Venture Capital and ”camel” companies — an unnatural combo?
The stereotypical Venture Capital (VC) investor is trying to identify the future outlier (the black swan, the unicorn) early. That is a game of high stakes and high risks as the odds of getting it right are low. Characteristics of the traditional VC model include things like “winner takes it all”, “double or nothing” etc. This is justifiable, as the lucky ones who picked the right ticket and had the guts to see it through to the very end can win handsomely. If you enjoy the thrill and excitement or want to be part of changing the world, traditional VC might be for you.
The common perception of startups and their investors lives and breathes the unicorn dream and is not concerned by the fact that unicorns are the outliers, the statistical exceptions. They are only the visible utmost tip of the iceberg. What about the part hidden underneath, the non-exceptions? They are the startups we call camels — the resilient, reliable companies who don’t try to beat the odds but rather accepts them. They are ambitious — but not in an “all-in, victory or death” way. They take rational risks, considering also the downside. They plan to be in the business infinitely, rather than burn through the cash quickly and hope to raise more in time. Their #1 goal is to become revenue funded, not to raise the next round. They move on and stay alive, rain or shine, with whatever resources they have.
The camel companies form the bedrock of any business ecosystem, including the startup one. But they are not visible as they don’t get the media attention or seek the limelight — they just focus on serving their customers and building their businesses, day in day out.
The traditional VC business model does not favour camels as they don’t target to be the outlier since day 1 — the math just does not work. Yet, camel only refers to the way the journey is made, not the eventual outcome. Camels may well reach even a unicorn status, they just take a far more balanced route to get there. The stakes needed along the journey, and the associated downside risk, are far lower than in the boom or bust model.The ”camel investing” concept is not a fashion (or forced by economic cycles) — it is a timeless fundamental. Professional Angel Investors in the US have practiced it for decades and have proven it to work.
We at Gorilla Capital love camels as they can produce VC level returns with much lower variance. With the cost of funding one outlier-candidate, one can fund several camels. The substantially high level of diversification alone is a great risk mitigator. Also, the probability of reaching a median outcome is way higher than getting to and capitalising an outlier exit. Not to mention the difference in the time it takes to get to the point where investors can get their money back.
The world needs the outliers. Where would we be without Google, Amazon etc. But the world also needs the camels, the countless, invisible companies which solve real problems for real customers and get paid for it, today. They form the bedrock of a healthy startup ecosystem, from which also the outliers grow.
Betting to be the next outlier is the right strategy for very few startups. But aiming to build a healthy business is never wrong. Any company which has eventually been worth billions, was first worth 10 million. Let’s reach that first, and then strategize for the next leg. We at Gorilla have experience of guiding founders through that maze of choices. So for all the camel minded founders out there who have felt a bit misunderstood so far: stick to your conviction and let us Gorillas help out!
