Historically, the main actors in venture capital have been a specialized set of tech investors who themselves came from the technology industry. They understood it well because they were the ones who built foundational technologies or sold hardware, software and systems into businesses.
And so, generally, the people who invested in tech companies — the traditional venture investors — could tap their extended talent networks and apply their knowledge to bring talented people into startups, or at least coach the founders on how to select the right talent to scale and grow.
To be a good venture capitalist, you must understand what we call “venture risks.” What are the technology risks? What are the market risks? What are the people risks? What are the execution risks that remain? How do we manage hypergrowth when it happens?
Almost all the returns in venture occur when you have a company with lightning in a bottle. And then if that does happen, can the founders, investors and extended talent network bring it all together in such a way that’ll spur growth and achieve the kind of outlier successes that account for most of the returns in venture capital?
But over the past few years, the momentum for the sources of capital has swung dramatically from these traditional, specialized venture investors to a much more diverse universe of investors. These new venture investors are deploying a lot of capital, believing that they will be able to generate outsized returns. And in some cases, they have had early success, at least with returns on paper.
That said, unlike the traditional venture investors who stayed close to their investments through a stake in the company, a seat on the board and other special terms, these new, nontraditional investors are, for the most part, playing an asset deployment game.
These investors are working under the assumption that the founders, or the existing early investors in the company combined with the founders, should have all the skills and resources it takes to build the company to its full potential. The new entrants are therefore bringing only money to the table with the hope that it can punch through all the remaining problems the company faces and things will work out.
So, where does this put you -- the startup founder, entrepreneur or company executive?
It’s a great time to be a founder
If you’re committed to building an enduring company and you want to, as Steve Jobs put it, “make a dent in the universe,” then this is the best time ever to be a founder. We’re currently living in a capital-surplus environment, which means that there are many options available to you and almost every interesting idea is getting its due. That’s an ideal situation from a founder perspective, and the possibilities are intoxicating.
If you’re a founder who’s trying to decide whether to pursue venture capital or nontraditional investors, ask yourself these questions: What do you need at your stage of development? Have you punched through all the possible failure modes? What risks remain in the business? Given that perspective, how much money should you raise and at what valuation?
If you're a founder and you are completely confident you know everything needed to build a durable company, and all you need from investors is money, then taking money from an asset manager may be the right path for you.
But if you understand there are risks that happen in the lifetime of a company -- things that can go wrong that money alone won’t solve -- then pairing up with a venture investor who knows your business might be the best approach. A pure asset play can buy you a little bit more time, but fundamentally you need to have talent in the management team, and a VC firm can help you there.
If you believe you’ve punched through all the risks and points of failure, then just take the money at the highest possible valuation and be happy. Why waste your time with people who want to take board seats and more? If, however, you still have a lot of risks to work through, a lot of building left to be done and lots of scenarios to play out, then I would be thoughtful about how much money you take from whom, and at what valuation.
People experienced in venture help diagnose and make sure you don’t fall through the inevitable trap doors.
As I explain in my book, “Anticipate Failure,” there are many potential sources of failure, including people, product, technology, business model and more. Because while much has changed in the venture industry over the years, the fundamentals of business-building remain the same. And as long as there are founders who need more than just cash to ensure their startups succeed and grow, there will always be a place for the unique skills and networks that the best venture capital investors and firms bring to the table.
How many venture investors truly live up to their promise to add value is a separate discussion.