What VC’s fear the most, it’s not FOMO.
Fear Of Missing Out is not what VC’s fear that most. You’ll be surprised, find out below.
You just received an email with a term sheet attached, you’re elated and anxious at the same time. You want to share the news with your team, but you have to read through the term sheet first. You open the term sheet and you see terms like participating preferred, senior stock, anti-dilution, contingent upon, pre-money valuation, post-money valuation, warrants, conversion etc. All great but you come to realize it doesn’t mean much unless you can pull additional investors into the round. Now the real work begins. How do you leverage this term sheet to generate interest from other VC’s? Most in the industry leverage a signaling behavior called FOMO/FOLS — Fear Of Missing Out / Fear Of Looking Stupid. Unfortunately, this is not what strikes fear into the mind of most VC’s.
It’s simple psychology. Think about a schoolyard. No kid wants to miss out on what the other cool kids are doing so he/she will generally move in the direction of what the kids that seem to be having a good time are doing. This also applies to human behavior and social conformity. A simple research on brain games simplifies this in the below video.
To begin, the most efficient pathway to understanding anyone’s mindset is understanding what drives them, and their pain points. While most people assumes the VC life is all rosy, in reality it’s a complex one that’s not always simple.
VC’s need big hits to survive. Every successful fund will have 1 or 2 big hit companies that “make” their entire fund. While everyone is smart in retrospect (hindsight being 20/20), VC’s don’t know which company would be the most successful ones at the time of their investment (otherwise they would have only invested in big hits).
What do VC’s fear the most? Bootstrapped Startups that show successful incremental adoption metrics, have a loyal following (incremental network effect), and a solid revenue model. You can use the simplified model below;
- >70% organic, non-SEO, growth
- →60 NPS
- →40% of customers would be very disappointed if they could no longer use your product
Those are the signs of a disruptor! Case in point, Atlassian. A startup that bootstrapped it’s way into a billion dollar valuation that had VC’s lined up at their door to invest. This was even before their well received IPO.
Joel Flory and Greg Lutze co-founded VSCO in 2011. Prior to that, Flory was a wedding photographer and Lutze was an art director.
The pair grew the business without raising any capital for the first three years. It was profitable. Early on, the company experimented with different products and business models. This is what bootstrapping is about, agility! “Bootstrapping in our early days gave us the freedom to build solely for creators.” said Joel Flory.
By 2014, VSCO had grown to 40 employees and was profitable. Investors were reaching out and were interested in the technology and community that it had developed. “Almost every major VC came around but what clearly stood out was Accel’s intentionality of seeking us out and long term belief in creativity,” Flory said.
Ultimately VSCO decided to take venture money to “accelerate” on its “mission of helping everyone fall in love with their own creativity.” So in May of 2014, Accel led its Series A round of $40 million and in 2015, Glynn Capital Management led its Series B round of $50 million.
Raising venture money helped the company build out its team and proprietary technology.
You can observe the recurring theme here. When raising VC money is not the goal, your reason for building a startup becomes clearer. While all of these companies had different reasons for taking venture money after many successful years without it, they do have that common denominator. So, as I have said in other prior posts, Ditch the Pitch and just launch already!
Cheers!
Alani Kuye is the CEO of Phlatbed — An On Demand delivery platform with thousands of drivers across the United states.
