We need “Venture Capital” to be split in two — the 1% and the 99%

Tldr: I‘d love to find a new term for venture capital which still means ‘early stage money’. I’d love founders to not feel shame if they don’t get A16z or index deeming you worthy of a billion dollar path. I’d love more acceptance that founders can have great outcomes, and often a better life, with early stage capital that accepts fast (but slower) growth and big (not insane) outcomes. That’s just not today’s narrative.

It builds on ‘Should I take venture capital, No’ where – although I love (and Invest In) ‘the billion dollar thunder lizards’ – I believe there should be a better defined and less stigmatised path for the 99% of tech founders that fit ‘fast growth’ and ‘ambition’ but not the ‘billion dollar company ‘mould’. Here goes….

In reality there are two very different types of venture capital:

  1. The ‘Capital V’ – the 1%

This is the kind that fits with Balderton / Accel and other VC fund economics (and growth expectations). I call these the 1% and have outlined their incentives and motivations in this post here.

2. The ‘Small V’ – the 99%

These founders need venture money (ie people prepared to invest at an early stage) but will likely never build – and may not truly desire — the life that comes with a billion dollar outcome. There are many reasons you may not ‘fit’ including market size, model, and founder temperament. These are the 99% for whom there are multiple ‘less sexy’ funding paths including crowdfunding / family offices / angels and corporates.

The problem comes when founders conflate the two types of capital in their heads

Pretty much every founder I know thinks they want the ‘CAPITAL V’ whereas in reality they would have better outcomes taking ‘small v’ — more patient capital that is understanding of less big outcomes.

This is because “You can be Zuckerberg” and“You can be a billion dollar company” is the dominant narrative in tech BUT a simple look at the stats tells you this is not the optimal path for most founders.

VC funding comes with a low probability of success and can kill companies. This can be heart breaking – especially if the company is your true calling.

I’ve seen:

  1. Companies grow fast – but not fast enough. Dead.
  2. Founders happy selling to make £5m to £15m personally but being blocked. Dead (in the long run).
  3. Companies grow too fat too early (dead)
  4. Valuations sprinting away from fundamentals (dead)

Ie in short..companies killed because of misalignment between what you want and what ‘the 1%’ want. They have lost the ‘optionality’ from the get-go.

Why is this?

It happens for many reasons:

  • Venture capitalists don’t educate people in their model
  • Founders don’t take time to work out what they really want in life.
  • Socially it has become ‘unambitious’ to have a £200m company without raising a bucketload of capital.

Again — I play the ‘Capital V’ game. I love ambition. I wouldn’t care about this if it wasn’t for all these founders thinking they are shit because they don’t fit the model. I am simply pro education and pro de-stigmatisation .

So…

I have three wishes:

  1. A new term for the 99% of venture (ie early stage investing). It can’t be derogatory ie ‘lifestyle’ or ‘cash flow’ as these founders are ambitious and can have fast growth businesses ie 15 to 20% per month)…...

Patient capital business? Fast growth businesses ?‘Venture plus’ businesses ? I know someone can do better than these?

2. Founders to ask themselves these questions before going for Capital V:

  • Do you like growth at ALL costs? Including to yourself.
  • Do you want to give up ( in practical if not % terms) all control of your company?
  • Are you happy with a personal outcome of £5m or only £100m plus ?
  • Do you have a model and market size which fits with what balderton index and Accel want?

In sum, there are many paths to a great life — not just the life you are told you want.

Love to know your thoughts and thanks to David Hickson for the inspiration :)

If you liked this and want more then this is 😊 Me , 💵What I invest in,⚡A belief in corporate innovation and 😱A movement I helped start by accident . Check out www.thebakery.com and www.saatchinvest.com

Postscript from David Hickson

“Ha — love it :)

Couple thoughts.

Imo venture is lazily categorised as meaning ‘unicorn hunting’ by VCs with big funds that need literally massive exits to return their mega- fund. You know how I find lazy characterisation (aka naive narratives) anathema. Like most things in life, it’s more complicated that that.

Actually, venture (small v) is an investing style. It means investing into a company for a minority stake on clean terms with the aim that the company can scale as a function of capital. The clean terms bit is important, because you aren’t focussed on mitigating downside (like those aggressive PE terms we discussed) but see your returns by multiples on the upside. You know that you can only ever lose 1x but you could get 5000x (Uber).. and of course everything in between (subject to a reasonably well understood probability distribution function)

Venture (small v) is actually fractal. You can (say) invest 100k 5x and have one 10m outcome and return your investment. Its still probable that some of your portfolio will fail, but small exits become winners.

To restate, venture is an investing style, but its often conflated with [the narrative that is] VC (maybe verb versus noun?)”

VC Partner@SAATCHiNVEST. Seed investor in Citymapper, Farewill, Ometria + more. Chief of Staff@Redbrain. NED@Picassolabs. Founder Linkybrains.com

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