Fund size generally dictates strategy and a tough market makes math tougher for VCs and I'm not sure that founders have digested what it means for them.
I’ve been talking to my team about this for the last couple weeks. The last conversation with my CTO about an hour ago, and then I got this in my email. I forwarded it to everyone on the team. Divine timing as they might say.
Totally spot on post. Many large VCs just can't operate at a check size that fits into a seed or even A round today - the size is just too small to move the needle. This means they will likely pay a premium in B and C rounds to access the high growth deals, further limiting the return profile. We're back to the home run or bust mentality because singles and doubles don't do it anymore, and that can create real tension with operators who don't want to bet the company on low-probability outcomes.
It's quite profound to learn about this discrepancy between founders and VCs; I wonder if a greater adoption of this revelation would result in VCs taking greater risks on companies that stand out with big ideas, beyond simply having a portfolio of successful unit economics. Time, as she always does, will tell.
This seems so obviously accurate, yet I don't think I realized it:
"The biggest understanding gap I see between founders and VCs today is this understanding of the relationship between the investor focus on terminal outcome and the founder focus on the microeconomics and unit economics."
Thanks for sharing! Adding it to The Pitch Insider this week.
From a VC perspective, targeting a small market only makes sense if the goal is to dominate a niche to financially support a lateral move into a larger market.
What about the products that can create a market for themselves? The terminal value might seem small in short term, but in long term, it could be next airbnb?
It is very informative. Unlike the U.S., Japan has a small-cap IPO market, which is different, but what has changed and what has not changed in the market? How will the startup scene change in the future? This is a very thought-provoking writing on how the startup scene will evolve in the future. Thank you very much.
There’s a lot of alignment between VC thinking and commercial outcomes. At the end of the day, founders need to be able to tell their company story in the newest language VCs understand - if it’s terminal value, then you should lean that lang and speak to that.
I’ve been talking to my team about this for the last couple weeks. The last conversation with my CTO about an hour ago, and then I got this in my email. I forwarded it to everyone on the team. Divine timing as they might say.
“But founders have to deal with the world as it is, not as they would like it to be.”
I’ve recently been saying to teams “We have to solve the problems we have, not the problems we wish we had.”
Great and timely post.
Great points, Charles. If your expected terminal value is no longer interesting to your VCs (but is still interesting to you!), we can help.
Great post, Charles. Thx for sharing and reminding people of VC fundamentals!
Totally spot on post. Many large VCs just can't operate at a check size that fits into a seed or even A round today - the size is just too small to move the needle. This means they will likely pay a premium in B and C rounds to access the high growth deals, further limiting the return profile. We're back to the home run or bust mentality because singles and doubles don't do it anymore, and that can create real tension with operators who don't want to bet the company on low-probability outcomes.
Thanks for sharing, Charles.
It's quite profound to learn about this discrepancy between founders and VCs; I wonder if a greater adoption of this revelation would result in VCs taking greater risks on companies that stand out with big ideas, beyond simply having a portfolio of successful unit economics. Time, as she always does, will tell.
This seems so obviously accurate, yet I don't think I realized it:
"The biggest understanding gap I see between founders and VCs today is this understanding of the relationship between the investor focus on terminal outcome and the founder focus on the microeconomics and unit economics."
Thanks for sharing! Adding it to The Pitch Insider this week.
I’ll be forwarding this to my team as well. A lot of funds (including mine) are adjusting strategy right now.
From a VC perspective, targeting a small market only makes sense if the goal is to dominate a niche to financially support a lateral move into a larger market.
What about the products that can create a market for themselves? The terminal value might seem small in short term, but in long term, it could be next airbnb?
It is very informative. Unlike the U.S., Japan has a small-cap IPO market, which is different, but what has changed and what has not changed in the market? How will the startup scene change in the future? This is a very thought-provoking writing on how the startup scene will evolve in the future. Thank you very much.
There’s a lot of alignment between VC thinking and commercial outcomes. At the end of the day, founders need to be able to tell their company story in the newest language VCs understand - if it’s terminal value, then you should lean that lang and speak to that.