Crossing the Corporate & Traditional Venture Capital Chasm
By Thomas B. Cross @techtionary
This is a brief analysis not an indepth analysis of the venture capital (VC) community and what are some of the fundamental challenges in startups crossing the chasm to growth and success. I would like to thank Crunchbase for the wide array of data in preparation of this article.
First, corporate VC involvement is way up and is not always seen in public for good reason. Rather than deal with corporate siloes, intransigent and legacy internal groups lagging the market, corporations are looking far outside to see what they can get going. As a key advantage, corporations have access to their own internal knowledge, IP-intellectual property and resources that when they find a potential startup, they can get involved quickly. Not so fast, corporate VCs still struggle with their own funding failures or fear of failure and whether they should buy rather than build. Moreover, in cases where the big guys have bought companies you find there is little or no guarantee of success either. There are too many examples of failures to mention here nor is it within the scope of this article.
Second, according to Crunchbase, “Angel and seed-stage deals accounted for 60 percent of deal volume, but just four percent of total dollar volume. This is in line with prior quarters.” Yet the disconnect is that amount of seed funding seems to not reflect the enormous number of startups. My analysis comes from conversations with VCs, angels, startups and customers (yes they have a great amount to say about who they are or not buying from which includes many startups). One prominent VC explained his firm funds about one out of a thousand startup business plans they receive. In other conversations this is about the average but also depends on the focus of the new startup. VCs like founders who have a great track record, yet prior ability or luck has little to do with future success as one VC pointed out. Another said, they have found three key areas for failure: 1-market timing, 2-functional or rather dysfunctional management teams and 3-anti-marketing from the management. Market timing seems obvious but in a highly volatile market, timing can be neither now or never. This anti-marketing mentality is confirmed by nearly every other source. The idea that a product or solution “will go viral” marketing strategy is considered a red flag for not funding. Many others explained that having the “best” management team at the beginning is really an enigma. Yes, it reflects a cohesive understanding of the product but often they do not understand marketing much less growing a team. Growing or scaling a team is actually harder in most cases than scaling the product.
Teams of people are tough, trouble and tiring to deal with, ask any football coach. It is not the first new-hire but often the 20th or 80th person hired that teams and group communication and collaboration processes go afoul. Investment in business process management at the beginning is a good indicator of later success but rarely found in startup business plans.
Third, what is not reflected nor answered by the Crunchbase analysis is the impending doom brought on by too many players with too many solutions chasing too few customers. For example, look at the cybersecurity market place where I have done a lot of analysis and consultation. First, starting with customers they want fewer not more vendors. Second, customers want more integrated solutions rather than “by the slice” solutions to their problems. Third, they need professional services help to install and manage solutions which is often not available nor capable of providing such indepth help. Looking at the wide range of travel, beauty and shopping consumer then look at tech, fintech, healthtech, insurance tech, etc. from B2C to B2B there is only so much that consumers or businesses can cope with. In either group, there are already too many choices and again like cybersecurity, everyone needs help figuring it all out. This really means in both B2C and B2B considerably longer sales cycles. For consumer buying this means months and for enterprise this means years often many years. In many consultations with startups they really think enterprise customers need their solution immediately. On the other hand enterprises, have their own often really long lists of what they are looking for and then work valiantly to get the budget. Then they try to allocate the “scraps” of funds received for what they asked to and then fund and implement a few items to see if they really work. Startups just don’t realize nor matter how great their “mousetrap” is companies have so many other mousetraps they need to buy.
Bottom-line – I plan to continue to analyze the Crunchbase and other research but also work as hard to get “street view” commentary to balance the results. For example, there is a rule of thumb that says it takes “3 times the money and 3 times the time to market” to have a chance for success at all. After working with startups for decades now I believe this rule of thumb is a good one. The purpose of this article is to give startups who really need it but ignore any advice thinking they really know it all the most realistic information on which to build and implement a business plan. For investors, this information is developed to help them guide their decision making and improving their results.
Thanks again to Crunchbase, they also provided a simple Glossary:
- Seed/Angel include financings that are classified as a seed or angel, including accelerator funding and equity crowdfunding below $5 million.
- Early stage venture include financings that are classified as a Series A or B, venture rounds without a designated series that are below $15M, and equity crowdfunding above $5 million.
- Late stage venture include financings that are classified as a Series C+ and venture rounds greater than $15M.
- Technology Growth include private equity investments with participation from venture investors.