Investors have strong incentives to share their opinions. Blogs, podcasts, and books serve as inbound marketing for VCs. Accordingly, much of our collective wisdom surrounding startups stems not from those building companies but instead from those funding them. While this arrangement might not be inherently bad, founders should be careful of the biases backed into commonly accepted conclusions.
I’ve identified a few potential misalignments. This list is a work in progress.
Cofounding
While I personally think having a cofounder is awesome, it seems like a great deal for a VC. They get a company with two cheap, ambitious, ultra-dedicated employees instead of one. While the founders both instantly lose half their stake, investors lose little. No wonder YC advocates so strongly for cofounding with only 10% of admitted startups having a solo founder [1].
Law of Large Numbers
Investors are placing many bets with the hope of one or two home runs. A 10% chance at a $100B exit is a great bet for many early investors. Most founders would not be eager for such a risk profile. A 50% chance at a $100M exit would be much more attractive to the founder even though it has half the expected value. VC wisdom is oriented towards these big outcomes since they have the luxury of a portfolio and many bets. “Blitz scaling” and high burn rates tilt startups towards these all-or-nothing outcomes. With a higher risk-free rate of return and as PE activity picks up in software [2], I am excited to see how people rethink all-or-nothing outcomes. Ending up with a midsized business isn’t always the end of the world for the typical founder.
Bigger Rounds Pre Product-market-fit (PMF)
There are stories of perseverance. Figma took 3 years of hacking with WebGL before launch. Twitch was a reality TV show. Airbnb was selling cereal boxes. They give the impression that good products take time. Well-capitalized investors sitting on billions of dry powder seem not only to have preached these stories but also internalized them themselves, pushing founders to raise bigger and bigger rounds without product-market fit [3]. This seems to be a potential time trap for founders: taking too much money obligates them to work on their company for many years to come when they may or may not have a product/market worth their time.
Valuation
These days, every VC blog, podcast, or fireside chat seems to be highlighting how valuations have been too high and how investors are becoming more diligent with money. While this is mostly true and appropriate, exposing such beliefs puts VCs back in the driver seat. A little bit of skepticism is always healthy. ∎
[1] https://www.protocol.com/y-combinator-founder-matching-help
[2] https://pitchbook.com/news/articles/pe-firms-software-deals-q2
[3] https://www.theinformation.com/articles/venture-capitals-new-normal-outsized-checks-and-unsolicited-offers?rc=1pxzio