Let me start off with something that might sound a bit cynical: Venture Capital firms are in the business of making money for their clients and they don’t give a hoot about your startup’s idea, narrative, or cause – those are just packaging.
The only thing early-stage investors care about is whether you will grow quickly enough to be attractive for another round of funding and increase the value of their initial investment.
Much like Ponzi schemes, the gains of previous investors are paid for by the new entrants, who are wooed by friends, promises, half-truths, and strategically crafted narratives. The reality matters less than the pitch.
For instance, a startup with a sizable war chest can afford today’s exorbitant user acquisition costs and appear to be the next big thing on paper by throwing money at (somewhat) vacuous growth. As long as your new board member has a triple-digit success story to share, that might be all that’s needed to secure more funds for sustaining the invest-grow-invest cycle. Even if LTVs are in the gutter and long-term prospects are grim.
Of course, I’m simplifying things and this doesn’t hold true for all VC funds. And it’s not like anyone is intentionally scamming or that there’s an actual Ponzi scheme in play. These fund dynamics are the inevitable product of the VC environment.
Why VC funds can’t afford to believe in your cause
VC funds are high-risk, high-reward – they receive their funds from investors (limited partners or LPs) looking to outperform safer investment options.
That means it’s not enough for a VC fund to be in the green to count as successful.
If you can get a steady 7% yearly return by investing somewhat safely in, let’s say, real estate, then any returns below that are a failure on the VC fund’s part. Plus, given the additional risk of the volatile startup world, we can say that anything below a 10% return can be seen as underperformance. For most LPs, even 10% won’t justify the risk.
Tomer Dean broke it down expertly, concluding that a 12% return over 10 years requires a tripling of the initial investment.
In other words, it’s not enough for VC funds to have your startup succeed. They NEED it to succeed BIG. Doubly so because some of the other startups in their portfolio will inevitably underperform.
VC funds, by their very nature, will be first and foremost hyper-focused on growth and anything short of exceptional results will hurt their bottom line. Accordingly, they cannot afford to get side-tracked or bogged down by tangential factors such as a startup’s purpose or your aspirations as a founder.
What this means for startup founders
Here’s the main takeaway I really want to drive home: investors don’t care about how your product will make the world a better place or change the industry. Instead, when pitching investors, startups should focus on how they’re planning to grow their value and aggressively raise further rounds.
As a former VC analyst and current startup founder, I’ve been on both sides of the equation and this lesson I’m sharing with you today helped me secure a €100k pre-seed capital for Supliful in just 30 minutes.
In that half-an-hour, I mostly talked about user acquisition and business revenue – the two things that VCs care most about, yet most pitches don’t spend enough time on.
Look, I’m not saying that your greater vision doesn’t matter. It does. But not for the reason you think. The way you talk about your ambitions and goals in front of a potential investor helps them determine whether you’re the right person to deliver the growth you promise.
They’re not going to invest because they believe your vision of the future or because your touching presentation spoke to their humanity. They’re going to invest because they believe in you – your passion, your experience, your knowledge – and in the growth opportunity you’ve presented them.
At the end of the day, VCs need the startup to stay ‘’alive’’ until the next round and don’t care much about what happens to it afterward. This may sound a bit cynical, but by approaching investors with such a mindset, founders might have higher chances to get the money they need.