The Founder’s Paradox: The Real Value of Venture Capital
The promises come every day. Some delivered straight to my email, some via LinkedIn messages, some through friends of friends of friends. I will admit — the promises are intriguing. There is a bit of flattery. But there is also some earnest admiration for what we are doing at Aha! and an interest in helping us do even more of it.
I will let you in on a little secret — which runs counter to much of the conversation happening in Silicon Valley right now.
Despite what you are pitched by venture capitalists, private equity, family foundations, and providers of debt financing, cash infusions from outside investors do not lead directly to a sustainable business that creates real value for customers and the team. I have also pointed out in the past that most small businesses do not have massive funding events. So this article is really targeted at a tiny subset of emerging companies.
Now, let’s be clear. You need some money to start a company. And you need different amounts depending on the type of business you are building. Data center hardware or fueling pharmaceutical development requires real capital. But building a software company? That can be done for virtually nothing if you have the right idea, discipline, and team.
The reality is that money is just another asset. It cannot intrinsically create any more value than it is worth.
And while tech companies and their founders are enamored with raising money and announcing new company valuations after they do, cash is now a commodity. There is a lot of it for any company that shows any promise. Just look at 2018 and you will see. According to financial data company PitchBook, there was $130.9 billion invested in U.S.-based startups — surpassing the all-time high in 2000.
2018 also marked the highest total capital raised by venture funds, with $55.5 billion raised across 256 venture funds in 2018. And sure, there are companies like WeWork that take a lot of that funding (to date, the company has raised $12 billion in venture capital). But there is plenty more to go around.
I have been building products and companies in Silicon Valley for more than 20 years now. And I have not seen stories and bankers dominate since the late 1990s. In that time, I have been a part of companies that accepted outside investment and went through a few acquisitions too.
Those experiences taught me a lot about how I wanted to build a business — in a human-centric way and with a focus on real value. Not valuation.
This is why we self-funded Aha! (with a small amount of our own money) when we founded the company in 2013. Six years later, we are one of the fastest-growing software companies in the U.S. and profitable. Of course, that success has caught people’s attention. I have received more than 500 messages from would-be investors over the last few years.
Remarkably, the majority of the pitches are the same. They provide some cursory observation statement about our business, present how much money they have in their fund to invest in growing companies, promote one or two benefits of working with them, and ask for a meeting on a specific day. (Typically Wednesday, for some reason.)
So I decided to take a look at the pitches I have received and summarize the perceived value of what is most frequently touted. These are the benefits that venture firms consistently list in their emails to me and my view of their real value:
Promise: Accelerate growth Reality: What is the growth you actually want? What milestones are you trying to reach and can money really help? Money is not typically the one missing ingredient. Time, talent, tenacity, and a growing market are not things you can buy.
Promise: Increase your brand awareness Reality: Joining the unicorn club will certainly get you some press coverage. And maybe that will garner you more name-brand recognition. But does all that buzz matter long term if that awareness is for the money raised and not the service or product you are providing? A funding announcement is a one-time event — customers use your product every day.
Promise: Reach new customers Reality: Experienced investors know people and have meaningful networks. But that does not mean that anyone in their network cares about what you are doing. They might take a meeting because they were asked to — but I have never seen investor networks actually drive customer growth. I have seen countless meetings waste a tremendous amount of time.
Promise: Get together with other CEOs Reality: It is true that similar types of businesses often have similar challenges. But if you are a CEO, then you are likely so consumed with your own business, family, friends, and other commitments that you do not have time to focus on the challenges of other founders and CEOs. Now, some people really like connecting with others and sharing experiences. And I think that can be useful because leading a company is hard work. I am fortunate to have a strong network and personally prefer to reach out directly to people I already know. I have found this a better use of time and a more direct path to problem-solving than cold-calls or one-off meetings.
Promise: Access to advisors Reality: As I mentioned, proven investors have meaningful networks and access to resources. And the biggest firms have advisers who are available to assist their portfolio companies. They might stop in for a few hours to give you guidance. But how well do they really know your business and is there a genuine interest in helping you grow it long-term?
Promise: Potential for M&A Reality: You have one company. Investors have a portfolio. Their goal is to realize a big return on the investments they make. One way to do that is via an IPO. And you need $150 to $250 million in revenue for a meaningful IPO these days. So it is often faster to combine multiple companies to increase the overall revenue. But is this what you are working for? Are you willing to risk damaging what you have created? And how much time do you want to spend working on combining companies and workplace cultures? Investment databases like CB Insights track data on acquisition results, but the numbers vary wildly. The failure rate tends to range between 50 and 85 percent. Not great odds.
Promise: Liquidity Reality: That is real if you want it for you and the team. But know that it comes with a heavy cost — a new partner to oversee your future. Prior to taking any money, consider your life today. You are responsible to yourself, any co-founders, and the team. That is it. Do you want a new boss?
Venture capital has definitely changed the course of the world.
Despite my reality check above, I do not think the story is all negative either. These kinds of investments have given life to many breakthrough ideas that would have never been supported otherwise. And some of the brightest people I have ever met are venture capitalists.
But from my view, outside funding is not necessary for many types of businesses. If you are considering raising money, it is critical to explore the realities of what accepting an investment means against the promises that are made. Maybe we will start to see a more balanced presentation by investors of what a post-investment world means for founders and the people who work in the company.
Maybe some VC will have the chutzpah to publish estimated growth charts for different types of companies that they invest in through a “this is how we will work together” article so it is clear what founders are actually signing up for on a term sheet.
I believe most software companies and the people who work in them would do exceptionally well to look past the flattery of investor pitches. Look towards what you are working for and the future — one where you are delivering lasting value to your customers and your team.
Read more of The Founder’s Paradox.