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The Players Technology Newsletter 22.0 — 04/28/19

The Devil’s Name is Venture Capital


Hey <<First Name>>, 

The IPO market is white hot, new millionaires and billionaires are being minted, and excitement surrounding venture capital is back. 

All the speculation surrounding a “tech bubble” and unprofitable venture-backed startups has died down. The proportion of companies reporting losses before going public in the United States is at its highest since the dotcom boom in 2000.

Fortunately for founders, the massive influx of new capital in Silicon Valley over the last ten years has resulted in venture capital serving as the popular funding destination for ALL new companies, and with the newfound success of the IPO market, there is no end in sight. Unfortunately for most founders, venture capital is also the reason why they’ll fail!

Some tech companies are worth billions of dollars, but the vast majority won't be, and shouldn’t raise money like they can be. We’ve been pitched more and more companies that have no business in the venture arena, from hair extensions to towels! The best way to use venture capital is if you have a venture-scale idea. Not every company can be a unicorn and scaling fast isn't the best choice for every startup. 

Examples of the new venture funding non-venture companies is extremely prevalent in the consumer space where VC’s have backed “tech” companies selling socks, shoes, furniture and eyewear with growth prospects and valuations similar to enterprise software companies! For every consumer “tech” phenomenon like Casper, Everlane, Allbirds and Warby Parker, there are hundreds of other consumer companies raising funds touting similar growth projections that won’t survive. 

This doesn’t mean they aren’t good companies; they just aren’t “tech” companies. Venture capital kills more businesses than it "helps” because the pressure to grow crazy-fast means companies keep raising money to keep their growth rate up. That, in turn, means they rarely have the opportunity to learn how to spend money in a disciplined, sustainable way. The best consumer companies have achieved outsized growth and scale because brilliant marketers run them, but they aren’t tech companies. 

Venture capital has also completely upended startup media companies as evidenced by BuzzFeed, which has raised almost $500M in venture capital, has endured massive layoffs and asked for donations to stay afloat. And it was hardly the only venture backed news startup to hit a wall. In the summer of 2017, Vice announced layoffs after raising $450M. And Mashable was sold to Ziff Davis for $50M, far below its $250M valuation from a March 2016 investment round.

With so many of these startups chasing digital ad dollars, the backing by venture capital simply became unsustainable. Facebook and Google now control that game, and no amount of clickbait is going to change that.

Because most venture capital firms focus on investing big money in companies that might provide billion-dollar exits, it's a zero-sum game. If you attempt to grow too fast and fail, your VC will chalk it up as a losing bet and move on to the next company to go “big.” But I think for every company where that’s a good move, there are 100 where that’s a big mistake. So, while it might be great for your startup to have slow, steady growth, that will be of zero interest to most VCs. And for VC’s it makes sense, you can’t hit a home run with without swinging; the problem is sometimes when you swing and miss, your teammate doesn’t get another at-bat.

Sincerely,

Rudy

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“You only find out who is swimming naked when the tide goes out.”

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