I recently saw a letter circulated from a well-known Silicon Valley VC fund.
They were forewarning their vast network of start-ups of a cold winter in search of funding this year (names omitted to protect the [innocent]).
That letter advised taking stock of resources, budget, and more, centered around preparing to have less access to capital this year than in prior periods.
A reasonable assumption if you are a traditional VC.
However, that letter cemented an already unfortunate reality that, as a founder, I was painfully aware that most founders that I’ve worked with are not.
Traditional VC funding for start-ups is foundationally broken.
And for the most part, it is a road not best traveled by every start-up founder.
Especially ones with high personal integrity and a desire to be the primary financial beneficiary of their hard work and creativity.
In my experience and opinion, here is why the traditional VC model is fundamentally flawed and how it can finally get fixed.
The Broken Foundation of Venture Capitalism
You would think that after five years of VC-bashing from the recent Silicon Valley TV series, investors would wise up and maybe consider a fundamental change.
Not a chance. And they seemed to have doubled down in recent years.
Greed also appears to have no boundaries in our capitalist world. Just ask Jeff Bezos and digest his “march to mediocrity” in how he treats Amazon warehouse workers.
In the world of VC money, nearly everything will be considered disposable on the way to a highly profitable exit.
And I do mean nearly everything. Nothing is off the table, especially for the founders.
After all, the bizarre cult-like culture evolved by VCs that you must run through dozens of start-ups burning hundreds of millions in LP cash, like wine tasting until you find the perfect flavor to exit the tent with, should be sufficient to see such a model is at best fundamentally flawed.
Lest we not diverge.
Over a specific 4-year period of my life, and after more presentations than I can count sitting in front of VC decision-makers from Tiger Global, Benchmark, and Frontier, to Spark, Thrive, Global Founders Capital, and dozens more, several fundamentals became painfully apparent as a start-up founder to get VC funding.
1. You will give up substantial equity — a decision founders always regret later.
2. They will take far too much control — a process founders always regret later.
3. You will likely not wind up leading your vision — a change founders always regret later.
Through hundreds of VC-speak meetings and term sheet negotiations, all VC funding seems to balance start-up founder decision-making on the same fulcrum: it's their way or the highway.
Resultantly, start-ups and early-stage companies somehow have adjusted their minds and souls to live with this as a “necessary evil.”
As such, (1) — (3) above is prevalent when calculating the market-standard VC start-up valuation formula:
VCs estimate start-up value by projecting a terminal flow to investors at an exit event and typically only modify this on new rounds and compensation incentives.
From a founder’s view, however, that formula winds up looking a lot different:
Pulling back the VC curtain on this broken stage, we see how flawed this model has become.
VC Flaws Every Start-up Should Know
Let’s be honest.
VCs know what a start-up is. And start-ups know they’re not conventionally investable.
VCs are aware you’re not coming in with 5, 10, or 15 years of audited balance sheets. GAP compliant books. Or with a seasoned C-suite and stable customer base looking to grow business with a conventional loan that you’d service like a mature company.
Instead, start-up founders are more like an actor performing auditions to land highly paid roles so they can pay the rent, their team, keep building products, or maybe keep the lights on.
Start-ups are peddling equity for cash to either get or stay airborne.
VCs know start-ups are not safely investable no matter what they may tell you.
Hence their justification for taking so much from a start-up to hedge their risk.
Flaw №1: the art of a VC is how to convince founders they are helping when they’re skillfully gutting your start-up to their ultimate financial advantage.
It’s like the exotic car shop that knows you have nowhere else to go with your Bugatti. So, you are convinced it is a necessary evil to pay $50,000 for brakes and $500,000 every four years to maintain your investment.
Or, on a lesser scale, how Apple forces device owners to fix their products at Apple stores, where they can charge $1,200 to fix a laptop screen when bending a multi-pin connector for a better fit at your local FixIt shop can turn your screen back on for $25.
The art (con)? Convince start-ups that they need VCs more than they need the start-up. And often, manipulate agreement to terms founders likely regret when it’s too late to change them.
Flaw №2: Venture Capitalists are inherently not founded by highly successful start-up founders, so they are generally clueless about what a founder is going through or will go through to succeed.
This is an observable (and proven) fact pervasive across most VCs.
In nearly all cases, their investment criteria and business models are blueprinted, led, and managed by people who have either never worked in or are successful start-up founders, having made it through dumpster fires or 7, 8, or 9 digit exits.
That’s rarefied air for a VC.
While not necessarily every VC falls into this category, I would say about 99% of them do, from my experience.
Flaw №3: By nature, VCs are generally a classic start-up “bait and switch.”
Getting funded by a VC is not materially different from getting married. The primary difference is; that ordinarily, there is genuine love going into matrimony.
Not with VCs.
They’re happy to court and coddle you until “I do.” But unless you’ve had your most trusted attorney explain the terms you’re getting into, be prepared for the worst possible outcome after signing on the dotted line.
“We’re here to help you to a great exit” commonly (and sometimes rather quickly) turns into “we want to go in a different direction.”
Am I anti-VC?
Not at all. I simply don’t agree with inexorable business models.
Believe everyone when they tell you that VCs were founded with one and only one core investment principle in mind: results for them, not for you.
Most VCs reading this will likely shake their head and say, “this guy has no idea what he’s talking about. That is Investment 101.”
Ahhhh…., but alas, we pierce the VC veil and plainly see why these flaws are so prevalent today.
Greed.
Simply, good, old-fashioned greed.
The God-Like Change
It is high time to change this cult. Dissolve the priesthood. And shift who holds the power.
And this change is about as straightforward, simple, and real as it gets:
MAKE START-UPS 100% INVESTABLE BEFORE INVESTING.
This may sound too simple but think about it.
If this were factually in place, it would:
Shift the VC world tectonically.
Give LPs better access to fully qualified deal flow.
End the billions going down the drain.
And most importantly to me, keep start-up founders at the helm of their vision with most of their equity.
To drive this point home, let’s look at arguably one of the most famous VCs today. The odds of receiving an equity check from Andreessen Horowitz are just 0.7%. The chances of a startup being successful after that are only 8%.
Combined, that’s a 0.05% or 1 in 2000 success rate.
Is that necessary? Absolutely not.
Would Andreessen Horowitz otherwise convince you that it is?
They absolutely will.
VCs are a priesthood. And I have seen firsthand how most will protect that membership and club practice to the death.
But what if start-ups could learn the same knowledge that the priesthood has? And get the know-how their Wall Street experts have coveted for decades?
What if founders could learn the same inside skills, “trade secrets,” and back-office VC funding models they so skillfully use to their advantage?
After learning that, what if start-ups could follow a tailored program for their own business with their own team and make themselves 100% investable?
And finally, what if start-ups then had VCs lined up to write checks on the correct terms they need to ensure making it to a successful IPO?
Does this sound more fiction than fact?
Well, this is the “God-Like Change” needed.
And it’s happening as I write this article.
Rather than elaborating for another 10,000 words, find out for yourself.
I am on the Board of Directors of what I wholeheartedly believe is a program on its way to creating that tectonic shift and forever changing the VC world.
It is the Financial Architect System™ and the fastest way to legally raise capital–guaranteed.
It comes from Commonwealth Capital. Founded in 1998, Commonwealth Capital is a hybrid venture capital management company comprised of former Wall Street investment bankers and stockbrokers, as well as experts in deal-structuring, corporate governance, fraud prevention, and securities regulatory compliance.
They provide start-ups and early-stage companies a no-frill, no fancy marketing, no-big-pitch program that drives a stake in the chest of that VC priesthood with authority.
Fortune favors the bold, and that fortune is placed entirely in the hands of start-ups that complete this program.
Again, please don’t listen to me. See for yourself.
Visit the Financial Architect System™, start the program at no charge, and the first two chapters are free.
And the funding world will soon be at your disposal.
Conclusion
I’m a serial entrepreneur, a seasoned start-up founder, and now sit on both sides of deals.
Feel free to visit my own site anytime or my current company and latest projects under our incredible corporate parent at GA Telesis, one of the world’s largest commercial aerospace firms with over $1.0 billion in assets under management.
I speak from my own years of experience, not from an ivory tower.
Having traveled the start-up road that got me where I am today, I’ve learned well enough to know the Financial Architect System™ is truly the God-Like change the VC world needs.
If you’re a start-up or early-stage company founder, this program is for you.
Invest the thought-equity now to savor your start-up equity and lucrative exit later.
It could be the best investment you’ll ever make.
Good luck!