Look, I know this is a shocking title for a first newsletter from someone who makes a living helping founders raise VC money, but I have to get this off my chest.

I think over 95% of founders shouldn’t be raising venture capital money. 

And it’s NOT because VCs are evil, or the “model” is broken or it’s really hard. 

It’s simply because venture capital is designed for a very specific type of company. And most companies aren't it.

Let me explain.

If you don’t understand the VC model the rest won’t make sense.
VCs make the majority of their money when they sell their shares in your company at a much higher price than they paid - through an acquisition (exit), an IPO, or a secondary sale to a bigger investor.

Here's what that looks like in practice. A VC invests €500K into your company at a €5M valuation - a 10% stake. The company eventually exits for €1B. That €500K is now worth €100M (oversimplified if we don’t calculate dilution).

Now let’s zoom out. A typical VC fund manages €100M of investor money. They need to return €300M, €400M or more to make the fund worthwhile. And since most of their bets will fail (that’s the nature of startups), the few that win need to win massively. The above example company returning €100M, returns the entire fund and covers for every failed investment in the portfolio. That’s the kind of companies (and bigger) which VCs hunt for.

The only thing you need to remember about the VC model for now:
VCs invest in startups which can become big enough, fast enough to return the entire fund and beyond.

Now you understand briefly how venture investors make money and what their model is.

(I’ll be covering that in more detail in future editions.)

But now let’s look at the 4 non-negotiable aspects, all of which need to be present in a VC-backable company. 

I also include a quick self-asses question at the end of each aspect.

This is the natural first “requirement”. It’s impossible to become a VC-scale company in a small market. Imagine the size of the market as your ceiling - it determines how big you could become.

The question which VCs are asking is: “If this company captures 1-5% of this market in 10 years, could they become a billion euro company?”

For this to happen - capturing 1-5% of the market and becoming a billion euro company, your market size needs to be between €20B and €100B.
(Market sizing is art on its own, so more on that in a future newsletter edition. 😉)

The second part of the market equation is growth rate - your market has to be growing. It means that the demand from customers and their spending is increasing. A growing market can accommodate new players, new products, new business models and more innovation.

Ask yourself: If we capture 1-5% of our market in 10 years, is that a billion-euro company?

Linear growth is when every new customer costs you roughly the same - more customers, more people, more costs. That doesn't work for the VC model. Investors need to see a business model where growth becomes cheaper as it gets bigger - this is exponential growth.

Think of it this way. A consulting firm needs to hire a new person for every new client. 10 clients = 10 people. 1,000 clients = 1,000 people. Growth is capped by how many humans you can hire and manage.

Now think of a software product. You spend €500K building it once. Selling it to your 10th customer costs you almost nothing extra. Selling it to your 10,000th customer costs you almost the same.

Ask yourself: Does serving our 10,000th customer cost roughly the same as serving our 10th?

Investors believe that technology is what creates your moat (especially early on) - the reason why competitors can’t copy you tomorrow.

A technological edge doesn't always mean deep R&D or patents. Sometimes it's a proprietary dataset, a unique algorithm or simply being so far ahead technically that catching up would take competitors years.

And yes, defensibility could also come from other aspects like distribution, network effects or switching costs, but these take longer time to develop and generally come later in the company’s life.

Ask yourself: If a well-funded competitor tried to replicate what we've built in 12 months, could they do it and actually replace us?

Building a high-growth, fast-paced disruptive company is beyond this world demanding and stressful. And really a long-term fit only for a specific type of a founder. 

The top unicorn founders I know are obsessed with their companies, customers and growth. This obsession requires some major trade-offs for their success - be it with family, friends, weekends or free time. Building a unicorn/market leader/industry disruptor really becomes your major life fixation for a set period of time.

Add to that the pressure from investors (sometimes direct, other times in-direct) who want to see the numbers going up and the company growing.

In my view 95% of founders out there aspire to build a lifestyle business giving them a steady revenue stream and comfortable life, instead of an industry disruptor with a billion euro potential.

And there’s nothing wrong with that, the issue is when they try to utilize VC money for a lifestyle business and wonder why VCs ignore them.

Ask yourself: If someone offered me a great salary to stop building this company tomorrow, would I hesitate about it?

To sum it all up.

Assess honestly where you stand by asking yourself the above questions.

If even just one answer is negative, VC is probably not the right path for your company right now. And that's totally fine. In the future I’ll be giving you ideas for alternative funding sources.

On the other hand, If all four aspects resonate with you, you're in the right place. The next steps are understanding how to run a proper fundraising process - build your story, decks, data rooms, approach investors, and get VCs who would help you with that moonshot.

That's exactly what this newsletter is about. Every edition from here will give you one more piece of that puzzle.

That’s all for this week.

See you again on a Thursday soon.