No.9: Paradigm shifting in VC
Curated news, insights and stories about bootstrapped entrepreneurs building real businesses and the investors who want to finance them.
Good morning folks,
Today a dose of change and many cool links, so let’s get to it.
Getting a seat at the investment table
Photo by Nastuh Abootalebi on Unsplash
Monique Villa from Mucker Capital wrote an excellent piece in Techcrunch this week. While the venture industry is known for its lack of diversity, change has been happening and Villa is sharing her own experience building a unique career in venture capital.
I tried to blend in as much as possible when I first entered the venture world, not wanting to draw attention to the fact that I came from a very different background than the people I was interacting with. I didn’t know what ski week was, my parents didn’t belong to private clubs, and Ivy League schools were a distant concept. Fast forward to today, I see the greatest opportunity for those who are boldly unique. A seat at the table means I can be myself and draw upon my unique experiences to make decisions and support my portfolio companies in a way that only I can. Our industry thrives when contrarian views are developed over time and implemented without compromise. Conformity is the main villain when we decide to settle for the familiar, ultimately generating stagnant venture returns. After all, venture capital is, by definition, meant to be a high-risk asset class.
I had the opportunity as a young LP to interact with the firm and I remember an open and intelligent discussion. As highlighted by Villa, investors are realising how being different from the rest (e.g. in diversity of gender, ethnicity, age…) can impact the potential return of venture funds:
The private and public markets are waking up to the realisation that representation matters. A 2015 McKinsey study found that “companies in the top quartile for racial and ethnic diversity are 35 percent more likely to have financial returns above their respective national industry medians.” […] having an investment team more representative of the population generates better deal flow. I have this conversation on a biweekly basis and know that the next generation of investors is watching to see what established VC firms are doing to remain competitive.
Ultimately, firms with investors from all backgrounds will have a competitive advantage in accessing the best deals - and therefore will generate top returns. It is good to see that there is no shortage of investors reshaping the standard of the venture industry as we know it.
In other news
EIF: what does venture capital actually do for startups? (article)
The European Investment Fund (EIF), which is one of the most active LPs in European venture funds, compared VC-backed startups against similar startups without VC backing. The result?
Well, EIF backing means startups can actually invest far more than non-VC backed companies in the first few years after the VC injection. Does this affect short- to medium-term profitability? Sure, it can, but young startups are laser-focused on long-term growth and the “patient capital” of VC investors is there to help them scale up production and reach break-even. VC backing also “signals” the quality of startups and helps them secure further debt financing. VC-backed startups borrow more, despite being relatively less collateralised than the control group.
“Venture capital money kills more businesses than it helps” (podcast)
Basecamp CEO Jason Fried, Courtesy Basecamp
Basecamp CEO Jason Fried has obviously a different opinion from the EIF. The bootstrapped entrepreneurs explains that the current model of “growth at all cost” promoted by venture capital is killing more companies than it creates. Instead, he believes that entrepreneurs are better off building and running smaller, more sustainable businesses.
“If you have a bunch of money in the bank, you’re encouraged to spend it because no one ever ... Well, I shouldn’t say no one, but hardly anyone ever goes for one round. It’s round A, round B, it’s like, you’re going back to the drug dealer. […] Lots of businesses could be great $10 million, $20 million businesses, but they’re not allowed to be, [They’ve] got to be $200 million or $500 million or a billion ... One of the reasons you get into entrepreneurship is to control your own destiny to some degree, to not have to go work for somebody else, to not have to collect a paycheck from somebody else. And so the thing is, when you go take money, you’re working for someone else again, instantly.”
Softbank Vision Fund, explained (article)
Theodore Schleifer from Recode profiled Softbank and the impact of its $100B funds has on Silicon Valley, calling into question the sustainability of their portfolio companies.
And then there are observers who say the amount of money that the Vision Fund is investing in companies isn’t even good for the startups that receive it. Many old hands in Silicon Valley believe that startups run better when they’re not overflush with cash: tighter ships have a smaller margin for error, goes the argument. So even though they’ve got more money behind them, are their companies actually more sustainable, more pressure-tested — especially once they IPO and no longer have the luxury of a SoftBank check?
Clearbanc (podcast)
Clearbanc’s Michele Romanow was on Stebbings’ 20VC and discussed alternative financing mechanisms for e-commerce companies.
“If you are building a crazy piece of AI and need 50 engineers, or solving a disease, VC is the perfect fit for you. What I am saying is, at Clearbanc we are like, if you know what channels are working, if you know you are putting $1 into Facebook and getting $5 out, that is by definition repeatable and scalable, it is not true risk capital, and you should be able to use cheaper capital than equity to be able to fund that. […] It is all about looking at how do we create a different asset class around the repeatable part of scaling your business.”
Booking’s FareHarbor kept the bootstrapping myth going while discreetly raising outside money (article)
When you start as a bootstrapped company and continue the narrative, even though you have raised $5m+ in outside capital.
So it’s all true that FareHarbor started out as a family-run business and managed to scale its operations until early 2016 by apparently taking money mostly from friends and family. But the problem is that by early 2017, FareHarbor had raised around $11 million in funding — including around $7.5 million from investors — yet kept the myth going, and misled people to give them the impression that the company had taken no outside money because it was growing organically and really didn’t have to go fundraising.
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