Startup Financing and the “Foie Gras Effect”
VCs are force-feeding startups until they self-destruct.
“I’m sorry for the ducks. I love foie gras.”
Foie gras is a French delicacy made of the liver of a duck or goose that has been specially fattened. The production process known as “gavage” involves shoving metal tubes down the throats of unsuspecting ducks and geese to force-feed them copious amounts of grain and fat, an amount that is more than what they would normally eat in the wild. As a result, livers swell up to more than 10 times their normal size, producing the fatty consistency that is admired by many.
There has been widespread controversy over the production of this famous dish and has been banned in countries such as Argentina, Australia, Denmark, Germany, Italy, and the UK. World-renowned chefs such as Wolfgang Puck have also condemned the production and use of foie gras.
Duck, Duck, Goose.
Through all of the smoke and mirrors, the world of venture capital is nothing but a wild goose chase. Venture capitalists spend billions of dollars in hopes of securing the world’s next unicorn. It’s a massive game of “Duck, Duck, Goose” — walking around in circles until they land on an unsuspecting victim.
Like ducks, startups are being force-fed excessive amounts of capital to chase hyper-growth.
Venture capital can work wonders when conditions are just right and if it’s in the hands of the right company, resulting in explosive growth. Unfortunately for the majority of startups, being overstuffed with cash results in the business going belly up.
When a startup takes on venture capital financing, they get caught up in the VC treadmill. Companies are compelled to scale prematurely as burn rate, cash runway, and valuation events end up being at the top of the priority list. With such high pressure to perform, this takes a company’s focus away from listening to customers and evolving to their needs, running lean, and financing through its own revenue.
Here is 167 of the Biggest, Costliest Startup Failures of All Time by CB Insights.
Not All Growth is Created Equal
Growth without context quickly becomes a vanity metric rather than a success metric. While “good growth” can supercharge a business, “bad growth” can cause a vicious cycle of unsustainable burn. Instead of financing businesses under the assumption that capital is a constraint to startup scale, capital should instead be strategically used to scale models that are already proven to work.
Money has no insights on how to fix a broken business.
As a company looking to grow operations, don’t be a sitting duck. Just because foie gras is on the menu, that doesn’t mean you should order it. Alternative financing options such as revenue-based financing focuses on achieving sustainable revenue growth.
Written by: Sabena Quan-Hin
Flow Capital provides revenue-based and venture debt financing for emerging and high-growth businesses.
