Venture capital is incredibly useful as an asset class. It unlocks innovation and can help create enormous impact towards advancing society. However, VC has become a cookie cutter funding ambition for start-ups of all shapes and sizes.
Pouring venture fuel on the fire is appropriate in some circumstances, as the brilliant Bryce Roberts @IndieVC notes. if you’re trying to privatise space or cure cancer then absolutely. Venture funding is uniquely suited to funding companies solving deep structural problems with long maturation cycles. When companies crack these types of problems they create huge moats and consequently outsized value, which rewards the genuine risk capital that backed them.
It also theoretically works in ‘winner takes all’ markets or new platforms which require massive investment capital to scale faster than competitors. People may doubt the sustainability of businesses like Uber or AirBnB but once these types of businesses achieve scale and liquidity, they become incredibly hard to displace and so highly valuable.
But its not suitable for the vast majority of companies.
Many ideas out there could be fantastic, profitable, $10M or $20M businesses. But the economics of venture capital demand that they become $200M, $500M or $1Bn companies. That sounds great right? ‘Go big or home’. Well perhaps less so when you consider that only 0.14% of venture backed companies achieve unicorn status.1 In trying to achieve that mercurial target, many great businesses end up burning through vast amounts of capital, destroying value for both their founders and their investors.
Some people reading this article may argue that the above criteria applies to global ‘Tier 1’ venture funds and that there are whole host of smaller brand names out there with more grounded targets. Possibly. But remember that the role of most VCs is to optimise for AUM, not exits.2 To raise their next fund, VCs push portfolio companies to burn capital as fast as possible and uplift your valuation, often artificially or at the expense of founder equity.