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Are most VC’s just followers?

I’ve been working wtih a VC and their crieteria seems like a bunch of BS. Of COURSE you want to invest in companies that are already growing, making revenues, AND have well known institutional VCs. Does anyone else hear this?

  • Always.

    I often tell them, nicely, that if you invest only in companies with proven success, you are not a “v”c; you are a “c”.

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    • I have a great concept but they want a company already making money. If that is the case then I don’t need them. I’m a brand new corporation.

      @Electronsquared

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  • You are politely being told it’s not a fit. It’s annoying because I wish people would be more direct but it is what it is. Plenty of seed stage VCs exist and the good ones are more than happy to be your first money in, provided they believe in you and your concept.

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  • A VC is not the same type of investor – at least these days – as angel or even seed.

    VCs in general have lots of requirements which simply don’t fit a typical startup: for example, they have to have $500K+ sized investments.

    If you think about this, though, this basically doesn’t apply to the vast, vast majority of startups. Everyone wants $500K increments towards multi-million dollar seed rounds, but the actual opportunities which justify this are really quite few.

    Let’s look at a simple example: you’re making the next Snapchat.

    You want $2M to start with and would be happy with 4-$500K VC investors.

    Thing is, that $2M means diddly squat. No one believes that the next Snapchat will be built for $2M. What that $2M really means is $500K apiece now, $1M in a year, $5M in 3 or 4 years, etc until somewhere there is a credible 10x, 20x, or higher acquisition or sale.

    More concretely, a $2M on a $6M premoney = $8M at start. Add $4M in 1 year = $12M. Add $20M in 3 years = $32M. The company already has to be worth $320M to $1B!

    And a VC who participates in the seed round has to cough up $6.5M in order to get to that $320M to $1B, or risk getting diluted out.

    Is it any wonder that they tend to be extremely cautious?

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  • Most VCs will tell you that they will bring more value to your business than just money. That is not true, unless you count negative value.

    The decision-makers in the four VCs I’ve been involved in had never run their own businesses, and they lived in a parallel universe to the one that startup founders live in.

    One of them was inordinately proud of the fact that his fund had a 30% success rate with their investments – which he claimed was much better than the other fund I had pitched to. To me, a 70% failure rate was not a good recommendation, but I suspect that is the norm, or worse. They make up for a lot of poor decisions on the law of averages. Despite their incompetence, some of their investments succeed.

    When you bring in a VC you lose control, no matter how small the percentage you give away (read the fine print), and you will probably be one of the 70% without enormous luck. Don’t kid yourself otherwise. What you have to decide is whether you are desperate enough for their cash to put up with their interference, their dumb strategic changes, and your ever-diminishing equity.

    If you want a quick hit, and don’t have any emotional investment in what you are building, roll the dice with the VC’s money. But if you care about your business, grow slower if you have to, but try to keep control for as long as you can.

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