It certainly doesn't make the strategy any sounder, but why are highly intellegent founders who have far more to lose than any investor getting caught in this pinch? This seems to be the missing question from Paul's post.
Investors are looking for a particular curve. The slow burn, 7-figure exit that founders want is almost useless to VCs. The model requires that the winners pay for the losers. The VC has a finite number of at-bats every year, and each one needs to potentially be an out-of-the-park home run. A company that deliberately bunts is costing the VC an opportunity to recoup their losses on failures, which is the majority of their portfolio.
Founders like to kid themselves about this, but if they raise from a big institutional VC and plan on sitting on the money or executing on a "safe" 1.5-2x model, they're the ones being deceptive.
Safe, conservative plans are awesome. That's why companies should bootstrap.
There's a difference though between swinging for the fences and throwing money away.
>Investors are looking for a particular curve. The slow burn, 7-figure exit that founders want is almost useless to VCs. The model requires that the winners pay for the losers. The VC has a finite number of at-bats every year, and each one needs to potentially be an out-of-the-park home run. A company that deliberately bunts is costing the VC an opportunity to recoup their losses on failures, which is the majority of their portfolio.
This is the problem isn't it. Investors are basically saying unless you can hit 30% month on month growth then we aren't interested in you, but if you do what is required to hit this target then we won't give you the funding to do this with a reasonable runway.
>Safe, conservative plans are awesome. That's why companies should bootstrap.
I agree 100%. Almost all founders should avoid taking VC money and just bootstrap. This of course is not the sort of meme that is popular with VCs.
No, founders are accepting the amount of funding VCs give them. I don't love VCs, but it's weird to blame them for this phenomenon. The VC model can't work differently. Most companies fail, and the winners have to pay for the losers.
I am not blaming VCs, I am blaming founders for taking VC money when the model they are giving it to you under is fundamentally flawed.
It is debatable if VC model couldn't be made to work better, but if this is how they are going to play the game then you are better off not playing and get on with bootstrapping.
But the model isn't fundamentally flawed. Many founders just want to apply it in situations where it doesn't work. VC money is useful when you have a scalable, winner-take-all market that requires a large amount of capital to build out a viable product that you can monetize. If any of those clauses don't apply - the market is not scalable, the market is not winner-take-all, or the capital requirements for monetization are not large - a founder should not take VC. (Strangely, VCs are much better at telling founders when the VC model doesn't apply: many will outright refuse to fund companies that don't meet these qualifications.)
But for founders who are attacking markets with those characteristics - the existence of VC is a huge boon that can accelerate what would normally be a lifetime process (eg. Walmart, Microsoft) into a decade or less (Google, Facebook).
Edit. Changed how to who :)