NFX is a Silicon Valley venture fund that I love. They are wickedly smart. Their recent newsletter painted an optimistic landscape for founders. Yes, I know that doesn’t sound right. How can it be that the worm has turned and the founder/ startup CEO has a fighting chance?
Herewith some data, courtesy of their managing partner, James Currier. In 1994 there were approximately 150 full-time venture investor firms. Barbara and I started our first company in 1995, and yes, you could park on Sand Hill Road and you could knock off a dozen VCs in two days.
Today there are approximately 32,000 venture firms. All of them are chasing Mr. Unicorn exits, what the stock-market gang calls “seeking alpha,” which means looking for investment opportunities that are uncorrelated and can generate returns seriously exceeding the market averages.
“Founders are lucky to be alive right now,” says Currier. He goes on to make the case that the number of venture investors will increase, not decrease. Lots of money looking to make more money. Again, good news for the founder.
The rest of the newsletter is a healthy caution to the venture community. Red flag warning — it is going to be harder to get deals and make outsize returns. For the moment, it appears founders have entered the new shark tank — imagine, all that over-subscribed VC money is trying to find you.
One potential result of this is to stay alive, VCs will have more frequent exits of smaller amounts. Lots more singles and doubles. No more Casey at the bat.
Currier says deal-sourcing has changed. In the old days, VCs would wait for inbound inquiries, you needed a warm introduction to even get a sniff. Now he says, “you can expect to get called by more VCs looking to find what you are up to.” So, founders, when the phone rings, answer it.
All investors are developing “outbound deal sourcing” to get ahead of their competitors. They are moving upstream to seed and pre-seed. Now the caution for the founder. The associate who calls you, his/her job is to talk, to get intel, to pick your brain and maybe your pocket. Your job is to build a company so manage the chit chat. Be polite but be focused.
Currier suggests changing your LinkedIn profile to “stealth” or “working on something new.” Equally important is to have a terrific chief marketing officer (CMO) because you need to tell the world you even exist. And I encourage “forward looking statements.”
Be careful what you wish for, you may get it. My little AI company gets pitched last week from someone who wanted us to hire him to raise money and make introductions. That idea is closely associated with the plague. Run, don’t walk, away.
He spent 30 minutes telling us how smart he was and why he was worth $25,000 per month as a retainer. He never asked us one question about who we were, our history, the company etc. Know your customer is the banker’s mantra. I think it applies equally, if not more so, when you are courting a customer or an investor.
If you have a good story and a good company, the money will find you, and professional investors hate when you hire a stand-in-stooge. All that says is that you are a rank amateur. Money usually bets on the founder, not on the promoter.
The VC community is now using AI to assist in the picking. Notwithstanding NFX’s optimism, you might still want to figure out what the AI buzz words are and see if you can put them on the menu. “Farm raised, organic, artificial intelligent chicken parm.”
Currier says VC investors “need to make founders happy” in order to compete for an investment into the company. (Maybe, but the idea of happiness, as a concept, is beyond my ability to process). I am a big believer in gratitude, not attitude. Careful about arrogance as an appetizer. You are not the only entrée on the menu.
Finally, a serious caution. Currier says, “All 32,000 VC firms have learned that non-consensus ideas drive returns, which means non-consensus ideas are now also consensus, meaning even outlier ideas” are likely to get a parking place on main street.
Rule No. 843: “Don’t follow leaders, watch the parking meters.” —Bob Dylan.
Senturia is a serial entrepreneur who invests in startups. Please email ideas to [email protected].
