May 7, 2021
Venture Capital Funds Got Dumb. How Can We Make Them Smart Again?
New competition plus tougher markets for startups means that VCs need to evolve or face extinction.
Venture Capital funds are in trouble. This may sound odd because today there is more money flooding into the industry than ever. Look behind the hype because all that glitters may not turn into gold. As funds get larger VCs cannot offer the same level of help to the growing numbers of startups in which they invest. Today’s VCs are getting stretched thin and with growing competition and evolving needs from startups, VCs need to change their strategy if they want to remain relevant.
“Smart money” is the term used to describe investments that come with additional guidance, contacts and advice. Today with the speed and growth in the industry, smart money is suddenly not so smart.
Consider this scenario:
A late-stage seed funded company is firing on all cylinders. There is money in the bank and the founders and first hires are working around the clock to get the product updates released. Initial client feedback is positive and the future looks bright.
There is a problem though. The VC is not satisfied with the progress updates, especially sales forecasts and they want more data. Rather than adding value, the VC is now chasing founders for reports, a classic management trap that happens when responsibilities increase, and spreadsheets replace real conversations. Now, instead of VCs providing advice and coaching, the focus is on the reporting. This is a drain of valuable time and resources for everyone.
Recently I spoke to several senior VC industry executives who echoed this sentiment. Their challenge today is managing their own growth because it limits their ability to help their portfolio companies succeed. Others claim that their portfolio companies are expected to figure things out on their own because that is the way things have always been done.
This latter argument is facing new headwinds. All this liquidity is accelerating funding cycles, leaving startups speeding along and developing bad habits and missing critical steps in building a sustainable business. These are vital stages in a growing company’s development, and they need help now more than ever. Too much money, not enough smart money.
The opportunity here is for VCs to offer more compelling and targeted services to their portfolio companies with the singular goal of helping them grow more effectively through each stage of development. This does not have to be a massive undertaking but carefully selected services designed to reduce wasted time and increase productivity. For VCs that do not have the time to do this on their own, they can find partners to help.
The agile VC firms that solve these specific startup growing pains will be the ones who increase their portfolio performance and get the attention of ambitious founders who are being courted by alternative investment options.
Facing similar struggles? Drop me a connection request and I can share insider knowledge about how some fast-adapting investors around the world are solving this challenge.
Kyle Hegarty is a global business growth specialist based in Singapore who works with companies on growing their sales and expanding into new markets. His book, The Accidental Business Nomad: A Survival Guide for Working Across a Shrinking planet won the 2021 Axiom Business award and explores the good, bad and ugly lessons learned from global entrepreneurs.