Article Review: How to Raise Money from a VC (Scott Kupor, Andreessen Horowitz)

Author, Brian Parks, Managing Partner, Bigfoot Capital

If you’re a Founder, you likely have questions around venture capital, such as:

• What do VC’s care about?
• Should I pursue venture capital?
• What comes along with taking VC money?

Scott Kupor, a Managing Partner at Andreessen Horowitz, recently shared his thoughts on these questions (and some others) in a post on Medium, appropriately titled “How to Raise Money from a VC.”

Here are my takeaways on Scott’s article:

1. Market Size Rules:

Scott’s view: “The cardinal rule of VC investing is: Everything starts and ends with market size. No matter how interesting or intellectually stimulating your business, if the ultimate size of the opportunity isn’t big enough to create a stand-alone, self-sustaining business of sufficient scale, it may not be a candidate for venture financing.”

My view: Scott’s certainly not wrong as he’s speaking as a VC investor. The VC investment model is predicated on the notion that a handful of companies in a venture capital portfolio are capable of achieving massive scale (multiple hundreds of millions of dollars in revenue). It’s these outcomes that drive the outsized returns in a venture capital portfolio and make up for the 0’s and under-returning investments in the portfolio.

SaaS lenders like us don’t really care all that much about market size and massive scale potential as we’re not making “winner take all” market bets. We believe (and see that) successfully sustainable companies can be built and thrive in niche markets with very meaningful outcomes of their own. These are the businesses we’re interested in supporting and for which we are a more natural (and viable) fit.

Our investment success does not rely upon having outsized returns from a few investments, rather we’re looking to not lose money on any of our investments and have a stable portfolio that delivers return to us and our investors. That said, if you truly have the ability, desire and proof to go huge (become a unicorn), then VC may be the natural fit (at some point).

2. Venture Capital Rejection Makes Founders Feel Like Failures:

Scott’s View: “So, what if the market opportunity just isn’t of that scale? That doesn’t make you a bad person or your business a bad business. It’s unfortunate how many founders can feel that way. You could be running a multimillion-dollar business with great profits and be living a happy, wealthy, influential life. Your business might be helping people, enriching lives or even saving them, and still not be the right fit for raising VC.”

My View: I wholeheartedly agree with Scott on his point of Founders adopting the “I’m not good enough” mindset when VC’s pass on them.

This notion of Founders thinking “I’m not good enough” is pervasive in the tech industry and detrimental to the Founders operating in it. I’ve felt this feeling of “not good enough” as a tech Founder who has previously pursued VC and know many others who have felt the same way.

This is a cognitive fallacy that seems to exist in the tech industry much more so than in other more “traditional” industries, and it’s purely driven by VC’s dominating the narrative as the sole capital source that, at the end of the day, funds ~2% of tech companies. So, they dole out a lot of “No’s” that feel like rejection to Founders. Thankfully, as the capital options available to tech companies continue to evolve, this will become less and less the reality for Founders.

3. Venture Capital is not the End All, Be All Financing Path.

Scott’s View: “All that means is that you might need to think differently about where and how to raise capital and come up with a different approach. The point is simply that venture capital may not in all cases be the right source of capital for you. It might not be the right tool for the job.”

My View: Scott’s right, sometimes there is a better tool for the job than VC, especially when you’re an initial-scale B2B SaaS company pursuing a non-venture capital aligned growth path. That’s why we exist — to offering financing that works for these Founders with better alignment and without the downsides of the VC model.

The good news is that both the narrative of “venture capital or bust” and the Founder mindset of “I’m not good enough” are changing as: 1) SaaS financing mechanisms evolve and become more transparent (still more work here, you’ll see more from us on this) and 2) SaaS Founders realize they have more viable and varied financing options available to them than ever before.

It’s good to see an established VC explaining the venture capital investor mindset and saying it’s not aligned with every company out there raising capital.

4. The Rules of the Venture Capital Road:

Scott’s View: “And even if your business is appropriate for VC (because of the ultimate market size opportunity and other factors), you still need to decide whether you want to play by the rules of the road that venture capital entails. That means sharing equity ownership with a VC, sharing board control and governance, and ultimately entering into a marriage that is likely to last for about the same time as the average “real” marriage (8–12 years).”

My View: I applaud Scott for putting this out there to help Founders understand what they’re signing up for when they take venture capital money. The only thing he does not mention is the “growth at all costs” growth path you’re signing up for and the risks that come along with it. First and foremost being, if you don’t hit hypergrowth and can’t continue financing your business with subsequent venture capital, you will likely have a poor outcome where your venture investors may walk away whole and you still walk away empty-handed after years of really hard work.

Isn’t it strange that even if you didn’t necessarily really fail, you’ll be viewed my many as such and still feel like you did?

Your venture investors kind of feel like it even though they came in potentially expecting it and can certainly live with it. Your personal finances certainly feel like it as you likely did not have some financial windfall from this outcome and have not been earning a “market salary” which is what we all sign up for to a degree when building a business.

Think long and hard about whether you can live with that. It’s very common and can crush a Founder. Of course, you can always dust yourself off and run at the next thing. You’ll just be battle-scarred (good) and years down the road (fine, can’t combat aging).

To summarize, you will be taking significant dilution in the company you created, selling it piece by piece along the way. You will be signing up for a hyper-growth plan that can supercharge potential equity value creation or can drive your company into the dirt. If things don’t pan out, your VCs can realize their investment in your company as a zero in their portfolio and be ok with it. The impact is much, much more painful for you as you have one company (unless you’re Jack Dorsey or Elon Musk), not a portfolio of many you can shift focus and dollars to. In effect, you will constantly be competing for attention and future investment with your VC investor’s portfolio of companies. If you’re not demonstrating you can be a top decile returner, you may be left behind.

Can you, as the Founder of a single company in that portfolio, live with this dynamic?

That’s my take. Agree? Disagree? Let me know at bparks@bigfootcap.com.

Founders — please remember this:

• You’re good enough — you’re the one doing this really hard work.
• Your business matters most — its customers and employees, not the financing behind it.
• You are in the driver’s seat — not your investors
• You have options