Many venture firms underperform, leaving them with last-straw money sans merit — a lethal combination.
Let’s first dissect venture capital for a moment. It is vital for entrepreneurs to understand the financial instrument you intend to engage with to build your business, and to understand the expectations a venture capitalist will bestow upon you sooner or later. Their agenda will fluctuate based on the hedging of investments in their fund portfolio, and the return expectations of their investors (limited partners) to raise another fund shortly, and stay in business.
The term venture capital has been bastardized from its original intent to support high-risk/high-yield risk profiles in pursuit of upstream innovation to the support of an endless stream of downstream innovations with an increasingly commoditized risk/return profile. The majority of venture capital firms now deploy a uniform investment thesis and methodology, which by definition yields a sub-priming of the innovation they elect and collude on as “investable.” Uniformity of investment thesis being incompatible with finding outliers of upstream innovation. False positives and false negatives are therefore rampant.
Most of the popular investments in technology endeavors today are incapable of producing high-yield returns limited partners (the investors in VC funds) are expecting, and will never produce innovations capable of improving the evolution of humanity, and thus are merely a self-fulfilling and temporal prophecy. The rat-race of self-induced unicorn valuations suspending the disbelief in that prophecy momentarily. Until yet another massive chain of greater-fool financiers discovers that outlier returns do not come from the bosom of populism. We can always blame it on the purported nature of cyclical investment paradigms. Wait for it.
So, the reasons why you would reject venture capital today are:
- You don’t need the money.
- You don’t want the money from a subprime VC, because it means you are or will become subprime (very common in the valley). Learn how to detect them ahead of time. Read Subprime Venture Capital. You must evaluate the merit of an investor while he/she evaluates yours.
- You don’t want money from an investor who only seeks to build single fund performance, while you are trying to change the world. The two are thankfully not mutually exclusive, but only with experienced investors who can influence and deploy multiple financial strategies to support your upside.
- You don’t want money from an investor who understands your space better than you do. Either the investor is wrong, and you’ll spend your time proving him/her wrong rather than serving your market, or the investor is right, and you don’t know what you are doing, after that enslaved by an investor-driven agenda. Domain experience is highly overrated (pervasive in the valley) in innovation meant for disruption. You are building a new and better normalization of a suboptimal past, so the habits of the past do not apply.
- You don’t want the money from a VC fund performing poorly, putting undue pressure on a fabricated trajectory of your growth to recover VC fund performance within a set timeframe (very common in the valley).
- You do not want money from an investor unable to support a large part of the projected runway of the company monolithically. Too many board members from the fragmentation of rounds yield investor collusion’s kiss of death (very common in the valley).
- You do not want money from an investor if you do not see eye-to-eye on the upside of your vision. The establishment of the valuation of the company acting as the litmus test, if you know how to drive such a discussion. Read: How to set and ask for valuations
- You don’t want the money if the company becomes investor-owned and controlled, so prepopulate your projected cap-table before you raise your first round. Investors who deploy such an investment scheme should have remained an entrepreneur instead. A great investor knows how to support entrepreneurs without the urge of becoming one.
- You don’t want money from an investor you don’t like. Fundraising is like dating, in which the alignment and critical thinking of the two parents of the child you are about to raise are paramount. The two parents, entrepreneurs, and investor should strengthen each other in the drive for the upside of the company. One plus one equals more than two.
- You don’t want money from an investor who establishes valuations based on the downside. Because it means your investor does not envision you ever reaching upside. You must focus your fundraising efforts on investors who can see around the bend, to make a deliberate and determined bet on the foresight of your innovation. Otherwise, your investor is just not that into you.
Venture capital can be a fantastic instrument to build innovation to change our world for the better. Inverting the reasons mentioned above will provide some pertinent guidance on how.
Be sure to avoid the pageantry the quest for “innovation” has largely become. Only a handful of VCs is worth engaging with (Read: Why 99.4% of venture capital firms fail), about the same amount of “innovations” worth investing in per year.