Most businesses should Avoid vc...

@naomigoez

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Why it worked

The video offers a contrarian perspective on venture capital, directly addressing a common aspiration of founders. By explaining the underlying math and motivations of VCs, it provides valuable insights that resonate with entrepreneurs seeking funding or considering alternatives.

Summary

The speaker explains why most businesses should avoid venture capital funding. They argue that VC firms are designed to return their funds, which requires investing in companies that can achieve massive scale and exits, often in large markets. This focus on hyper-growth and billion-dollar outcomes means many otherwise profitable and successful businesses don't fit the VC model.

Structure

1Introduction: Most businesses should avoid VC.
2VCs aim to return funds, not just fund good businesses.
3VC model requires massive scale and exits (billion dollar outcomes).
4Market size is crucial for VC investment decisions.
5Many successful businesses don't fit the VC growth profile.

On-screen text

Most businesses Should Avoid vc... AT A VENTURE INVESTMENT FIRM, TELL YOU YOU RAISING VENTURE DOLLARS. AND NO, THIS ISNT BECAUSE BUSINESS IS BAD GONNA MAKE ANY MONEY. IT'S BECAUSE MOST BUSINESSES SHOULD REALLY AVOID V.C. VENTURE CAPITAL IS NOT ACTUALLY DESIGNED TO FUND GOOD BUSINESSES. IT'S DESIGNED TO RETURN A FUND. ONLY GOAL. LET'S A 50 MILLION DOLLAR FUND. AND NOW I'M OF INVESTMENTS. MY MENTAL MODEL IS THAT MOST GONNA GO TO ZERO, SO TOTALLY FAIL. A FEW OF RETURN A LITTLE BIT OF MONEY. AND THEN ONLY ARE REALLY GONNA WORK. WHICH MEANS THAT THAT ONE OR TO HAVE REALLY MEANINGFUL OUTCOME. OF THOSE TWO SUCCESSFUL COMPANIES, I DON'T OWN THE ENTIRE BUSINESS OUTRIGHT. WHEN I MADE THE INVESTMENT, 10%. BY THE TIME THEY MATURED AND ARE EXITING. NOW I MAYBE OWN 5%. SAY THAT 5%. FOR ME TO RETURN THE 50 MILLION DOLLAR FUND THAT I HAVE, COMPANY TO EXIT AT A BILLION DOLLARS. THERE ARE A LOT OF INCREDIBLE BUSINESSES THAT ARE HUGELY PROFITABLE. THAT WILL MAKE YOU LIFE CHANGING MONEY. BUT JUST DON'T QUITE FIT INTO THE MATH PROFILE. THAT I NEED TO INVEST IN TO RETURN MY FUND AND THEN SOME. THE GOAL TO MY INVESTOR. THIS IS WHY VC'S PUSH SO HARD ON GROWTH AND ON MARKET SIDE. COMPANIES THAT CAN GROW MILLION DOLLARS OF RECURRING REVENUE IN UNDER A DECADE. BECAUSE THAT STARTS TO JUSTIFY THE 500 MILLION $2 BILLION PLUS OUTCOME. SAME RATIONALE APPLIES TO SIZE OF MARKET. BUILDING IN A MARKET THAT'S $500 MILLION, THAT MIGHT SOUND HIGH NUMBER, BUT YOU WOULD ACTUALLY NEED TO CAPTURE 20% OF THAT MARKET TO GET TO THE $100 MILLION IN REVENUE THAT I NEED TO SEE. REALISTIC. THIS IS WHY VC'S TALK ABOUT THE MULTI BILLION DOLLAR MARKETS. IF YOU'RE BUILDING IN A 10 BILLION DOLLAR MARKET, YOU REALLY ONLY NEED 1% OF THE MARKET TO GET TO THAT OUTCOME. 99% OF COMPANIES OUT THERE DO NOT AND SHOULD NOT FIT INTO THIS PROFILE TO BE PROFITABLE, LIFE CHANGING COMPANIES BUILDING THEM. IS ASKING IF GET TO A BILLION DOLLARS. TRYING TO FIGURE OUT IS CAN THIS BE BIG ENOUGH, GROW FAST ENOUGH SUCH THAT MY EQUITY STAKE IS GONNA RETURN MY FUND AND THEN SOME? A MASSIVELY SUCCESSFUL BUSINESS THAT WILL CHANGE YOUR LIFE WITHOUT VENTURE DOLLARS.

Original caption

The anti vc pitch- a simplified and quick run down of early stage venture and the math behind making early stage bets #vc #startups #fundraising #venturecapital #techtok

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Transcript

As a partner at a venture investment firm, I'm here to tell you you're probably shouldn't be raising venture dollars. And no, this isn't because business is bad, gonna make any money. It's because most businesses should really avoid VC. Venture capital is not actually designed to fund good businesses. It's designed to return a fund. Only goal. Let's say I raised a 50 million dollar fund and now I'm making a bunch of investments. My mental model is that most of them are gonna go to zero, so totally fail. A few of them are gonna return a little bit of money. And then only one or two are really gonna work. Which means that that one or two company need to have really meaningful outcome. Of those two successful companies, I don't own the entire business outright. When I made the investment, maybe I got 10%. By the time they matured and are exiting, now I maybe own 5%. Say that 5% for me to return the 50 million dollar fund that I have, company to exit at a billion dollars. There are a lot of incredible businesses that are hugely profitable. That will make you life changing money. But just don't quite fit into the math profile that I need to invest in to return my fund and then some. The goal to my investor. This is why VCs push so hard on growth and on market side. Companies that can grow to 100 million dollars of recurring revenue in under a decade. Because that starts to justify the 500 million, $2 billion plus outcome. Same rationale applies to size of market. Building in a market that's $500 million, that might sound high number, but you would actually need to capture 20% of that market to get to the $100 million in revenue that I need to see. Realistic. This is why VCs talk about the multi billion dollar markets. If you're building in a 10 billion dollar market, you really only need 1% of the market to get to that outcome. 99% of companies out there do not and should not fit into this profile to be profitable, life changing companies building them. Is asking if get to a billion dollars. Trying to figure out is can this be big enough, grow fast enough such that my equity stake is gonna return my fund and then some? A massively successful business that will change your life without venture dollars.