products. Particularly for first-time founders, it seems any source of funding would do - capital is a commodity.
There are two main competing narratives about a VC’s value that founders struggle to reconcile. The first is that VCs are blood-sucking, self-serving parasites that don't actually provide much value beyond the money they provide. Vulnerable founders should limit their engagement and expectations, lest they fall prey to sharks who have a ton more experience and negotiation power. Social media accounts like @vcstarterkit & @VCBrags satirize VCs’ tendency of false promises and self-congratulation and have struck a nerve, amassing hundreds of thousands of followers and leading several prominent investors to block them.
The second narrative underscores the significance of choosing the perfect-fit VC, stressing that this choice can massively influence the trajectory and ultimate success of a startup. This narrative rallies for the VC as a strategic partner, rather than a necessary evil.
Which narrative is closer to the truth? I’ve experienced all angles of this as a former VC, angel investor, and CEO of a venture-backed startup. Let’s dive in!
The First Narrative: VC Hate
I understand where this comes from. VCs are in many ways easy punching bags. They say cringe-worthy things, dress funny, and in the worst-case scenarios, they end up promising the world, underdelivering, and taking much more value from a founder than they should for simply signing a check. This combination makes it very easy to push a narrative that founders should avoid VCs for as long as they can and that they are a necessary evil when it comes to building big businesses.
However, it's important to note that VCs don't have easy jobs. I’m not implying that they’re engaging in back-breaking work or spending sleepless nights at the office- but the vast majority of VCs don't make money for their investors and are out of jobs after a few years because they can't produce returns. They invest in super risky assets with a high chance of going to zero. The only way their business model works is if they capture enough value when companies in their portfolios are successful to cover the losses from other high-risk bets.
Casual observers will see VCs take a monumental amount of value and make billions off one bet, making it appear to be relatively unearned - haphazardly throw a few mil in without adding much value, benefit off the company’s creativity and strenuous labor, then have an outsized profit at IPO. The reality is that VCs are constantly balancing the blended risk and effort across their whole portfolio and often spending both personal time and company resources supporting their portfolio companies - not to mention the continuous work of raising for their own funds.
From this perspective, labelling VCs as valueless parasites is rather dismissive.
The Second Narrative: The Perfect-Fit VC
The second narrative suggests that a VC makes all the difference between success and failure, and that you need to carefully select the perfect investor. Founders should strive to only work with an investor who aligns perfectly with their vision and ambitions.
While the spirit of this narrative is accurate, the reality is that very few founders have the luxury of choosing which investors they get to work with. In many cases, you'll have to take the money you have access to in order to keep building a company that requires upfront capital.
Even when a founder able to bring on a super valuable VC, their expectations have to be tempered. VCs alone are not kingmakers; they do not drive companies to product-market fit or create flywheels that spin.
That being said, there’s something special about having someone who is truly invested in your success, understands your market, and possesses a valuable network to help grease the wheels. The right VC can have a major impact on the ease of fundraising in future rounds, the achievement of milestones, and even business deals and transactions.
Stimulating productive growth: The right VC can provide guidance, resources, and connections that help a company achieve milestones and grow faster.
Providing credibility to future investors: A well-respected VC on your cap table adds credibility and comfort, making it easier to attract additional investors in future funding rounds.
Introducing founders to future investors: VCs can leverage their networks to connect founders with other investors who may be interested in participating in future funding rounds.
Being instrumental in getting deals done: Transactions, acquisitions, and other business deals often hinge on relationships. Top-tier VCs leverage such relationships and can be the difference-makers in these deals.
When I was at Greycroft, I observed huge fund-returning deals and life-changing exits for founders. One message I heard over and over again was that “This deal does not get done if Greycroft isn’t on the cap table.”
What this highlighted was the instrumental role relationships served in closing these deals. In many cases, especially with large-scale mergers and acquisitions, the difference between a billion-dollar outcome or an unfortunate business closure is incredibly thin. It's a narrow, precarious gap, similar to threading a needle. In such delicate situations, the relationships fostered by venture capitalists can indeed make all the difference.
Finding the Middle Ground
When evaluating VCs and their potential contributions, it's important to adopt a balanced perspective. VCs are neither the valueless parasites depicted in one narrative nor the exclusive difference-makers portrayed in the other, especially for the majority of founders who don’t have the luxury of choice. As a founder, the responsibility lies with you to create a process that allows you to choose the best-fit investor and to leverage the value they bring once they join your cap table.
Next week, I’ll dive into the best practices for leveraging the value of your investors. Stay tuned!
Team is everything is one of those cliches that is so hard to embrace without experience
Startup success is all about people
- who you hire
- how you hire
- how you empower
- how you inspire
— Rachel Soper Sanders (@rachelssanders)
Jun 25, 2023
People will fund growth but now they need to see you prove unit economics first. Not super easy…
Most fintech companies grew super fast in 2021-22 because it turns out “giving away money for free” is incredible for growth.
It’s pretty terrible for business though.
The reckoning is happening now.
— Romeen Sheth (@RomeenSheth)
Jun 27, 2023
Look at that confident stance! I’m sure they got the job :)
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