When I began my career as a young entrepreneur in San Francisco, technology startups were the only business to be in.

Many felt that if you weren’t in or around SF building the next big mobile app or SaaS in the early 2010s, then you weren’t relevant.

Being there during that time felt like being at the center of the universe.

More than a decade later, we’ve seen the full cycle of how this plays out (both the good and the bad). 

Those times created some amazing, prosperous businesses that changed our world: Uber, Stripe, Airbnb, DoorDash, Snap, Tinder, Instagram, and hundreds of others.

These incredible wins should be celebrated. The founders became rich, as they should.

But there was a less talked-about downside for a much larger group of founders.

Imagine this scenario:

A founder creates an amazing product and gets their first few customers.

Growth takes off and they start to hire a small team.

Angel investors and seed-stage funds take notice and collectively put a couple million into the company.

With all the new sales and marketing people, revenue growth takes off.

Now big-time VCs take notice and invest a whopping $50 million into the business.

Expectations are sky-high and growth needs to accelerate.

After a few years, the business is doing $20 million in revenue…but is burning a few million dollars each year.

No problem, this is how every big company is created. Just keep growing, the VCs say, and they’ll keep putting money in until the business is worth billions.

But suddenly, growth stalls.

Instead of a +15% quarter, the business only grows 2%.

Not a huge deal. Just regroup and get aggressive about executing a new sales and marketing plan.

But it barely works.

Revenue jumps 5%, but expenses have to increase 15% to pull it off.

A few more quarters go by with the same story.

Revenue is increasing, but not fast enough. The burn rate is increasing.

Suddenly, the VCs aren’t so bullish.

They decide to pull the plug and stop funding the business. With only 4 months of runway left, the journey is suddenly over.

A $20 million/year business will either have to shut down or sell for pennies on the dollar.

The founder walks away with nothing (even after selflessly taking a low salary for years to invest more into growth).

A nightmare scenario for a founder.

But it happens nearly every day in startup land. I saw it play out during my startup days, and we’ve seen it play out again after a tidal wave of venture investments in 2020-21. 

Over the last three years, we’ve witnessed dozens of such cases. Former high-flying companies that failed to reach the ambitious dreams of VCs and were quickly cast aside.

Our firm has bought several companies that went through this unfortunate cycle. And we’ve learned a lot.

Many of these businesses can never be the $1 billion giants that VCs dream of.

But many can be run with healthy margins when we prioritize profitability, as opposed growth.

There are two main lessons I want to convey:

1. A bad venture investment isn’t necessarily a bad business. We love acquiring companies and making them profitable with steady growth; we don’t need hypergrowth to be satisfied with an investment.
   
   
2. Talented founders are realizing the pitfalls of taking on venture funding and are instead opting for steady, controlled growth over aggressive, out-of-control growth. As a result, more founders are choosing to only raise a small venture round or skip fundraising altogether in order to maintain control over what they build.

Venture funding has declined over the last couple of years as this cycle plays out again, just like it did in the 2010s.

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The market is finding an equilibrium. Venture is absolutely necessary, but with every hype cycle, investors get carried away and companies get overfunded.

Over the next few years, we plan to buy up many of the businesses the VCs are no longer interested in. 

We’re simply looking at businesses from a different lens: Instead of TAM and growth rates that VCs look at, we’re focused on stability and the ability to free cash flow. 

Venture is a viable strategy, but we believe our strategy is a different, yet still viable (and more predictable) strategy.

If that sounds like your business, or a business you know, please reach out to us. 

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