I have been tracking some VC firms of late – it is hard to ignore the hype. They deem a start up successful if it is “hyped enough”. For example, a voice app community called Clubhouse. I have no idea what problem they were trying to solve. Yet, it gained a lot of traction around the pandemic because “people wanted to hang out in the audio rooms”. Some prominent VC’s came in, but I have no idea if they keep up the habit.
The blog isn’t making a pivot towards dissecting startups. I am trying to understand the VC mentality to get the funding from the grants committee. I have seen some “grant-contests” in conferences, and I understand that it is usually “pre-decided” to issue grants to the teams that belong locally. The competition is for the show. I am not naming specifics – but there were genuinely constructive ideas ignored.
It’s very easy to get sucked into the competition of raising at the highest pre-money of all your peers. This may feel like winning, but it is not. Seed-stage valuations don’t correlate well with success. Success to me means building a sustainable, profitable company that people love. Investment is just a tool to help you do this.
Fundraising is extremely distracting. If you have multiple founders, nominate one to run the fundraising process. He or she should be the primary point of contact for investors.
So VC investment decision-making is driven by fairly straightforward psychology. It’s the fear of missing out on one of these apparently “hot” deals. This can then create a very aggressive bidding war. A hot round may get done in a handful of days.
Conversely, a VC doesn’t really want to look stupid in front of all their buddies by investing in a crazy idea that comes to nothing. However, economically, it’s much better for a VC to invest in a few extra “duds” than to risk missing out on the single hot deal of the year.
Now notice the similarities in how the science funding takes place. You propose an idea – basic research, but your chances of “success” increase with pre-written papers. H-indices determine your fate, and a lottery system determines your luck to achieve the outcomes. Besides blowing up smoke helps in the background.
Its the science which looses out. Ideally, we need a blend of both approaches. An idea is genuine only if its sustainable. For example, my idea to devise a health care platform is designed to be self-sustaining. I have deliberated of all possible outcomes (including economics and self-financing modes), but it requires considerable efforts to be heard. My peers don’t understand the technology side (some of them do!) or the ones in the VC industry fail to grasp the nuances because they are attuned to reckon about “services”, “customer moats”, “b2b” or “Saas” models.
Speaking to an audience of budding entrepreneurs at Pioneers Festival, which Wired.co.uk attended, he said that many people building startups think that engineering and design are the critical factors as to whether their business is successful. “I would challenge that. What’s missing in most startups is scalable, cash-flow profitable (costs you less to acquire the customer than you generate in revenue) distribution.”
Science requires genuine problems to be solved. We need to broaden the base of basic research (curiosity funded research) at the “college level” and then move up the ladder on the application base at the “higher-level”. Herein, the industry linkage will prove more valuable. How do you reconcile the idea of “sanitation robots” to a healthcare enterprise? Thats’ sheer wastage of resources. Someone needs to point out that the King has no clothes.
Something more what Tom writes:
Unfortunately, many investors will send quite a lot of bullshit reasons for a “no”, rather than reveal their true rationale – which is normally that you did not sufficiently impress them, or your traction is too far behind comparable peers. Unless you really trust and respect the VC, take the “no” part onboard and discard the rest. I found Michael Abramson at Sequoia and Angela Strange at a16z both exceptional for writing really thoughtful rejection emails.
Despite writing several cold emails, I haven’t received any traction from “professional chairs”, or even solicit video/telephonic interview (part of the reason is the distance). I have carefully plodded on. However, a mental note to myself – I don’t intend to loose conversation threads with interested researchers because there’s always a new perspective to learn.
Tim has brilliant advice on angel investors and crowdfunding. Fundraising is problematic (with many egos involved!) Therefore, it must be clear from the outset.