The world of venture capital has taken a bit of a beating recently. Probably the latest highest-profile misstep was the inability of WeWork to get its IPO away. To keep the company afloat, at least temporarily, its principal backer, Softbank, has had to reportedly tip further capital into the company at a valuation of US$7.5 billion ($10.9 billion). That’s some US$40 billion less than the company’s reported float target (which was US$47 billion).
Having buoyant public markets is a critical cog in the VC machine. Venture capital is really an elaborate game of pass-the-parcel. With each subsequent round of capital raising, investors are prepared to accede to ever-higher valuations because they are confident the public markets will eventually support those valuations in a way that will underpin their own returns.
The music has suddenly stopped and the prize that has been finally unwrapped appears not as attractive as people thought.
Companies such as Uber and Lyft that floated at ultra-high valuations are no longer quite as shiny as they were once perceived to be. Yes, they have been phenomenal successes in terms of generating brand awareness and user adoption. However, they are generating massive losses with no immediately clear path towards profitability, or even particularly defensible offerings. Investors are seemingly losing faith.
Uber, Lyft and other VC ‘success stories’ such as Peloton are all currently trading at less than their original issue price.
Are we at breaking point?
It’s easy to throw rocks at VC when the industry splutters. Some critics are blaming venture capitalists’ greed for pushing so aggressively for valuations completely divorced from company fundamentals. Others talk about the ‘hustle’ culture they seek to imbue in portfolio companies and the incredible pressure that can place on founders and their mental health. Others complain about the sector’s lack of diversity.
They are all valid criticisms. Yet, they are also probably too one-dimensional to the extent that they ignore the critical role VC plays in driving innovation. For all its faults and excesses, VC does succeed at marrying entrepreneurs with the capital they need to build new companies.
My question is whether in driving so hard to deliver the highest possible returns in the shortest possible timeframes, VC has become unsustainable. I understand VCs must compete for capital and investors demand higher returns from VC because of the perceived risk. I also understand the constraints of time-limited funds and so on, but like any system, there must be a breaking point.
A common feature of the VC landscape is the accelerator: a process whereby a VC or VC-style investor identifies promising early-stage businesses and looks to help them rapidly accelerate their growth, often through a combination of access to capital, networks and mentoring. There’s no doubt that every accelerator can point to its success stories and there are certainly some very high-profile accelerators in the industry, such as Y Combinator.
I just wonder whether the very notion of an accelerator perfectly captures the challenges and limitations faced by the VC industry today — its obsession with speed; move fast and break things. You wonder whether there is true alignment between the goals of an accelerator, the founders they rely on, and the goal of building a sustainable business.
Accelerators set out to push founders and their companies as hard as possible. If an individual company thrives, great. If it doesn’t, it dies and the accelerator moves on quickly. The supply of aspiring founders hungry for the next opening at the accelerator table is almost limitless. It’s like shark teeth: bite at everything. If it’s food, great. If it’s not, the odd tooth might fall out but there are plenty more ready to replace it.
A problem with this ‘high-speed’ culture is it doesn’t necessarily give companies and founders the time they need to grow into their market. I have worked with several businesses that have taken time to find their feet. What’s wrong with that?
They may have had the kernel of an idea or product but it has taken time — sometimes years — to truly settle into their market. It has taken them time to really understand the customer, to build trust, solidify their networks and even just to gain the necessary confidence in themselves and their product to truly go for it.
And there’s nothing really wrong with that. Just because a business doesn’t immediately display the cliché ‘hockey-stick’ growth doesn’t mean that it can’t end up becoming a large and successful business. It might just need more time without the pressure of having to run at a million miles per hour and keep voraciously sucking in ever more licks of capital at exponentially expanding valuations.
Unfortunately, it’s not a sexy concept, but I would bet that a ‘decelerator’ — an investment vehicle that gave founders time and space to develop — would probably have as many ‘wins’, if not more success, than a traditional VC accelerator. Finding that truly patient capital might be a challenge in today’s short-term culture but that’s for a separate article.