It’s long been known that VCs live off home runs. And the problem is only getting worse. In last 3 years almost 750 VC funds have closed over $100 billion in funds to invest in startups. High valuations and large capital infusions from venture firms mean startups better be showing unicorn trending results or be ready to scrounge for capital.
There has been much written about this phenomenon and the dangers of raising capital in this environment. But, it will continue. Especially if you live in the Bay Area where managing to the next round is a way of life (vs. working to build a sustainable business).
The pattern is getting very predictable. Tons of ideas easily raise $500k to $3m in seed money. The team builds a real product, even gets some real customers and revenue. The burst of enthusiasm out of the gates quickly hits reality when trying to raise a Series A. Turns out those seed dollars were just a call option in case of a rocket ship. And the result for many moderate growth companies is a kind rejection stating your company is “not venture scale.”
Most tech entrepreneurs quickly fall into a state of despair given the dreams of being the next Google have been dashed. At Scaleworks, we talk to a lot of companies in this exact situation.
We have found through experience that founders, especially in the B2B space (B2C is a very different animal), should often embrace their merely “good” business. But, it will take a major mindset adjustment to veer away from the venture scale path. We have found a few keys to create a great opportunity from this scenario:
- Get Fresh Energy. Business success is an act of will as much as anything and fresh energy and perspective make a difference. If you can’t get excited to build a merely “good” business, then you need to find someone that will while you go try for the home run again. You have to change your perspective to see that a smaller business can not only still have a big impact but also can create great returns — especially for founders.
- Buy time — and keep your options open. Get over your free spending ways and cut to the basics. Get to default alive and focus 100% on growth. Also, realize timing matters. Some ideas are ahead of their time, others need a few tweaks to hit the market right. Other businesses are adjacent to something magical and grow into it. Time allows you to explore all these options. When you are running things success based you have the time to figure it out — and you get more focused on the critical insights to make success a reality.
- Build a Minimum Viable Business. Silicon Valley talks about minimum viable products all the time. But, they often miss the basics required to grow a business. Many technical founders think product can solve any problem. They are usually wrong and they overspend on it. Sorry, sales works — and it is necessary. Right pricing…well, it can change the game overnight. Basic positioning and differentiation — in this competitive world it is a must. When you are swinging for the fences you can miss a lot while hoping for viral, rapid growth to just happen. Get focused on the basics.
- Find the 10x customer base. Every “good” B2B tech business has some happy customers. And the truth is if you have 500 customers in the SMB world, you can find 5000. You just need to get in the heads of those that already found you to understand why you are valuable and discover where those that don’t know you are hidden. But this takes real work fueled by curiosity. Stop building what you want and start building what the customers that love you want — and go get more of them.
- Repair the capital base. One of the biggest problems that haunts “good” tech businesses is a capital base that can only generate returns with a home run. You can’t build the right business if none of the shareholders can get behind it. Facing this is critical. This problem is the hardest one because most VCs actually would prefer a fast zero to a slow return of capital. This fact is also how Scaleworks helps founders — cleaning up cap tables and resetting things. But, if you have a “good” business, get the cap table aligned to realize it — there are many options to do it.
The truth is “good” tech business can be huge money makers and a ton of fun to build. Remember, returns are based on returns divided by capital invested — not just absolute return. Building a “good” software company today does not take much capital. The pursuit of huge and fast is what costs so much. Taking all that capital puts you in a tough spot should things slow down and the opportunity appears more modest. And even if you succeed the return might not be so big for you as a founder given the enormous dilution that comes with the capital raises. So, don’t give up. Embrace your “good” business, build the basics, understand customers, buy time, and see what options emerge — often they will surprise you. And you will own more of what you create.