Challenge of VCs

Published on Twitter, 25 Sep 2014

One response to the tweetstorm about Burn Rates:

"Why isn't this just hypocritical VCs overfunding reckless founders of out-of-control startups?"

In fairness, there is probably some of that, though we & the investors we respect try hard not to indulge recklessness & irresponsibility.

But while it's irresponsible to vaporize cash & your company, it can also be irresponsible to NOT invest to become #1 in a big new market. Particularly now, since there are SO many more people on the Internet & SO many more businesses that can consume cloud/SAAS vs 15 yrs ago.

Tension: Overinvest, escalate burn, risk down round, vaporize when market turns; OR Underinvest, starve growth, don't win market, implode.

Why is this so important? In tech-driven markets, overwhelming economic returns tend to go to the company with the highest market share. And, the winning company with the highest market share can invest the most in R&D, build the best and most advanced products. The prize.

Via Glengarry Glen Ross: Reward for market position #1 is 90% of the economic value. #2, a set of steak knives. #3, you're fired.

The challenge for CEOs and boards of tech startups is to thread the needle, just enough investment to take the #1 position, but not more.

Meeting this challenge has resulted in thousands of venture-capital-backed companies creating millions of jobs over last 50 years.

This challenge becomes far harder when money is flowing freely, since more competitors get funded. Very tricky. Requires deep judgment. BUT opting out of the race generally guarantees you won't be #1 or even #2. Not a good idea either. Just as serious a risk as blowing up. No single answer. Up to VCs, CEOs, boards, and later-round investors to think very carefully about this for each specific circumstance.