No, actually you don’t need a VC.

by | Aug 2022 | Early-Stage Capital

But they might need you!

Many startup founders, when looking for early-stage capital, automatically assume they need VCs (venture capitalists). Most are wrong. Hours upon hours of founders’ time is wasted chasing the wrong kind of investor. This is time most startups simply can’t afford to lose. Ironically, however, VCs will often take your meeting.

So what’s going on?

If a VC agrees to meet with you, it’s not necessarily a buying signal. Sure, most of the time it’s because of something you said or did, but that’s not necessarily your startup. Maybe you’re connected to the right people, maybe you went to the right university, or perhaps you’re doing something of relevance to one of their existing portfolio companies. I’ve seen VCs take meetings for many different reasons, even when they’re 99% sure there’s no interesting investment opportunity to discuss. This is something first-time founders need to be aware of.

VCs take these meetings because they have a very specific job to do. No, it’s not to find good businesses to invest in. Yes, you read that right.

VCs are not looking for good businesses to back. VCs are looking, exclusively, to invest in, and then support, potentially sensational businesses.

So why do VCs take your meeting?

In some ways, founders and VCs are aligned. In others they’re poles apart.

Take attitude to risk and failure, as an obvious one. VCs place many bets, knowing that most of the startups they back will not succeed. A total loss is never the desired outcome, but it is par for the course. Failed startups are collateral damage. If the VC has done his job well, a complete write-off is not, by any means, a catastrophe. For a founder, on the other hand, who may have poured their life’s savings, and ten-plus years into their startup, a total failure is nothing short of a disaster.

Another example of how VCs and founders differ is what success looks like. This is the part that many founders miss.

VCs subscribe to the power law. This is a concept that shows that the vast majority of returns in venture capital are derived from just a handful of startups. If a VC can get into just one of these deals, their fund or perhaps their entire career, will be considered a roaring success. If they don’t get into one of these deals, their returns will be average, at best.

What does this mean? Well, for founders, it means three crucial things:

For VCs, there is no such thing as a medium success.

VCs aren’t looking for a $20m exit. That would equate to a missed opportunity, wasted time, and wasted effort. It’s not as bad as a total write-off, granted, but it’s not the desired outcome. Pretty often, companies that look destined for a mid-level success will be sidelined, if not ignored, because it makes sense for the VCs to put all their efforts into the potential unicorns.

If your startup isn’t a billion-dollar opportunity, don’t even bother with VCs.

Unless there’s a consensus within the VCs investment committee that there’s a clear line-of-sight to an opportunity worth tens of billions of dollars, you’re not going to get a term sheet. It’s just not how VCs work. So don’t even meet with them. Focus your efforts on investors to whom a $50m exit would be considered a great success – family and friends, angel investors, perhaps family offices. Talk to corporate VCs and other strategic investors, who may have more to gain than just a financial gain. Are you disrupting anyone significant? Could they gain from being part of the action?

VCs are sometimes happy to waste your time.

As mentioned above, the core driver of a VC is to ensure they don’t miss out on the next Google or Amazon. That means, they need to meet everyone! Although your startup may not be attractive, for all they know, you may be related to the next Zuckerberg or Bezos. VCs need to leave no stone unturned. That means they’re prepared to take a lot of seemingly wasted meetings. When you’re planning your fundraise, make sure you optimise your time. Focus on meetings that are good for you, not just good for someone else.

Plan your fundraise

I’ve said elsewhere, this all comes down to raising intelligently and strategically. Don’t just start meeting people – pick your battles. Take time to plan your raise. Define your investor base by researching who is most likely to invest in your space, stage, and market.

If someone doesn’t fit, don’t waste time on them. Or at least qualify why they want to meet. It may not be what you think.

Image credits

– Money image by Steve Buissinne from Pixabay.
– Soldier image by ErikaWittlieb from Pixabay.

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