Should I take venture capital?
Tldr: Don’t blindly assume you should take vc because it’s what everyone does, think about the life you want and work back.
Founder: Should i raise venture capital.
Me: No.
Founder: Yes but
Me: No.
This is what i say to 99.5% of companies. Here is why. It is all to do with fund economics and if nobody has ever explained these then please read on…
Warning: this uses “directionally right” numbers but ain’t no spreadsheet. I keep it simple, I ignore ‘carry’, ‘fees’, ‘recycling returns’ and the fact very few VC’s actually 3x a fund. All good? Ok, let’s go…
What do VCs need to return?
- Let’s say a VC fund has £100m. Their game is to “3x the fund” within a decade. In other words, at the end of 10 years the VC says “thank you mr LP investor for my bag of £100m, here is a bag of £300m back. Pleasure doing business.”
How do the maths work here?
Let’s assume the following:
- The VC fund had a portfolio of 20 companies
- On exit the VC fund owns an average of 10% in each company
- So…in order to turn £100m into £300m the entire portfolio needs to be worth £3bn
ie 20 companies x 10% ownership x £3bn = £300m returned in a bag to investors. WHOOP. BINGO. YAY.
But wait. Your company is one of 20 in a portfolio, how have you done Mr Founder?
This is key.
The distribution of returns across your portfolio of 20 is shaped like a powerlaw. It’s just how it works. Always.
The upshot is that all of the VC fund’s returns come from only 1–3 companies. The rest don’t really matter and it is why ‘unicorn” hunting is such a thing.
“Why does this matter?” I hear you ask
Well, in a power law world, your VC wont care about you if you are not in that small club of ‘fund returners’. You become irrelevant to their fund return
Your company will be in the wilderness.
You may not have done loads wrong. You just weren’t on the crazy fast growth path that the economic model demands.
So, why should 99% of companies not take venture capital
Let me be crystal clear here…
It is highly probable that your company will NOT be worth £1bn+. Your chances are statistically tiny.
Those 1–3 fund returners are exceptional IN THE PORTFOLIO and each portfolio will represent only 0.5% of ALL the companies VC’s see (they’d typically pick 10 from 2000 each year).
So, in sum, if you take VC:
- You are still super unlikely to be a ‘fund returner’ worth £1bn +
2. You will be misaligned with your VC if you go off ‘the VC path’ ie super fast growth.
3.You will have lost all control and optionality In the meantime
The downside is you will be mentioned less in techcrunch and your ego may be bruised a bit
Oh well.
Final Thought
This is not anti-VC. Lots of successful founders take this path. I love them.
But I’m also pro education. Think about what life you want and what success looks like for you. There are many other forms of funding like crowdfunding, indie vc, smaller funds, family offices. Pro tip: find out what return they need over what timeframe and make sure you are playing the same game.
Ultimately the key take out is this:
DON’T BLINDLY ASSUME YOU SHOULD GET VC BECAUSE ITS WHAT EVERYONE DOES. THINK ABOUT WHAT LIFE YOU WANT AND WORK BACK. MAYBE 30% OF A £3OM OUTCOME IS GOOD FOR YOU? MAYBE YOU WANT TO BUILD A CASHFLOW BIZ WITH STEADY GROWTH? MAYBE YOU WANT TO DO IT JUST TO SEE IF YOU CAN?
Just know the game you are playing ….
What’s my game?
I am pro the life that you most want.
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
1. Related – a good article on the dangers of raising too much too quickly. Again, just know the game you are playing ;)
2. The VC power law in action- benchmark turn 9m into 6.9bn
https://www.linkedin.com/feed/update/urn:li:activity:6522298075866890240
3. The psychology of vc
https://www.nfx.com/post/how-vcs-think-investing-decisions
