If VCs Want To Survive, They'll Need To Evolve

(and so will entrepreneurs)
by Joe Procopio
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The Venture Capital industry has always been slow to change. Ask any founder outside of Silicon Valley who has raised VC money what they thought about their fundraise and you'll quickly discover that the pattern is usually the same.

1. Going into the fundraise, the management team was cautiously optimistic.

2. About a quarter-to-half-way into the raise, it became the worst decision they'd ever made.

3. The ones who succeeded never want to do it again, even though they know they have to.

That process is starting to change, little and late, but there's hope.

At the time of writing this post, Social Capital had just made public its new business plan to fund - or at least provide feedback to - startups from anywhere in the world, based on an application and access to the key metrics of the business.

This is a smart plan. If it works.


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It's also kind of reactionary, not revolutionary. The barriers to entry for starting a company have been falling fast and hard with the mainstream adoption of the Internet some 15-20 years ago. They fell faster and harder with the adoption of smart mobile ten years ago.

The hurdles to funding started shaking loose as well. Kickstarter went from a niche way to beg for early adopters to full-on fundraising machine. Angel investing has grown in awareness, if not necessarily in practice. Crowdfunding is starting to look real, as public laws and private interests start to turn an eye towards the attractiveness of early investment in future winners.

Entrepreneurs are coming out of the gate smarter, further ahead, and more investable. There is also easy-accessible data available to anyone who signs a non-disclosure agreement, offering a glimpse as to how much smarter, further ahead, and more investable these startups are.

That data is what Social Capital is banking on, so to speak. And they're not alone. VCs are starting to shift from an emphasis on relationships to an emphasis on data -- just like every other industry the world over. But it doesn't mean that the concept of "team makeup" is no longer important, it just means that "gut" is finally starting to be replaced by "facts."

This is great, because it means less of a reliance on bias when deciding which startups to fund.

It doesn't mean that the rest of the world is now game-on for Valley VCs. But add Skype, Dropbox, Google Docs, Slack, Trello, and a growing startup hub-and-spoke system, and Valley VCs can be just as remote-work-oriented as the rest of us have been for a decade.

It doesn't mean that you'll be able to get funded "sight unseen," which is an angle that most of the media around the Social Capital announcement are leaning on, but it does mean that "sight unseen" is a possibility, which means that the old sticky thing about having to be in a room with the founders to see what makes them tick before writing checks is going to sound like even more of an excuse than it does today.

Yeah, what makes a founder tick is important, but if whatever is ticking inside that founder is resulting in triple-digit quarter-over-quarter recurring revenue growth, then do you really have to be in a room with that founder to absorb and verify it?

I mean, come on, it's just a gut guess anyway, right?

It doesn't mean that biases about women founders, minority founders, older founders, hell, any type of founder that isn't a blonde, blue-eyed, khaki wearing, Stanford dude, are going to go away, but it does make it harder for biases to drown out data.

So this is the beginning of a decent trend.

But guess what? As those VCs are evolving beyond the confines of what their eyes tell them, the entrepreneurs are going to have to evolve too.

I've said this a million times and I'll probably say it a million times more: An entrepreneur shouldn't even think about raising VC money until they know exactly why they need it. Taken to the next logical step, the only real way for an entrepreneur to know they're ready is to be able to make reasonable guesses as to what their data is telling them.

There's no longer any excuse for not having a good sense of how much your company is worth before investment (called "pre-money valuation"). So before you even think about a pitch deck, you'll need to get cold, hard facts about current and future revenue, customer growth, market share, total addressable market, and all manner of data showing how potential customers will discover your product, when they'll buy it, how they'll buy it, and how you'll get them to buy more of it on a regular basis.

Not guesses. Facts.

"Send me your pitch deck" is very quickly being replaced by "Send me your dashboard." And while that's a lot harder to put together, it's going to say a lot more about how fundable your business is.

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