When the VC firms were starting a few decades ago, the investment team comprised some of the most successful entrepreneurs who had created thousands of jobs, benefited the world with their products/services, made money for themselves, and also made money for the people who had invested in them. They knew their business and industry very well. They knew what they were investing in; they knew what value they could add and they had a very good understanding of the future of the company.
That all has changed. Very few VC firms have been able to add value since then. The modern VC team looks more like clones. Most of them have similar backgrounds – similar education, and work experiences. So similar that it’s hard for a serious entrepreneur to distinguish the value that one firm can offer versus another one. Similarly, most of the team members have no experience starting or growing a business.
By the time a company makes it to the news sites, it is often late. I have seen several very quiet companies nowhere to be found on the “noise” channels. Their owners are not busy making noise. They are very busy generating revenue for their business. They don’t depend on the VC money to pay their bills. They are laser-focused. They are so hidden that a competitor often does not know that their competition exists.
The deal flow generation model of VCs is very flawed. They are busy going to conferences, attending trade shows, pitch nights, and reading the news sites that everyone else is reading. All these channels are crowded with other potential investment groups as well.
There are plenty of $1M-$9M revenue companies in the United States. Most have very few employees and they are often managed by one or two partners. Because of their well-managed operation, their margins are usually very high. Interestingly, some of these business owners don’t even know what Venture Capital or Private Equity means. For them, it doesn’t matter whether they know PE/VC. They do remarkably well anyway.
In Silicon Valley, it has become more of a tradition to boast how much money an individual or a company has raised. It is rarely mentioned how much money they have returned to those investors. Many companies raise money only to experiment with a concept. The company exists until it fails to raise another round. When the bank account becomes empty, they learn the lesson that they never really focused on business so that the business generates cash.
Most modern startups, especially the tech ones, reach out to VCs to seek money. The objective is usually monetary rather than strategic. Both the entrepreneurs and VCs tend to ignore the strategic part. Thus the company’s failures continue.
Many zero-level startups seek money in the beginning when they are starting the company (only if they are familiar with the word VC/PE). If they are not able to raise, they start minding their own business. The committed ones continue no matter what they have to go through. The experimental ones disappear (so many founders, and co-founders’ titles on LinkedIn). Once the committed ones start showing traction, they become very encouraged. That’s when they realize that they don’t need a VC.
I have met with some companies who followed the capital raising route. They tried. They couldn’t secure the funding. Within two years, they were generating million-plus in cash – nearly a hundred percent in recurring revenue with over eighty percent in EBITDA. Each week a VC would reach out for a call. All calls would be declined. There was just no need for external money. Another company had become such a large player that they would decline to meet the top private equity professionals simply because they didn’t want to “waste” time meeting with people who didn’t know what the business owner was talking about.
The ones who didn’t know that they can “raise money”, have done even better. They simply knew that they had to put their all efforts into the business.
Rather than following the noise, VCs should find great businesses led by dedicated entrepreneurs pursuing amazing ideas (yes, ideas do matter; it’s not just the execution).