It had a good thing going for a long time, but in the last decade it has lost some of its identity and direction.
What happens to people at inflection points in their lives?
You start questioning who you are, whether you should be doing something different and if you can possibly keep up with a changing world.
Maybe you quit your job, cut unwanted obligations and chase every shiny object that catches your eye.
I believe venture capital is in a similar kind of moment. The system is no longer functioning as it once did, and it’s got a lot of people asking, “Where do we go from here?”
This is not a dig at VCs. I count many of them as friends and people I highly respect. I talk to them about these issues all the time and they nod their heads eagerly in agreement!
My goal is not to criticize, but to raise awareness so we can all work together to get the system running smoothly again.
What Happened To Venture Capital?
Several unfortunate trends have emerged in the startup world that we need to acknowledge and address, because they’re costing all of us in terms of a loss of checks and balances, overblown valuations and overly risky investments.
The Old VC Checks And Balances Are Gone
New companies used to have to prove themselves to progress through increasing rounds of funding. Series B investors counted on their Series A buddies to hand them deals that had gone through the appropriate hurdles.
That changed after Facebook went public with a $100+ billion valuation, starting a trend of high-valuation IPOs. Wall Street lost its former IPO “pop,” so it went to Silicon Valley and started pumping money into earlier-stage companies, counting on the power of big numbers to pay off.
These days, founders with nothing more than a PowerPoint are getting millions!
The median pre-investment valuation for a Series A round of funding has increased sixfold to $37 million since 2010. Too much money going into startups too soon is ruining companies, and it’s putting VCs in a tough position.
Valuations Over Value (Obsessed With Unicorns)
With so much money pouring into the startup world, valuations across the board have gone crazy.
I feel sorry for a lot of young entrepreneurs because they’ve been misled into thinking fundraising is the goal. They tell me excitedly, “I’m going to be the next decacorn!”
There are many factors that go into valuations, and they can have more to do with massaging investment terms than any true indication of value.
You can have the best valuation in the world and still be in the startup graveyard in two years.
Founders don’t realize the negative impacts of accepting so much money so early. It can force you to focus on the wrong things, and you always lose some control. You can easily end up in a high-pressure job rather than being the master of your own destiny that you envisioned.
High-Dollar, High-Risk Investments
In this environment of overvaluations, VCs, needing to deploy capital, are having to fight for deals by making big bets on unproven companies.
Yet, funding terms haven’t adapted to match the changing reality.
While VCs are often passive capital, they’re used to locking founders into a fixed path with little flexibility to learn, iterate or pivot.
This was never an ideal approach, but it worked fairly well for proven startups. However, if you’re investing in something that’s just an idea, chances are that kind of rigidity will kill it before it ever becomes anything more.
The sad thing is we’ve become OK with throwing money into 10 companies knowing nine of them won’t work, as long as that last one explodes. It’s part of a “unicorn or bust” mentality that steers founders in the wrong direction and leaves tremendous opportunity on the table.
Wasted resources, damaged relationships, potentially great companies wrecked, stress all around and too little value created.
There has to be a better way. And there is.
How Venture Capital Can Get Its Mojo Back
Here are the top strategies I’m embracing in my corner of the startup world to bring the ecosystem back into balance.
Restore Checks And Balances
We need to get back to vetting early-stage companies before significant venture investment. Most ideas can and should be tested for a fraction of what people are pumping into them today.
Doing this early on gives us the freedom to be objective as we test and iterate ideas. We can avoid the mindset of, “This has to work.” What ends up working is rarely what we think in the beginning. Let’s go in expecting that, figure out quickly and cheaply whether there’s a viable path, and then decide if it merits further funding.
This will help us all get back in our lanes, so series A, B and C investors can come in with appropriate levels of funding when the company actually deserves it.
From the beginning, venture capital has been an exclusive club that most people don’t have access to.
New technologies and funding systems are radically changing the game.
Crowdfunding is making it possible for anyone to make small investments in lots of early-stage companies. Blockchain technology is enabling creators and founders to take this a step further — crowdfunding their ideas using NFTs without even needing a “middleman” platform.
With the rise of low-code/no-code platforms, the costs to start businesses and create products are dropping fast.
These developments are fueling an explosion of great businesses coming out of non-traditional regions and populations. VCs need to pay attention and embrace this democratization of entrepreneurship and access to capital.
Focus On Value
Let’s get back to the essence of business, which is creating value and improving people’s lives.
The Great Resignation should be a wake-up call.
People want not only flexibility and freedom, but meaning and purpose in their work, and they’re no longer willing to settle.
Talent will be the battleground for business for the next couple of decades. Companies that fulfill this need have a major advantage.
Entrepreneurs are supposed to be problem solvers and visionaries. There are too many problems in this world, and too many great ideas that need support, for us to be continuing on the path we’ve been on. It’s time to reassess our priorities and refocus on meaningful work.
From Crisis To Opportunity
Psychologists are beginning to recognize that a midlife crisis doesn’t have to be a completely negative experience. It’s an inflection point that can be a natural period of transition — uncomfortable, but useful — paving the way for new awareness and growth.
Despite these recent imbalances in the venture capital world, I’ve never been more excited about the prospects ahead.
The emerging possibilities for meaning, fulfillment and reward are beyond anything imaginable a decade ago. As we enter this new era, we all have a choice: we can be obstacles, or we can be stewards. I choose the latter.
Mark S. McNally is the founder and chief nobody of Nobody Studios, a globally distributed high-velocity venture studio bringing together investors, founders and creatives to forge companies with purpose, real-world value and a human connection. For more information, visit www.nobodystudios.com.