“One of the terrible things Silicon Valley has done is convince founders that the only way to build a big company is by raising lots of money and hiring people constantly.”
— WILLIAM HOCKEY
Everybody Wants Rapid Growth. right?
Rocket ship growth. Doesn’t that sound exciting? You identify a problem in a market that you think you can solve. You create a small company, hire some people, and successfully achieve a level of product-market fit. Congratulations! Honestly, that’s quite an accomplishment. Something that most people in the world won’t even dare to attempt, let alone achieve some success in doing so.
So now what?
Well, the answer is obvious. Time to grow — and I mean GROW BIG! Take what you have, apply the lessons you learned, grow the heck out of this thing, and become a celebrated and famous entrepreneur. For many companies that reach this stage, the answer often comes down to finding some venture capital investors, filling up the bank account, and setting the stage for ‘rocket ship’ growth.
However, is ‘rocket ship’ growth really the appropriate strategy for every company?
Be Careful What You Ask For — Particularly When it Comes to Capital
Before I go further, I think it is important to state clearly what I believe. I have been active in the venture markets for more than two decades and am a firm believer in the model. I believe that over the last several decades, high-risk, venture capital funding has created one of the best environments for risk-taking and innovation that the world has ever experienced.
But, (there is always a but) that does not mean that every newly-created company is an appropriate fit for venture capital funding. In fact, the hard truth is that many are not. Actually, many are a terrible fit for that type of funding.
Venture capital funds have evolved over the years and have created a formula that has lead to success. Venture capitalists invest in (often) dozens of companies in each fund. Many times — particularly at the seed stage — in thirty to forty companies per fund. The expectation is that each of these companies has the ability to achieve significant year-over-year growth, and can do so in a very short period of time. Without getting into the weeds on ‘venture capital math’, suffice it to say, that this structure has enabled many funds to deliver strong returns to their limited partner investors. Sure, it does not always work out that way, but enough have been successful for the model to have been proven out.
But You Know What? This is Actually Pretty Hard to Do
Well, come to find out, achieving significant year-over-year growth over a relatively short period of time is a rather tall order. The unfortunate truth is that only a very small percentage of companies have the ability to do so. Venture capital GPs know this, and expect that the success of only a very small number of companies will lead to the success of their overall fund. What happens to the others that don’t make it — while unfortunate — is of a lesser concern.
Therefore, while venture capital funding has lead to an explosion of innovation (which is great), the unfortunate by-product has been a significant number of ‘failures’. The capital is great when it works. However, the expectations that come along with that capital are extremely high, and can lead to some sub-optimal strategic decision-making at the company level.
Perhaps, by putting some companies in a position in which that type of hyper-growth is the expectation, we could be doing more harm than good.
Aligned Expectations and Goals are Keys to Good Capital Partnerships
Over the years, I have met many companies that were not an appropriate fit for venture funding. Instances in which companies sought (and successfully raised) venture funding — and the lofty expectations (and decisions that came with those expectations) ultimately led to the company’s demise.
Axios Pro Rata recently ran an article that addressed this subject. In it, they interviewed William Hockey, who in 2012 co-founded Plaid, a fintech company that raised over $700 million and was recently valued at $13.4 billion. He recently founded a new startup called Column, but doesn’t want any venture capital investment. In the article, Hockey is quoted as saying, “One of the terrible things Silicon Valley has done is convince founders that the only way to build a big company is by raising lots of money and hiring people constantly. And it can cloud your perspective, like it maybe did with Fast, because you think you’ve made it just because you have VC money, even if you don’t have many customers paying you.”
Let’s put it in perspective. This is one person, one company, one opinion. Every company is different and has different needs. However, I do believe that companies need to be completely honest with themselves if the expectations that come with venture funding are worth the capital. The capital is great, and can enable great things. But the capital comes with weighty responsibility.
© Copyright May 2022 Marc Patterson/Bennu Partners. All Rights Reserved.
Axios Pro Rata by Dan Primack 4–21–2022