The fastest way to destroy a great business is to turn it into a venture moonshot

As we prepare for the end of the summer and the beginning of Fall pitching season, every founder is using this lull in the venture world to polish their decks, practice their pitches, and prepare for a fresh charge for funding when all the investors return from travel after Labor Day.

But during this quiet time, let me ask you to take a moment and reconsider your plans to fund your business with investment from venture capital and angels. Because for 99% of startups that aren’t moonshots, venture capital is a one-way ticket to failure. Other ways of funding a business have a much higher chance of success.

I realize this is a strange request coming from someone who has invested in 150 startups. But as a mentor, I meet too many earnest founders taking venture funding that will destroy their businesses and their lives. I’ve met too many founders who after their startups died an agonizing death, tell me they wish they’d known they were setting themselves up for failure before they took venture funding.

I only ask that you consider what I have to say and think about whether venture capital is the right path for you before you take our money.

Here is what inevitably happens to startups 9 times out of 10.

Founders come up with a killer idea. They talk to customers and confirm there’s a real need. They put together a prototype or MVP and develop customer traction. Great!

Now it’s time to get funding and build out the company. So they create a pitch deck and begin hitting up investors.

Investors’ first question is how big is the market? The second is how big will the company grow?

The founders put together a TAM/SAM/SOM analysis showing a $250M market opportunity, and financial projections showing them reaching $10M in revenues within 5 years.

Initial response from investors is tepid. The founders don’t understand why they’re not getting much love. At some point, someone like me sits them down to explain the hard truth.

Venture capital invests in moonshots. In order to generate the 25% per year returns they’re shooting for, they’re buying lottery tickets. The rule of thumb for venture capital is the startup needs to reach $100M within 7 years and be acquired (or have an IPO) at a valuation over $1 billion. Anything less than that doesn’t fit the venture funding model.

“Should I focus on angel investors instead?” comes the inevitable question. Unfortunately, angel investors have exactly the same economic incentives as venture capital firms, just at an earlier stage when they can write smaller checks. The same rules about lottery tickets and moonshots apply to venture capitalists and angels alike.

So it’s back to the drawing board with a new pitch deck. The goal now is to show how you’ll reach $100M in 5 years.

You look for ways to show a bigger market you can address. After starting with the beachhead market for taco-flavored protein bars, you can add taco-flavored protein drinks, taco-flavored cola, taco-flavored tortilla chips, even taco-flavored tacos. You can expand from the U.S. to Europe and Asia not to mention Latin America. China alone could buy billions. It won’t be long before you blow past $100M on your way to becoming the taco masters of the world.

Now angel investors are excited, especially once those taco protein bars hit the shelves of a few speciality retailers. Then, once you get your first order from Walmart, the VCs will pile in with millions. You hire a big team and throw big bucks at TikTok ads and influencers.

Your sales quickly grow from $1M to $5M to $10M. Investors hand over more cash to keep you growing. Life is grand. Your dreams of becoming a taco billionaire are coming true.

But then sales start to plateau. The next year, revenues grow to $15M. Not bad, but not exponential. The next year $17.5M. And there they stay, bouncing around between $15M and $20M.

The protein bar is selling well, but everything else is a disaster. Nobody wanted the taco cola, not even when you added sriracha sauce and dill pickle flavors. The Europeans banned the main ingredient in your flavoring. In China, a local competitor hits the shelves at a price a tenth of yours.

The one product you started with in the one beachhead market has worked out as planned, but all the extensions beyond that didn’t pan out. That happens every time.

Now you’re losing millions every month. It wasn’t a problem while investors kept throwing in more cash. But once sales hit that plateau, nobody will answer your calls.

You need to raise more money to survive. But now that it’s clear that this is a $20M business rather than a $100M business, nobody will write another check.

The VCs expect 90% of their investments to fail so long as the 10% that succeed do so spectacularly. Once it’s clear there’s no 100x exit, not even a 10x exit, the VCs shrug — despite all their promises of supporting their portfolio companies, that only applies to their winners.

And with that, poof, another once-promising startup is dead.

But it didn’t have to be this way. The problem wasn’t with the startup. It wasn’t even with venture capital. The problem was the poor fit of the business for venture capital. Which unfortunately is what happens when founders pitch a $20M niche businesses as a billion dollar opportunity, and try to turn their niche business into a moonshot instead of focusing on building a sustainable, profitable business at a smaller scale.

What Went Wrong?

The number one cause, by far, of startup failure is not that the product doesn’t work, or that the founders have a fight, or a competitor eats your lunch. The overwhelming reason startups fail is that the market is too small for a venture business.

Once it’s clear the startup isn’t growing exponentially towards a billion dollar exit, venture investors no longer see the investment as viable and abandon the startup.

In pursuit of that $100M market you were targeting, you’re spending $40M in engineering, sales, and marketing and only generating $20M in sales.

By the time you realize you’re not growing fast enough to keep the VC funds flowing, it’s too late to downsize to a smaller, sustainable operation that isn’t losing money.

The cause of death will get marked down as ran out of cash, but the underlying reason was the market was too small.

A Better Alternative

What if you accepted from the beginning that your product was a niche opportunity? That the market size was $10M or $20M, not $100M? That this isn’t a moonshot, isn’t an exponential business that will remake an entire industry? But that it is a great product that a specialized group of customers will happily pay for?

With $15M in revenue and a decent 20% profit margin, the company should be making $3M each year in profits. With two co-founders and no outside investors, that means taking home $1.5M each year. It’s not a billion dollars (almost all of which would go to the VCs anyway), but not too shabby, either. And the chance of success is at least 10x higher this way.

But How to Fund It?

Here’s the crux of the problem: nowadays everyone thinks they have a killer business idea and need venture capital to fund it.

But that’s not the way most companies have been founded and most wealth created over the centuries. Sometimes the old traditional way, the tried-and-true way, is still the best.

So how do you fund it? Instead of hustling for investors, hustle for customers. Build what customers need, not whatever the VC are falling over themselves this year to fund (AI, AI, AI!)

Get the customers to pay you to develop the product for them with special features they need. Not only does that bring in needed revenue, but gives you a checklist of what paying customers want. Get customers to pre-pay for delivery. Or get customers to pay for consulting to do by hand whatever you’re automating.

In fact, if customers won’t pay to develop the product or pre-pay for delivery, that’s a strong sign that the customers aren’t as desperate for a solution as you think.

As you start generating revenue, use that income to grow the business. Hire more engineers, more sales people, and more account managers, and pay for marketing when justified by the income.

Yes, you won’t be able to grow as fast as you think you could with a big dollop of venture funding. But trust me, you won’t grow any faster anyway. No startup grows as fast as they expect because the limitation on growth is the customers, not engineering or sales, and all of Sand Hill’s billions won’t make customers move any faster.

What you’ll create is not only a successful, profitable business, but one laser focused on the needs of customers instead of the shifting whims and interests of your venture capital funders. That will allow you to build a business that can be sustained, generating profits, for the long-term instead of creating a flash-in-the-pan to sell out quickly to the highest bidder.

Is Venture Capital Right For You?

If you’re building a new AI model to compete with OpenAI or developing a new AI processor to beat Nvidia, you’ll need a billion or two of venture capital. Get your pitch decks ready.

But if you’re building a new AI-powered chatbot for car dealers or AI-powered software to read radiology images, you don’t need venture capital. Build it yourself and focus on selling the product to customers instead of selling equity in the business to investors.

So over the Labor Day holiday, I ask you to put away the pitch deck and sit down with yourself. Ask yourself, honestly, are you certain that the market is big enough, ready enough, open enough, to get to $100M in revenues in seven years?

And if in your heart-of-hearts, you know the answer is no, or even if you’re not sure, do not wed your company to venture capital. Because unless your startup is that rare rocketship that will blast into orbit, and 99% of startups are not, that venture capital investment may get you a feet off the ground, but will quickly explode what could otherwise be a profitable, sustainable, wonderful business.

The founder/CEO of SüprDüpr is on a mission to revolutionize transportation with teleportation 🙀. She raised $1B in funding from Satoshi Nakamoto, the head of Bitecoin Ventures. And he’s pushing for the biggest IPO in history while the teleporters are still at the MVP stage. What could go wrong with that? Now the chief scientist is missing and his sister is worried. Despite misgivings, she enlists her ex-boyfriend, the hacker Ted Hara, to find him. And what will he discover inside this crazy startup? Elephants! 🐘🐘

A wild ride through Silicon Valley and the most fun you’ll ever have reading about startups. 🏅American Fiction Awards finalist for Best Mystery Novel.🏅National Indie Excellence Awards finalist for Best Suspense Novel. 4.8 ⭐ on Amazon. To Kill a Unicorn. 🦄

Please support these free articles by buying my novel and leaving a review. 🙏🙏🙏