Venture Capital: Don’t Chase Unicorns, Breed Workhorses
Venture Capital funds are always on the lookout for companies that can be potentially valued at over a Billion Dollars, the famed Unicorns. A small investment in an Unicorn can provide more returns than all other fund investments combined.
It doesn’t have to be like that. My VC firm’s policy is to invest in consistent growth, high return workhorses. The workhorse is unattractive and uncool — When everyone is investing in Artificial Intelligence and Big Data, talking about your investment in a Mattress manufacturer can sound like VC reputation suicide.
If we remove the media hype and look at the metrics, the perspective changes considerably. Many VC funded AI startups are like infomercial sponges — They absorb more investment than their own weight. Their potential is great, but many lack a product, sufficient data-sets and a sustainable business model.
A Mattress manufacturer offers a clear product in a clear market. There is plenty of competition, however there is a lot of opportunity for innovation. A good example is Australian based Koala. The startup’s sales went from $0 to $13 Million in 12 months — A small amount of innovation and clever marketing created a valuable brand in a country with a tiny population.
Venture Capital funds wouldn’t traditionally consider Koala for a seed round, however, a seed round would have proven more profitable than many software based startup rounds. Koala managed to grow without VC investments and is now looking to raise $15 Million to enter the Asian market. This is a small win for the workhorse.
Most traditional industries can create great workhorses that provide consistent growth and returns. Venture Capital funds should consider alternative strategies that provide better inclusion for workhorses in their portfolio.
Beyond the obvious metrics, there is a strong need for cultural change. The VC market is saturated, the cost of capital is low and a large proportion of funds will fail in the 7 year horizon. Venture Funds should focus less on hype and more on sustainable businesses with a solid consumer brand awareness.
Just like the startups that have to adapt to rapidly changing markets, VC funds must adapt to changing dynamics. Current global dynamics, heavy corporate acquisitions, and plentiful early stage investors are requiring funds to be more innovative and flexible than ever.
There are many ways to breed workhorses. As the Managing Partner at Outroll Ventures, I focus on helping workhorses enter new markets such as Asia and the Americas. The workhorses provide a much lower risk threshold than traditional seed stages. Workhorses also provide returns in much shorter timeframes than traditional Venture Capital Investments.
You can consistently breed workhorses, but you can only hope to find an unicorn.