With increased attention on the world of investors, ("Shark Tank," anyone?), it may seem like the road to growing a business is through amassing tons of money from experienced venture capitalists. But there are issues with building a small to medium business through that model.
First and foremost, VC firms are businesses in themselves. To remain profitable, they want the potential for high return on every business in which they invest.
“Each one of those investments is a lottery ticket,” said $450 million fund Spark’s Katie Bolin. “We want it to be a home run, blow it out of the park, because it’s a power law.”
Bolin said that means her fund is not interested in businesses without the potential to be “huge.” “It’s kind of not worth your lottery ticket,” said Bolin.
That leaves a gaping hole in available capital for SMBs looking to build on moderate successes. Not every business is going to become Twitter, and those businesses still need financial backing and resources.
“Not every business is a venture business,” said Bain Capital Ventures’ Steve Anastos. “So, I think for the guys that haven’t raised money yet, I think the key thing to ask is, ‘Should this company really be a venture business? Do I want to commit to a seven- to 10-year slog to try to get to a really, really big outcome?’”
“That looks a lot different than building towards a $50 million business,” he said.
“This is actually a really big problem, I think, for entrepreneurs,” said Next View Ventures’ Rob Go. “Because the vast majority of capital sources out there -- professional capital sources for early stage companies -- do not invest in companies that can’t have the potential for a multibillion-dollar outcome. And the vast majority of companies aren’t like that.”
“It’s a problem. The fact that VCs only invest in these huge companies, that is a reality and that is the state of the world. There isn’t a solution for this problem,” Go said.
PUBLISHED APRIL 21, 2015