The Big Lie of Venture Capital
I was part of the problem. As a journalist covering the startup ecosystem, rag-to-riches startup stories were my bread and butter. I’m not saying my stories were not genuine: I’m saying that I contributed to perpetuating the Big Lie of venture capital.
To be fair, I was not on it. I did not know it was a lie.
Of all the people, I should have been aware of the Big Lie. Unlike most people, I actually was paid to interview venture capitalists, read market research about VC investment, failure rate of startups and so on.
I knew very well launching a tech startup was a foolish move. I knew that only 0.91% of start-ups end up raising from angel investors and only 0.05% from venture capital firms.
Only 0.91% of start-ups end up raising from angel investors and only 0.05% from venture capital firms. Click To TweetI even knew that only about 30% of FUNDED startups manage to exit.
I knew angels and early-stage VCs are not investing in ideas; they’re looking for a great founder, a great team, a huge market, a product that works and some kind of proof that the market wants the product.
I knew delivering all of those things would be very hard without money or personal savings. But I did it. And nonetheless, I failed at closing an angel round for Hardbacon. There were a lot of angels interested and even some VC firms, but no one wanted to sign the first check.
I personally spent a lot of time during the last four months meeting with prospective investors in Montreal and Toronto. And I realize now I should have been investing all my time in acquiring customers, making them happy and signing deals.
I’m not saying that, since I failed at raising an early-stage round, no one can. Far from that.
I’m just saying that, like a lot of other entrepreneurs, I naively believed the Big Lie of Venture Capital.
There are a lot of early-stage rounds happening in Montreal. No questions about it.
What I was naive about, like so many founders, are the requirements for raising such a round. No fewer than 38% of startups received funding from friends and family. Early-stage investors don’t like to sign the first check, so they tend to prefer investing in startups that already did a friend & family round.
Another thing investors like is when the founders made a sizeable investment in the startup themselves. As a result, when you read in the media about entrepreneurs starting in a garage or in a dirt-cheap apartment, well, they indeed started in those settings. It’s just that they omit to mention that sure, they were working from a one-bedroom apartment, but they also had rich parents or were wealthy themselves.
It’s not only about the money. It’s also about the great team. But what is the definition of a great team? For most investors, not mentioning their predilection for all-male founding teams and distaste for non-whites, it’s either people that had a successful exit in the past or people that attended an Ivy League university, preferably Stanford or Harvard.
It’s no surprise that there is a disproportionate number of VCs that graduated from top universities, and that those same universities are where a disproportionate number of founders studied. And trust me, it’s not only in the US. Go and check the Linkedin profiles of Canadian VCs and funded entrepreneurs, and you’ll find a surprisingly high number of Ivy League educated Canadians.
So, unless you come from money, attended a prestigious university in the States or sold your previous startups for a lot of money, you should assume that you’re never going to raise early-stage capital. Don’t use counter-examples. Sure, they exist. Sure, Oprah was a dirt-poor single mother before becoming a billionaire, but those are fairy tales.
Unless you come from money or attended a prestigious university, you’re never going to raise early-stage capital.Click To TweetBootstrapping a tech start-up is not for the faint of heart. It is extremely difficult, especially for SaaS business like Hardbacon, because we need thousands of subscribers to break even.
But given the low chances of getting funded at our current stage, if I were to start-over, I would have taken the slower, but more cash-rich route of doing a little bit of services to finance our product business. As of now, I stopped taking meetings with investors to focus on signing deals with financial institutions and preparing our equity crowdfunding campaign. Yep, we’ll raise money directly from our users.
The problem, with the Big Lie, is that it kills a lot of startups that end up building their strategy around a capital infusion that will never come, and end-up wasting a lot of time trying to fundraise. Some of those startups would have had a better shot had they focused on sales. It’s still super hard, but the odds are better. The problem is that bootstrapping success stories often remain unknown, as the valuation of those startups is never announced in press releases.
Mailchimp has built a 700 employees highly profitable SaaS business out of Atlanta doing just that. Basecamp is another highly successful SaaS built out of Chicago that never raised. In Canada, there is GSOFT that built a highly profitable SaaS business out of Montreal, and PlentyOfFish, that was built out of Vancouver. When the dating website was sold for 575 million in 2015, its founder Markus Frind pocketed the whole amount, since he did not have any investor. Not a bad, hey?
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We came to the same conclusion, my dear Julien. Last year we were the pretext for the 5 to 7 angel investors meetings. We were the wannabe Miss Universe in Bikini for the VC analysts who asked us for our Pitch Deck (and a whole bunch of other documents very strategic, very confidential, and very easy to use to advise our competitors). To refuse is also a job after all. Today it’s over. We focus on sales. We no longer believe in this lie. However, there are other lies. The “parasites” of the startup-system still have many tricks in their bags to make you waste time and money. The only ones who know are your peers, the other startup executives. But as no one wants to look weak, defeatist or pessimistic, they keep quiet. Thank you for your honest article that tells the truth!
I’m very disappointed Julien is writing like this. Sounds like a bitter and angry article that makes no sense. First of all, little support for its biggest claims. For example - that early investor don’t sign the first Cheque. What’s the data to back that up? Where’s the data to back up that they requiere family and friends funding first? A data point was thrown - 38% of startups raise from family and friends - so? If anything, it means 62% of startups raised from early investors, negating the claim.
Then, the other bold claim that VCs have a distaste for “whites” in great teams is misguided. The article quoted said 87% of “funded” (not great) teams were white but that the Asians were the largest funded in dollar amounts. It’s just rude then to claim distaste. Moreover, that article is for the US - not Canada and is from 2010! that’s 8 years ago. 1 year after Uber got started. Talk about DATED data! VCs have changed, teams have changed. I know Julien asked NOT to give examples quoting Oprah but that’s not fair. Here’s one: Jessica Scorpio with 2 others started GetAround in Ottawa in 2011. Super successful startup. Not captured in that data: later than 2010 and Canada. NOT a fairy tale. Hard f work.
I believe being an entrepreneur is hard. The focus is on everything: sales, operations, having enough money (raising, debt, friend and family, however) and those that succeed are the ones that are persistent, that add value, that believe they have something to give to the world. It’s tough. Not getting an angel round when you wanted is just part of the deal. Just like getting a flat tire on my road trip vacation. Learn from it, adjust the course and keep going. Positive thinking attracts positive energy which attracts money, talent and success.
What doesn’t work is claiming everyone out there is a racist and that if you’re a certain race, nationality and didn’t go to certain school then you don’t stand a chance is just LAME. When you BLAME other people and things for your failures you’re Being LAME. Keep working hard - there is no failure. Only success and lessons learned.
This is an over dramatic article. VCs take great risks, and bet on various types of ventures measuring different aspects of their EXECUTION, their ability to measure the correct KPIs, to know their client, to pivot based on real results, to sell, to build a cheap prototype in order to test their market, etc. Montreal is VERY conservative VC market, you should take a look at Asia, where VC is bullish, and invests in ideas, talent and the ability to commercialize and execute. While there is racism and elitism for sure, these are hardly important points. VCs usually are very well connected and can help their portfolio companies get in touch with the right partners, at the right time, when they haven’t got connections. If you don’t have capital to start, I recommend you seek an incubator or accelerator for your seed money. Also, there is nothing wrong with seeking FFF funds, and angel investors, these are vital to take risks and invest in your idea without any traction.
Although I’ve been talking about the pros and cons of VC funding to friends and entrepreneurs for the past 10 years, and I’m a firm believer that bootstrapping has always been the way to go, I can’t fully support this article and its sweeping generalizations. It’s not a lie if you’re the naive one, Julien. The pros and cons have always been in front of you. Perhaps you bought into the hype more than others.
Sour grapes. I bet that if Julien had gotten VC funding, he would have praised how worthy and smart the VCs are. What is even more astonishing is that he admit to have an understanding of how VCs invest and why. VCs are capitalistic organizations that invest in highly risky enterprises that can bring them a very high return. Therefore, their invesments must fit specific profiles. And if you don’t fit the profile, they will not invest. The hard truth is this: 90% of all files that VC look at are simply not worth investing in (lofty ideas, me too ideas, “we are going to change the galaxy”…but overlooking market forces, even basis demand forces…and no execution plan”)….even more so 99% of “entrepreneurs” are not worthy of an investments (and that where it really hurts the ego of some folks). “Entrepreneur” has become some kind of lifestyle status. It really isn’t. And never should be. As an advisor to startups and growing companies, I can attest to the fact that most “entrepreneurs” have no real idea about what it takes, day in and day out, to build a successful company. And even less of an idea to build a company that is worth the attention and $$ of a VC. Most entrepreneurs believe they can replicate the very few high visibility successes because…well, because what exactly? “We are going to make you rich investing in the stock market because we have a magic formula and an iPhone app”….seriously, Do you really understand how the stock market works? Do you really understand the negative winds a retail investor is facing when trying to make money on the stock market? and do you really believe that you can negate all those forces with your app? Really? And you want VCs to believe you? Like I said, 90% of ideas are not worth funding. And 99% of people pitching these ideas are not worth funding. That gives you VC statistics!
It’s eloquent and accurate. (Exaggerations and shortcuts are based on a literary style that works well in the original language (French) which Julien used in his previous métier.)
To speak more precisely, let’s redefine the lie as more of a social myth perpetrated by everyone altogether, and certainly not by any individual VC. I hope my own reputation is as one who avoids wasting anyone’s time.
Thank you Julien!
“So, unless you come from money, attended a prestigious university in the States or sold your previous startups for a lot of money, you should assume that you’re never going to raise early-stage capital.” I have to strongly disagree Julien.
I’d rather put it as: “Unless you are an extremely strong entrepreneur, with a well-balanced team and have a very solid idea that can scale it is unlikely you will raise early-stage capital”. There is a strong competition! No one will offer an investment to someone simply because they want to be an entrepreneur and have an “ok” idea.
Until you have seen first-hand the number and caliber of entrepreneurs in Montreal and Canada by meeting meaningfully 100+ of them, I believe it would be very difficult without data to make such an assessment. Yes elite universities (or employers) and previous success is often attractive to VCs. It is because it often correlates (not always) with being an extremely strong entrepreneur.
In my time as a VC, we probably invested just as often (if not more) in unproven entrepreneurs without a very prestigious name to their resume… but they all were extremely strong entrepreneurs. Portraying the pretty large number of Canadian entrepreneurs who don’t have previous exits or a degree from an Ivy League but that did raise money, as only a “fairy-tale” is at best uninformed… and at worst a bitter claim from someone rationalizing their own failure.
At the end of the day, if you are a very strong entrepreneur with a world-class team, with an idea that can really change the game, you should be able to find capital in a place like Montreal. It’s easy to blame the system, what’s harder is to look in the mirror and recognize that you and your team are not world-class yet or that your idea is not that special or scalable.
I do however agree with two things you stated:
1. If you are a first-time entrepreneur with limited experience, participating in a strong and proven accelerator is an excellent path
2. You shouldn’t focus all your energy on raising capital early-on but on building your business, learning and proving your model. This is especially true if your idea is not THAT original and strong, and if you don’t have previous successes that can give a lot of confidence to investors that you will deliver.
I’ll leave with this final thought. There is something obvious but often overlooked: not all VCs and investors are equal and they shouldn’t be lumped in all the same boat. There are bad VCs (highly biased, focused mainly on the financial and legal aspect of a deal, in it for themselves, etc.), there are good VCs (good at evaluating talent and idea, focused on the business and how to bring value, in it for the entrepreneurs, etc.) and everything in-between.
Accurate and honest. Thank you Julien. Your metaphor exaggerations and shortcuts seem to me a translation of your classic style which works well in French. I saw it in Le Journal Les Affaires for many years.
Crowdfunding solves two problems: getting first love from clients-users, and first love from wellwishers-backers. You’re on the right track imho.
Thanks for writing this perspective because VC has to build itself up and market itself even when, or especially when, the chances of getting early-stage funding is very low.
From looking at the startups in Canada, you can see that they fund things themselves, or more likely, depend on whatever government grants they can find. And of course, the same “rich get richer” perspective applies. If you already had funding, or already have connections, or went to a top university, you’re already plugged into the funding network and are way more likely to raise early-stage funding.
For everyone else, you have to stop buying into the “big lie” as Julien puts it, and put in the hard work to find customers, listen to their feedback, build a better product, and figure out a marketing & sales strategy. This may reduce the scope of what you can actually build, but that’s much more sustainable and less stressful than trying to chase early-stage funding dollars which your startup is very unlikely to get.
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