There are a lot of unhappy people out there.
Specifically, founders. And LPs. And, even, VCs and angels.
Specifically, women. Men. Black people. White people.
Every type of people.
The issues of the venture capital industry are not restricted to a group of people (surprising, I know.) However, they are felt and perceived first, by underrepresented founders – particularly women, coz we be gifted in that way (emotional intelligence, anyone?)
Female founders are making noise because they are the canary in the coal mine.
But what are they saying?
Having led The Female Founders Lab, my virtual accelerator for early stage, purpose-driven, primarily female, founders, for five years, I have a few insights to share from this dark coal mine of founder experience:
- Institutional VC firms aren’t investing pre-seed. They aren’t deploying capital. At least, not in rare circumstances – this is regardless of whether the founder has had $1m in revenue till date, they are using AI or are not, or have a groundbreaking vision and personality. It doesn’t matter – they will not invest. No matter what. So, I tell founders to raise their first $2m from angels only. (Technically, according to Carta, $200m was deployed in pre-seed capital in the US in Q1 of 2024 – which comes to about $1m into 200 startups. And it’s unclear how much of it was institutional versus angel.)
Why is this a problem? If those claiming to invest in early-stage founders are simply not investing, it’s misleading founders on where they need to go to secure capital, and wasting months of their time in “having conversations.’’ Even worse, because of the reputability of raising from a VC firm, it's creating havoc on founder self-worth and sense of validation from the investor market.
What’s the source of this problem? I think it’s risk aversion and herd mentality, along with the fact that most firms invest in very niche sub-sects of industries they know really well.
- Institutional VCs are still going by the same formula – they assume that the minority of their portfolio companies (1 out of 10) will survive and achieve 100x growth. The rest are a write-off. From the founder perspective, this creates Hunger Games energy, which isn’t conducive to stable, high profit margin foundations, or healthy team culture. What if the goal was that “portco’s” (portfolio companies) would achieve a minimum of 3-5x, and anything beyond that is gravy on top? I believe that 10% would still become moonshots, while at least 70% more could survive and simply exit at various levels (through micro-acquisitions, equity buy-back, paying back through dividends, or other mechanisms).
Key takeaway: If we focused on company survival rate (incl. by investing in coaching and capacitation and aiming for reasonable returns for 80% of them) rather than boom-or-bust moonshots as a strategy, we would see much healthier VC portfolios, happier LPs, and more importantly, more thriving companies, less trauma for the people working at these companies, and more impact.
- Many tech venture business models succeed only at scale – which means they need to keep raising capital to succeed. Tech ventures are a special breed of business, because they are leveraging a core capability that often only works at scale. But once it does, the implications of it are beyond belief. For example, the sharing economy only worked at scale. Democratizing access to data, in healthcare or for transparent supply chains, only creates value at scale (once there is enough data or consumers.) These types of companies tend to have slim (if any) margins in the first several years but often become unicorns quickly due to the proprietary tech and networks they create. These are the types of companies venture capital was meant to fund. But the risk is great that they don’t make it to the finish line. If the value they would hypothetically create is of utmost importance to humanity, and has ethical and transformational elements which should not be lost along the way, how do we protect these ventures? Remind them that Cash is still King, and you should never be reliant on venture capital.
Cash is still King and don’t be reliant on VC: If you’re building something that can shift an entire industry at scale, then you better bake in elements that work while you’re still “not at scale.” This can look like high margin B2B contracts, or perhaps a highly customized, high-margin revenue stream for a niche audience. Because you can’t count on being able to access the venture capital you need to scale, you need to prioritize the self-sovereignty afforded by cash flow. Cash is King.
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