VC funds are just like Ponzi schemes — and you should take advantage of that when raising capital
VCs are only interested in rapid growth
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 todayhelped me secure a €100k pre-seed capitalfor 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.
Story byRihards Piks
Rihards is a serial entrepreneur and digital marketer, working in the D2C space. Currently, he’s building Supliful – an on-demand supplement(show all)Rihards is a serial entrepreneur and digital marketer, working in the D2C space. Currently, he’s building Supliful – an on-demand supplement fulfillment startup. Before that, he co-founded, scaled, and successfully sold the D2C online brand Grafomap.
Get the TNW newsletter
Get the most important tech news in your inbox each week.
