Why Traditional VC is Broken and What Founder Should Be Aware Of

Credit and Thanks: 
Based on insights from 20VC with Harry Stebbings.

Deep Dive

One of the most significant lessons he learned was the "golden rule of investing," which emphasizes the importance of entry price. This principle is crucial for founders to understand; they should be acutely aware of their valuation during fundraising rounds. Overcapitalizing a company can lead to dire consequences, as it sets unrealistic expectations for growth and profitability. Founders should strive to maintain a balance between raising sufficient capital and not inflating their valuations to a point where they become unsustainable.

Green also expressed skepticism about investing in AI infrastructure, likening it to the early days of the internet when the market was flooded with companies that ultimately failed to deliver. He argued that the incumbents in the AI space are likely to dominate, making it a risky investment for newcomers. For founders, this serves as a cautionary tale: rather than jumping on the AI bandwagon, they should focus on building unique value propositions that differentiate their offerings in a crowded market. Founders should ask themselves how their product can stand out and what unique insights they can bring to the table.

The notion of billion-dollar companies emerging from single founders was dismissed by Green as "comical." He pointed out that the complexities of building a successful business require teams with diverse skills and resources. This insight is particularly relevant for founders; they should prioritize assembling strong teams and fostering a collaborative culture. By doing so, they can leverage the strengths of each team member to drive the company forward, rather than relying on the vision of a single individual.

Green's analysis of the SaaS landscape revealed a troubling trend: many companies generating between $50 million and $200 million in revenue are experiencing slow growth and are not yet profitable. This cohort faces significant challenges, as the market is increasingly unforgiving towards companies that do not demonstrate clear paths to profitability. Founders in this space should focus on refining their business models to ensure sustainable growth. They must be prepared to pivot if necessary, seeking out new revenue streams or optimizing existing ones to enhance profitability.

The IPO market, according to Green, is fraught with challenges. He noted that many companies that could go public are choosing not to, which could have long-term implications for the venture capital ecosystem. Founders should be aware of this trend and consider their exit strategies early in their journey. They should engage with their investors about potential paths to liquidity, ensuring that they are aligned on expectations and timelines.

Timing is critical when it comes to selling in venture capital, and Green highlighted how many in the industry have mismanaged their exit strategies. Founders should be vigilant about market conditions and be prepared to act when the time is right. This means not only understanding when to sell but also recognizing when to hold on to their companies for further growth. They should develop a clear exit strategy that aligns with their long-term vision.

For smaller emerging managers, Green's advice is to focus on building strong relationships with limited partners (LPs). He emphasized that LPs are often more important than founders in the investment ecosystem, as they provide the necessary capital and support for growth. Founders should cultivate these relationships, understanding that LPs can offer valuable insights and connections that can help propel their businesses forward.

One critical question every LP should ask their VCs is about the exit strategy for their investments. This question can reveal a lot about the VC's approach to managing their portfolio and can help founders gauge whether their investors are aligned with their goals. Founders should be proactive in discussing their exit strategies with potential investors, ensuring that everyone is on the same page from the outset.

Green's perspective on ByteDance and TikTok was particularly enlightening. He argued that TikTok's significance to ByteDance is overstated, as the company's core business extends far beyond its social media platform. For founders, this highlights the importance of understanding their business's broader context and potential. They should not become overly reliant on a single product or revenue stream but instead explore diverse avenues for growth.

The power of Chinese AI is often underestimated, according to Green. He pointed out that China has made significant investments in AI technology and talent, positioning itself as a formidable player in the global landscape. Founders should take note of this trend and consider how they can leverage advancements in AI to enhance their products and services. They should remain informed about global developments in technology and be prepared to adapt their strategies accordingly.

Actionable Insights

• Conduct thorough due diligence on your valuation to avoid overcapitalization.

• Focus on assembling a diverse and capable team to drive your startup's growth.

• Regularly assess your business model to ensure a clear path to profitability.

• Develop a strategic exit plan early, considering the evolving IPO landscape.

• Prioritize customer retention strategies to maintain high gross margins and ensure sustainable growth.

Key Quote

"Entry price matters a lot; don't overcapitalize companies."

Future Trends & Predictions

As the venture capital landscape continues to evolve, we can expect a shift towards more sustainable business models, particularly in the SaaS sector, where profitability will become a key focus. The rise of AI will likely lead to increased competition, with established players dominating the market, while emerging startups will need to differentiate themselves through innovation and strategic partnerships. Additionally, the importance of ethical considerations in technology will grow, as consumers become more aware of the societal impacts of social media and AI-driven products.

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Jiten-One Cerebral

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