Venture Capital isn’t for all new Ventures. Many have already explained the key reasons why Founders should think twice before looking for Venture Capital money (too much dilution and control), however the big upside is scaling, or at least this is what Founders expect, as Venture Capital is meant to fuel growth and scale up a startup.
However, what I have seen is many startups are looking for money before they are ready to scale. This is the beginning of the end. A killer strategy.
But there is more. From my experience working with VCs and Founders, I can say most of the time the honeymoon gets over quickly. Why?
- The Founders expect more beyond the money
- The VCs expect to get traction quicker
It’s all about expectations and facing reality.
In this article, I suggest Founders to put themselves in the VCs’ shoes to better understand why things don’t always work out as expected. Venture Capital leaders have a number of pressing issues to think of. Here 5 issues that Founders should be fully aware of:
You think VCs buy only. In reality they sell everyday
No VC fund exists if someone doesn’t invest in it. Simple.
When Venture Capitalists are in the fundraising mode, they are all in. They need to sell to LPs their vision and strategy for the new fund and they know the fund must have a reasonable size to make their goals happen. So, the hunt is an ongoing, and often unease, process. What this really means is VCs need to step out of their comfort zone and become great sales managers to get this done.
Not an easy thing. Sometimes frustrating. Sometimes painful.
Besides, many funds don’t have either a distinctive edge or a niche they target. Why shall LPs put their own money into these funds?
Get it right. There is no way back.
Investing in the right startups is everything for a VC. Not only takes time, but also it requires a strong understanding of the markets, good judgment calls. Just to mention few challenges.
From a practical standpoint though, VCs need to look at hundreds of startups and their decks. They have limited time to review them and make the right call. Pressure goes up.
Although most of the time the investment is well thought and the VCs believe in the market opportunity and the scalability of the project, things sometimes don’t really work as expected.
According to one of the latest analysis of 101 startup post-mortems (Source: CB insights), startups fail primarily because there is no need in the market for what they offer. Equally, they either get outcompeted or they don’t have the right team on board.
How can VCs mitigate the risk of failure? No one has the crystal ball and things sometimes change. In addition to this, the unexpected happens. How are VCs dealing with that? Through a better decision-making process? Better risk management? Better strategic planning?
That deal is mine!
Winning the best deal. That’s it. This is what really counts for a VC.
For the best startup in the market, the competition is fierce. Some of the reasons are:
- The market size is huge
- The Founders have successfully built other startups in the past
- Other top VCs are thinking to invest in the same opportunity
But what if VCs get into the fear of missing out that normally becomes more intense after the market has just experienced an uptick?
Besides being a dangerous emotion, the fear of missing out leads to jealousy, dissatisfaction with the current portfolio companies, and bad decisions.
This clearly increase the risk of bad investing.
Exit, Exit, Exit
The latest researches about VCs in the US have confirmed, for acquisitions, the time to exit has increased across the board, and in particular since 2013. The average time to exit by acquisition is now around 6 years, approx. 2 years more than 2005.
What does this mean for Founders? VCs will triple their efforts to scale their startups so shorten the exit time. This is great as this the value expected by the Founders. But do VCs have the right structure and resources to unlock opportunities for all startups in their portfolio? What if only some startups will get the most out of their VCs?
Is there too much on their plate?
Along with the selling/buying/scaling process, they need also to find time to nurture their existing network and build a new one. Not even thinking about admin, office work or other things that are not essential to their priorities.
For all these reasons, VCs feel often stressed and overwhelmed. I bet they are. They have too much on their plate. They risk of losing focus, energy and vitality. They can get distracted and cannot give Founders full attention. Eventually, they could make poor decisions that cost money.
They are under pressure and time is not negotiable. They just need to do what it takes to build a long-term successful firm, to be effective leaders and to bring value to the both sides of the fence. LPs and Founders.
Venture Capital is a fascinating industry though. VCs have the unparalleled opportunity to work with like-minded, bright and real passionate Founders and get exposed everyday with amazing ideas, projects and innovation.
Developing the right leadership skill set to cope with these challenges and to build success shall be a key objective and priority of the industry leaders. It is a marathon though. Not a sprint.