A lot of founders that pitch to us miss a fundamental point of venture funding – VCs are all about trying to find really big outcomes. They want to discover the startups that will grow into 200million, 300million, 500million, billion dollar companies. Such companies are – to borrow a phrase from current political discourse – the few, not the many.
And so, as a founder, perhaps the most important part of the pitching process is convincing the investor that there is a chance that the idea you’ve got, the business you’re running, can get to that size. That’s difficult, especially as you might not yet have any revenues to speak of. But some entrepreneurs we see don’t talk at all about how big the opportunity could be.
We want to see these opportunities clearly articulated, preferably from the bottom up – with solid evidence of how many potential customers exist and what they would be prepared to pay for your product – rather than a top-down view of possible total market size and no indication of how you will capture a sizeable chunk of it.
The dream you’re selling to VCs is the potential for exponential growth. I’d say that at least 90 per cent of the companies that pitch to us will never be able to build a company of sufficient scale because the market they are attacking just isn’t big enough.
We often see companies who do have revenue and customers, who are looking to scale and they want to raise something like £1million for an 18-month runway to push the product into new markets. But unless doing that is going to lead to a big outcome – in the order of hundreds of millions in revenue – it’s not really an exciting enough prospect from a venture perspective, strange though it is to write that.
Most companies don’t have such potential, but that doesn’t mean they can’t be highly successful and very profitable. They’re just not the kind of companies that VCs get excited about.
Early stage venture is about putting in a comparatively small amount of money at seed stage so that 12-18 months later, a company can raise a Series A from one of the big investors – the Baldertons and Accels of the world – who will tell you (with a straight face) they only invest in a company if they think it can be a billion-pound business.
Most companies will never get that big – how many billion-pound companies is it possible to create? But that’s the background against which we operate, so we have to work with the teams we do invest in with a view to passing them upwards.
So, it might be that a company is doing great, with good revenues, interesting unit economics, and the ability to grow both those things. But unless they have that potential for really significant scale, the VC path is probably not right for them.
This is not necessarily a bad thing. Raising venture funding is a means to an end, not an end in itself.
In this 24/7, TechCrunch-covered, Twitter-commented world, too many entrepreneurs are obsessed with raising money. Too often, success is defined as a big fund raise. It’s sometimes forgotten that, actually, the object of the exercise is to build a business that’s sustainably profitable.
The only reason for raising money from a venture firm is to grow faster, and for some businesses – for most businesses – that is the wrong answer. What they should do is raise money another way, either from angel investors who know the space the company operates in or (a radical one, this!!) from customers, by generating revenue.
For an angel investor, a slice of steady growth in a small, early stage but profitable business can be attractive. From the founders’ point of view, it can make more sense to try and raise as little as possible, so they can retain a bigger stake in their business.
A lot of VCs refer to these as ‘lifestyle businesses’, which is a term I really hate. The people running these businesses are probably working just as hard as those building super high-growth firms, only the market they serve is never going to be big enough from a venture point of view.
These founders might end up making more money, personally, by raising a smaller amount from non-VC investors. The recent coverage of the FanDuel exit, which is said to have made the founders precisely zero $, is a timely reminder of the Faustian bargain that the VC funding route can involve. A company that raised tens of millions of dollars and was proclaimed a unicorn by commentators left the entrepreneurs with nothing.
By contrast, I recently had an exit from a personal investment, where the sale, after three years of hard work and skill led to an exit in the £10m–£20m range, a nice return for investors and a very handsome payout for the team inside the company.
So be clear and realistic about what you’re building, be sure that your interests as founders are aligned with those of your investors, and focus on the goal – building something long lasting and self sustaining.