September 10, 2023

How Spray and Pray Kills Companies

Happy Sunday, friends. I have a controversial take today. Ok, here we go. I have seen VCs invest into companies that can't consume and use their capital as an experiment or part of a spray-and-pray strategy, and they don't have to care if they burn out and die.

There, I said it. And it might irk people. When the RBF market exploded in 2020, I called out that we would see founders suffering from over-indebtedness, and I was right. That annoyed a lot of people, but it galvanized others around the idea that we all (every capital provider) ought to approach the privileged work of funding other people's dreams through the lens of do no harm...not the lens of deploying as much capital as fast as possible without regard for the outcome for the companies taking on our cash.

VC is a game of chasing ever-growing unicorns, and today's VCs require staggering outcomes in order to deliver the returns they need to raise their next fund, which continue to grow. As VCs chase ever larger fund sizes, their outcomes have to become ever larger as well. It’s a brutal and predictable cycle. That can be great for the few LPs in the best performing funds, but it comes at a cost to the rest of the early stage ecosystem.

Those staggering outcomes mean something very important for entrepreneurs, and it's something I think they often miss when contemplating how to build their businesses: The companies who can get to multi-billion dollar outcomes are the ones who will get the follow-on capital. That means the ones who can't get there will be left in the cold, and while that's not news, it's worse now than it used to be. The bars are higher. The funding landscape drier. Good companies are right now struggling to raise the capital they need to survive the "VC Winter". And good companies that took the wrong kind of capital will die because they didn’t hit their VC’s milestones.

I don't think the blame lies just with VCs though. This is a systemic issue, and I think you have to look left in these situations; i.e., look at what drives VCs. And in my view, it's the LP community funding those VCs, and pushing to get into their ever-larger funds that bear ultimate responsibility. Those same LPs will eschew emerging managers and new approaches in order to stay in the safe and warm aura of the GPs they’ve invested in before. After all, VCs are basically salespeople; they're selling returns, and they're selling money. LPs keep buying on one side, and entrepreneurs keep chasing on the other.

It's also the accelerators, consultants, and economic development organizations pushing the narrative that raising VC money is an outcome, not a means to an end. They train entrepreneurs to raise money, not to run a profitable business. How many times have you watched a CEO whose company should absolutely not raise VC pitch at every event they can sign up for? How many companies have you seen that keep pitching, year after year after year? Those CEOs believe the fantasy of VC is real: that if they just raise a round, they'll succeed. That’s a lie. How many economic developers have you heard say they’re building “the Silicon [insert geographic feature here]”? Probably a lot. Replicating that Silicon Valley concept — and the funding mechanism that power is — is a fool’s errand. “We need more $100M exits,” is something I hear in Midwest ecosystems all the time. Do you? Or do you need to meet your entrepreneurs and businesses where they are, find ways to promote your unique set of assets, and grow what you already have?

Yes, entrepreneurs need better education and a deeper understanding of their funding options, and what each decision means for them. But entrepreneurs have enough on their plates, don't they? They have to figure out how to go from zero to one, how to build, what to build, how to gain customers, how to sell, how to survive. And they aren’t the experts in capital formation; in fact, they’re the ones asking for help, advice, guidance and wisdom.

For that reason, I think it’s the duty of this community to educate entrepreneurs, LPs, and economic developers on these points. If we don’t, nothing changes. And because VCs are the most prominent players in the early stage ecosystem, I think it is their duty to do the same.

I hear VCs talk about approaching their jobs with empathy all the time, but I don't really know what that means other than being useful as a tag line and a way to demonstrate a founder-first approach. I think that it's time for VCs to shift their mentality and demonstrate real empathy for entrepreneurs by adopting this mantra: first, do no harm. I think about it this way. Every time a VC invests in a company that has little chance of delivering that VC's return multiples (as a spray and pray strategy, for example), that's a failure of the VC, but the entrepreneur ends up suffering the bulk of the weight of the outcome. It's the entrepreneur who reconfigures their business to hit the metrics the VC wants them to hit. It's the entrepreneur who loses their business when they can't raise follow-on financing because they're on a treadmill they never should have stepped onto. That is a brutal asymmetry. And it is an extension of the information and power asymmetry that starts the VC/entrepreneur relationship (a topic for another newsletter). Entrepreneurs have to play the game to raise VC, then they have to hit the VC's marks in order to get more money. And when they don't, they often lose their business. Poof. A dream, a life's work, up in smoke.

So hey everyone out there. I suggest we all live by this credo: First, do no harm.

Educate. Be responsible. Don't spray and pray. You're impacting livelihoods, and lives.