So, there I was causally reading The New York Times about a freaking ice cream shop when I realize the article isn’t about ice cream at all.
It’s about risk.
I wasn’t that familiar with the story of Ample Hill, its rise and fall, nor its efforts to rise again. But this time, to do so differently.
In their first incarnation, they’d raised $20M+ of venture capital and attempted to run the playbook of a venture backed startup:
“The Ample Hills story is a familiar one in the modern start-up world: Grow too fast, come down hard. This time around, the couple are determined not to get in over their heads. “Toward the end, I was in the office so much that I felt like I didn’t even know how to make ice cream any more,I won’t let that happen again.”
There is nothing inherently “wrong” with venture capital. Its impact and ability to fund, and rapidly scale, businesses is undeniable and highly valuable. But there is an underlying business model driving behavior that many overlook or ignore until they can’t deny its impact.
This added pressure to scale quickly with venture capital can serve as a valuable forcing function to sift the truly venture scale companies from those that aren’t. The early flameouts are endemic to the venture modeal and allow investors to allocate their remaining dollars to the companies with the most upside potential who, in turn, can drive meaningful returns.
The definition of “venture scale” is oft debated, but comes down to either a company being able to reach $1B in value, $1B in revenue or return the entire venture fund that backed them. The expansion of fund sizes has only made venture scale math murkier.
Very few companies, let alone venture backed companies, ever achieve such scale.
So, while only an infinitesimal number of venture backed companies achieve venture scale, 100% of venture backed companies take on venture risk. Just as Ample Hill did the first time around.
And, like Ample Hill, there is a growing wave of founders looking to avoid adding venture risk to their current companies:
Unike venture scale, a definition of venture risk can be fairly straight forward to pin down:
- Moving Targets: Ask any 10 investors what milestones you’ll need to hit to raise a Series A, and you’ll get 10 different answers. You then need to hope that the sector you’re in hasn’t fallen out of favor with investors moving on to the next new thing. And even if you clear those two, they have to like you and want to work with you. That may seem a small thing, but innumerable rounds that tick the first two boxes fail dues to the alchemy of the last. If you’re a founder who prefers aiming at targets you can hit or have a personality or pedigree that doesn’t gel with investors, venture risk may not be right for you.
- Always Be Raising: Early stage investors see bringing new investors for future raises as one of their primary value adds. As a result, founders often find themselves on a never ending tour of coffee shops and board rooms prepping investors for their next raise. It’s not a stretch to posit that fundraising occupies 50–70% of an early stage founder’s calendar, conversations and head space. If you’re a founder who prefers selling to customers rather than investors , venture risk may be an unwelcome distraction from building the business.
- Decreasing Ownership and Control: No one raises just one round from VCs. The more you raise, the less you own and the more rights your investors have that may be at odds with yours. In headier times, competitive rounds led to leverage in terms and votting rights which allowed even highly funded founders to not cede much control. For all but a few, those days are gone. If you’re a founder who values a large ownership stake and a controlling voice at the table, venture risk may put your interests in opposition to the business model of your investors.
- Loss of Optionality: Venture is a binary business. You either build a massive, generational business or you die trying. That’s an incredibly potent rallying cry for many founders who want to make a meteoric sized dent on the universe. For others, they may see a time bounded opportunity, or a niche market going underserved, or may see a life changing outcome that doesn’t have a $B at the end of it. This says nothing about the ultimate scale potential of these business. The founders behind them may just have a more nuanced defintion of what success looks like. The risk of going home with nothing is a much more likely outcome than going big, and that’s an added layer of risk founders may want to factor that into their funding calculus.
- Pressure to Exit: Some founders view their companies as their life's work. Some would rather be their own boss than sell and work for someone else. Some prefer getting rich over time from a business that compounds rather than a one time sale. In venture, liquidity tends to come from secondary sales, acquisitions or IPOs. Outside of venture, there are founder who make life changing money every year through the cashflow of their businesses. That’s not an option for venture backed businesses. If you’re a founder who wants to build a business without the pressure to exit, venture risk may not fit with your ultimate goals.
There are lots of ways to build big and impactful businesses. Raising venture capital is just one way among many others. But raising from VCs doesn’t come without adding some very real layers of risk to your business.
Risk that you build a business that requires funding when investment markets seizes up or shrink. Risk that investors move on from your sector in favor of a newer shinier thing. Risk that today’s funding milestones continue to move just outside you're reach. Risk that you or your business don’t fit the mold that’s shaped for upstream investors. The risk that your personality, temperament or objectives don’t match those of the venture business model.
This is not a swipe at venture, VCs or anything like that. I’m an LP in funds, a friend to many others and the beneficiary of a venture career that changed my life in a myriad of ways. I’m forever grateful.
The optimal conditions for some ambitious founders may be at odds with what the venture business model requires. That’s not a judgement on the potential scale of the business or the capabilities of the founder; rather, it’s an acknowledgment that the venture model isn’t a great fit for many founders- maybe even the majority of those that raise it.
As the two examples above suggest, there’s a growing wave of founders who are choosing to defer or avoid adding venture risk to their businesses. I think we will see a lot more experienced and capable founders doing the same.
Rather than continuing to hammer on the question of whether a business is or isn’t venture scale, we might be better served asking whether a company and its team are right for venture risk. The likelihood of venture scale is negligible, but the reality of venture risk is universally present once the wire hits.