Many entrepreneurs have experienced the keen sting of rejection when venture capital firms refuse to invest in or otherwise respond to their exciting new startups. In fact, founders today have less than a 5% chance of getting institutional money from the top VCs, and the most elite firms boast an even rarer rate of success (for example, the odds of securing backing from Andreessen Horowitz are approximately 0.7%).
However, that does not stop us from trying.
When I was a Junior in college, I helped found a B2B SaaS called Rola, which was a community engagement software for professional associations. We secured a pre-seed round of roughly $150k and were looking to scale quickly. After all, we were a group of twenty-somethings looking to validate our (rather ballsy) decision to drop out of school.
After relocating from NYC to San Diego, drafting over 100 pitch deck variations, and getting accepted to 3 prestigious accelerator programs, we were still coming up empty-handed in regard to interest from VCs. We had tapped our entire network for warm intros and sent dozens of eye-catching cold emails to no avail.
Though we had an MVP, sales funnel (validated by our advisors who worked as sales execs), a huge market, and a clear path to profitability, it seemed no one was interested in hearing our pitch. Even the institutions that claimed to invest in “hilariously early” startups fell through.
After months of tireless work, I began to ask myself some questions. The feedback that we were getting did not seem to add up. We were told that we needed more sales, but also that our product was not up-to-snuff. However, improving the product required capital, which was only possible through sales or another round of funding. And, of course, if the product lacked functionality, no one would be willing to pay for it in the first place.
If that synopsis was a bit confusing, I created a diagram that might simplify things. After one particularly frustrating week at Rola, I drew it on a piece of paper and called it “The F*ck Circle.”
Something was clearly missing. It seemed as if we needed more sales in order to raise more capital. However, we needed that very capital in order to improve our product, so that we could in turn make sales. In other words, The F*ck Circle was an impossible conundrum. One might even go so far as to call it “f*cked.”
It was not until recently that I began to understand why our team at Rola kept running into roadblocks. My realization occured when I perceived that VCs may not actually value what they say they value. What if they cared less about profitability and more about hype?
If that sounds like a ridiculous proposition, hear me out.
Venture capital is built on the assumption that for every hundred investments, one could change the world (and make boatloads of money to recoup the losses from the other 99 companies). Historically, this has meant that VCs are far more focused on a company’s potential (both its idea and founding team), rather than its current state.
This potential-oriented messaging is pervasive in the industry. Founders Fund even has an extensive manifesto where it examines the relationship between technology and innovation throughout the 20th and 21st centuries. The piece begins with the question: “What happened to the future?”
All of these data points have left the impression that venture capital firms are the daring defenders of freedom and modernization: transforming the world into a better place and crafting a more novel future.
Those of us who have studied the startup saga (from the dot-com bubble to the WeWork debacle) know that the reality is not so perfect.
An interesting example of the disconnect between what VCs say they value and what they actually value is apparent in 15-year-old Eric Zhu’s startup, Aviato.
Zhu garnered attention on Twitter after posting that he was leaving his high school class in order to pitch his company to venture funds. From a bathroom stall.
After going viral for his unorthodox pitching methods, Zhu is rumored to have secured funding from Sequoia Capital (after scout Josh Payne tweeted that “What happens in the bathroom stays in the bathroom”).
You may be thinking to yourself “Wow, Aviato must really be something.” And, you are not wrong. Zhu seems to be a talented founder with a knack for garnering attention on social media (and, it seems, closing deals). Furthermore, after just a cursory glance, his platform seems to be a truly seamless solution for investors.
However, it is not Zhu, or even his company, that is most curious. It is the way in which investors discovered him. At least on the surface, Aviato’s story reflects an age-old narrative: a charismatic tech founder (with a compelling story) has an idea that garners hype, and a bidding war ensues. Oftentimes, this leads to a lack of due diligence and an indifference to whether the product has the ability to affect real change.
And therein is the core problem of the current VC landscape: venture institutions have shifted away from making bold, future-oriented investment choices through bland, ambiguous, and inconsistent messaging.
On one hand, firms dictate that companies must reach a certain ARR before they would even consider investing, while on the other, they write checks to companies that have simply generated hype on Twitter.
Unfortunately, these discrepancies are all under the banner of “investing in the world’s potential” or “helping the daring [to] build legendary companies.” Yet, as we have seen in recent years, this is often not the case.
So, what does this have to do with why entrepreneurs struggle to secure financing from venture firms? Simply put, these trends exhibit the disheartening reality that a startup’s success is not necessarily, or even primarily, determined by the quality of its idea. There are other, less advertised factors at play.
The F*ck Circle illustrates the impossibility of what VCs say they are looking for. And Zhu’s company showcases what they are really seeking: hype.
With this in mind, I refuse to believe that this is the end of positive, world-changing venture capital deployment. While there are several concerning elements of the current VC industry, I have hope that time will correct many of these issues.
As Peter Thiel writes in Zero to One, “In a world of scarce resources, globalization without new technology is unsustainable.” I believe that VCs could still be the answer to many of this world’s problems. It just requires a paradigm shift. One that promotes quality over hype.
In the meantime, good luck to all the founders out there. And please let me know if you break The F*ck Circle.