By Lakshmi Raj, Co-founder and Co-CEO at Replicon
Medium | November 12, 2019
Given the auspicious start of WeWork’s growing empire, few expected that investors would lose enough confidence to cancel the company’s highly anticipated IPO and wind up ousting CEO Adam Neumann within one week. But now that we’re here, I couldn’t help but notice a pattern.
In pursuit of the next profitable innovation, vying for the support of VC investment can feel like reality TV. With an abundance of driven, self-confident visionaries setting out to be the next great vanguards of tech, some continue to fall victim to the “fake it ‘till you make it” school of thought. But this approach didn’t become popular overnight — some VC firms have strengthened appeal by playing into this repeatedly, funding the hotshot entrepreneur with a sparkling pedigree, supporting only those who can raise the highest valuation, and encouraging growth above all else.
But the rare unicorn does exist, and that business will make it big. The rest might at least have a successful exit, like in the instances of Tumblr or One Kings Lane, and find a new home for perhaps 1/10th the peak value. But at worst, constant overinvestments result in a business bleeding money without maintaining any gross margins. Ultimately employees take the biggest hit, but stakeholders can also get left behind if the singular needs of a few shareholders take precedence.
VCs cannot know the outcome of their investments, of course, but some have an agenda nonetheless — even if it means promoting a risky culture. Adam Neumann, for example, is far from the only eccentric figure that has been rewarded by investors. Another is Theranos’s Elizabeth Holmes, who took inspiration from big, successful personalities like Steve Jobs to the point of obsession; wearing black turtlenecks, excusing abrasive behavior, and surrounding herself with powerful people to dazzle investors into paying more and pushing for more — continuing the “fake it ‘till you make it” cycle until it cracked. In her case, the cycle made a full 360° turn. Encouraged by the idiosyncrasies of successful founders, she played a role until she convinced investors she was worth their money, despite promoting a questionable proposal. Adam Neumann, on the other hand, had a truly profitable idea, waylaid by his reckless business practices, including bleeding money without maintaining any gross margins.
What can be done to break the cycle? Due diligence isn’t just for VCs — founders and entrepreneurs can perform their own research on VCs, and keep the focus on a few key factors.
Valuation vs. Value
One core pillar of this process is around brand value proposition. Questions you may want to consider include what value does your company provide, and what kind of value (aside from monetary) are you looking for a VC to provide? Do they match up? As a founder and leader of your company, you know your business inside and out. If tangible markers of growth mean a lot to you, they should mean a lot to the VCs you’re pitching.
In determining its own organization’s brand value, leaders identify what they care about, worry about, and hope for. When looking for funding partners, you need to spend a fair amount of time thinking about their priorities, worries, and hopes too. If a VC has a history of prioritizing the valuation of a company over real benchmarkers of success, it might be a red flag. Monetary growth opportunities are essential and matter to both you and the VC firm, but the investment is also like a relationship, and having similar long-term goals is an important factor for success.
Understanding Market Challenges
In 2018, Pitchbook reported that female founders received $10 billion less in funding than one e-cigarette company took in by itself, and total funding for the year by those female founders accounted for just 2.2% of VC dollars. If you’re a female entrepreneur, this data can seem intimidating. As the fight for equality in equity continues, female founders face even more hurdles than their male counterparts. A careful understanding of this dynamic in VC culture can help founders ask better questions, engage in more productive dialogue about expectations, and, given their own goals, ensure that they choose the right partner.
Building Your Network
One contributor to the gender gap in entrepreneurship is women’s limited access to “social capital.” This is often in the form of robust support networks that are a critical factor in business success. According to the Harvard Business Review, stronger and broader business networks are linked to smaller gender gaps in organizational sustainability. In addition to sustainability, improved access to funding sources is another key factor in building out a network. You can think of a VC as becoming part of this network. Some of the best support groups are built on inclusion, intent, interaction, and trust: a VC may be willing to invest a large sum of money, but it can be a mistake for an entrepreneur to focus too narrowly on price, and not enough on the drivers of long-term value that can come from these components of a business network.
Connections and references on a professional and personal level are important to take into account during due diligence as well. Due diligence is not a black and white process, and entrepreneurs need to take a multi-faceted approach to governance — is the VC leadership relatable and reliable? Are they able to reasonably and thoughtfully address concerns? Are their goals for the future achievable through the discussed KPIs? Is their message consistent across a range of sources?
Of course, this industry is far from predictable, and great success is often tied to great risk. However, VC culture should be changing some aspects that are not linked to success. An investment of millions means very little if it can’t be paid back — and without taking these key elements into consideration, it won’t be. Entrepreneurs have the power to spearhead this mentality and break the cycle, one deal at a time — and no time is better than the present.
Original Source: Medium
Author: Lakshmi Raj, Co-Founder and Co-CEO, Replicon