by E. Keller Fitzsimmons
In Silicon Valley in the 90s, the catchphrase was definitely “Go big or go home.”
Stories abounded of entrepreneurs sketching an idea on a napkin and getting funded on the spot. At the height of the bubble, Silicon Valley was overflowing with cash, and venture capital became the new currency. If a startup founder didn’t have venture backing, they weren’t a real entrepreneur — or so the story went.
My friend Erik Schwartz, a tech entrepreneur who started his career in the early days at Yahoo!, said: “I used to think a lot of the mechanical pieces of venture capital were markers of success more than they actually were. And they are within the ecosystem of Silicon Valley, but they don’t lead anywhere necessarily. They’re not indicative of actual broader success. They’re only check marks on the Silicon Valley to-do list.”
In no way is venture capital a requirement for the vast majority of startups. Most entrepreneurs grow their businesses through cash flow and bank loans.
And yet, many people jump at the opportunity to receive venture backing because it seems like the right thing to for their startup. Truth is, there are only a couple of reasons why an entrepreneur should take on venture backing. Let’s dig into those reasons, then explore what VCs are looking for in startups (and founders) asking for funding.
When to Go After Venture Capital
As founders, the first reason to consider VC is that our model requires it. If it’s going to take a long time before we can monetize our innovation, VC might make sense.
For biotech firms, there may be more than a decade from initial breakthrough to marketability. Venture backing is needed for that model to work.
The second reason is scale. When a company has figured out a way to accelerate market adoption, and therefore growth, by adding fuel to the fire, VC makes sense.
VC works well for founders who already know how to make money. If they only had X dollars more, they could turn the crank and push Y dollars out. Too often, we make the mistake of believing that our problem is just a lack of cash when that’s not it.
The real issue — and the reason the vast majority of businesses don’t deserve venture capital — is we haven’t actually solved our money-making problem yet.
Venture capital can buy some time. But if we are using it to figure out the fundamental workings of our business, that’s an expensive and, ultimately, risky proposition. Until we understand the inner workings of our commercial ecosystem and how we fit specifically into it, we cannot scale. The exit clock is running. We are losing precious time.
What VC Investors Want from Startups
Venture capital works best for companies that have a legitimate possibility of being one of the rare startups capable of scaling to $100 million or more within five years.
Most venture capitalists want to see metrics that prove we’re on that growth path. They want to know that we have significant community engagement and/or paying customers. They want to see credible, repeatable customers who are likely to continue purchasing in some meaningful way for an extended period of time. It’s an essential proof point.
Venture capitalists aren’t just being jerks; they have to check a ton of boxes before they can write the check. They have to explain their investment strategy to their limited partners (LPs), show why it makes sense, and defend that decision.
“One thing that entrepreneurs should understand is that in the end, investors really only care about financial returns,” said Dan Weinfurter, an entrepreneur whose first startup landed him the coveted number one spot of the Inc. 500. “They may say they care about everything else — people, culture, doing good — but they have raised money from institutions that expect returns. Their livelihood, which often means being able to raise the next fund, depends upon investing in companies that will offer sizable returns.”
The Great Recession had ripple effects in Startuplandia. By 2009, startups seeking venture capital saw the number of funding rounds decrease dramatically (as much as 46 percent for internet startups). In addition to far fewer deals, the amount of funds raised decreased with each round. Just like entrepreneurs, VCs have pressures to perform. Their investments — at least a small number of them — have to pay off in epic ways for the funds of funds to keep investing in them.
Who a Founder is Matters
Most entrepreneurs have little or no experience with venture capital. When they walk into the meeting, the venture capitalists end up educating the entrepreneurs about what venture capital is and when it works. That is not the conversation we want to have.
Investors tend to focus on two key things: market potential and the entrepreneur. The market may be there, but the market can change. Their real focus is on us.
Universally, they are thinking, Is this someone I can get behind?
With few exceptions, the entrepreneur is being evaluated for our cognitive fitness, mental agility, and emotional stability. Investors often ask intimate questions about our family background and home life to assess how resilient and resourceful we are. Being prepared to talk about how we’ve overcome adversity in the past is crucial.
Whether we like it or not, we are evaluated on how we look. If we look sleepless and unhealthy, we are unlikely to get a call back. Whether conscious or not, the investor is judging us as risky. If we don’t invest in our self-care, why should they invest in us?
While Mark Zuckerberg could get away with a hoodie and jeans, it doesn’t mean we can. Implicit bias is real. If we want venture backing, we need to look the part.
E. Keller Fitzsimmons is a serial tech entrepreneur, artist, and mother of two. She is the cofounder of Custom Reality Services, a virtual reality (VR) production company whose first two projects, Across the Line (2016) and Ashe ’68 (2019), premiered at the Sundance Film Festival. Keller is the recipient of the Silvertip PwC Entrepreneurship Award and Speech Technology’s Luminary Award. Her work has been published by Network Computing, InformationWeek, and Inc. An active angel investor, she serves on the technology committee for BELLE USA, a venture fund that invests in women-led startups. Originally trained as a classical archaeologist, Keller holds a master’s degree from Harvard University. Her book Lost in Startuplandia: Wayfinding for the Weary Entrepreneur is available on Amazon.