By Kevin Monserrat, Founder of Consilience Ventures
For any entrepreneur being the next big disruptor that can grow a company from zero to a billion requires more than just a bright idea and capital.
Venture capital is a tough business. LPs struggle to get paid in excess returns for the risk, fees and illiquidity they take on for investing in venture capital. Entrepreneurs struggle to scale and grow their companies and position for great exits and VCs struggle to generate the returns they promise, and only a very few manage to deliver.
Start-up are exposed to wider economic risks and are inherently riskier because of their often-untested business models which means no safety net exists – they live and die on investment returns.
Research conducted by Harvard Business School says three out of four start-ups will fail, never to return any cash to investors. Although, were you to define failure as not delivering on the projected ROI, then 95% of VC- backed start-ups are, in fact, failures. Yet VC firms continue to be portrayed as the pioneering enablers of enterprising tech companies heralding in ground-breaking change.
Chamath Palihapitiya, the outspoken Silicon Valley tech investor, called the start-up economy a charade saying we are in the “middle of an enormous multivariate kind of Ponzi scheme” where valuation” (driven by inflated VC investments) became the barometer for success in the start-up world.Sadly, he is right.
In theory, venture capitalists should provide the following: Cash (to facilitate faster growth); Validation (to attract talent and customers, get press) and Guidance (advice, connections, resources).
Looking at today’s Venture Capital landscape it becomes quickly apparent that VC funds, lack diversity, meritocracy, balanced risk structures and transparency. The traditional VC model is ingrained with key faults which are not only toxic to start-ups but stifle real growth.
Firstly, start-ups, investors and experts’ interests and agendas are not aligned. Today’s start-ups are fixated on fundraising, desire a high valuation and have little incentive to share prominent business concerns or pain points with their backers. The investors meanwhile naturally seek reduced risk and lower valuations, whilst the experts find themselves working long hours, with low pay and high risk. This rift between funding and goals means start-ups are experiencing an unsustainable misalignment of business priorities and scientific realities.
Secondly, the process to raise capital is a massive distraction for founders, who can spend up to 60% of their time on future funding rounds and face unwanted “strings attached” from VC firms. This disables entrepreneurs from focusing on core business activities which could lead to strategic growth.
Thirdly, the current model continues to value returns over the value companies offer society. Investment will find itself into a profitable fintech company before a bio-tech company that can save lives; VC is blindly focussed on finding the next Airbnb or Uber, not sustainably investing.
Lastly, a mentorship relationship in a traditional VC is either non-existent or limited with first-time entrepreneurs unable to access to the network of mentors and investors. This takes them longer to commercialise their ideas.
This current VC model tends to follow a “spray and pray” approach in the hope of finding the next unicorn which is unsustainable. An alternative community and technology-based approach is needed to transform the VC process for investors and start-ups alike.
A focus on identifying and placing strategic, informed bets on start-ups with foreseeable growth potential that can be nurtured into robust, financially dependable businesses should be at the heart of a VC model.
A change of mindset is also essential for both investors and founders to distinguish sound business cases from just ideas and soundbites.
Start-ups need more than just investment; they need direct access to knowledge, networks and operational expertise. This is often what investment is ultimately spent on. Our model at Consilience Ventures, for example, offers a one-stop-shop ecosystem, which provides a community of carefully selected investors and experts that are incentivised to help grow each company and provided embedded operational support. Within the ecosystem we use tokens held on a blockchain platform to track ownership. These tokens are like digital shares in a company but can also be used as cash or to pay experts. This creates the opportunity for liquidity between the hundreds of investors and start-ups in the eco-system.
When a company in the eco-system is bought or IPOs, the proceeds are shared by everyone in the community, according to how many tokens they own. The tokens are unique concept because they are both a currency and a share that pays you dividends. With capital pooled into every start-up in the ecosystem, investment is less risky and more distributed. It incentivises founders to come forward with their pain points, as the community is not under the same pressure from investors to grow at all costs and doesn’t eat into the early profits the start-ups need to grow. New models like this can help tackle the faults with the VC model and most importantly, give start-ups an honest chance of sustainable growth.
The VC industry is starting to undergo a period of intense and far-reaching change. General principles around fund size and investment cycles are being challenged, lines surrounding investment stages are becoming blurred and firms themselves are looking to innovate practices.
The VC industry can get back on track if it evolves and moves away from being transactional passengers to mutual trusted partners. The successful venture funds of the future will be those which divideand minimise the risks, maximise and share the rewards and be more data driven; build better capabilities and focus on adding value and not just injecting money into it. Capital may be the lifeblood of all businesses but without a pathway to sustainable growth, its wasted.
Kevin Monserrat is the Founder of Consilience Ventures, a disruptive new collaborative community connecting capital, growth companies and business expertise.