The Ledger No. 41: Modern Venture Capital

March 16, 2022 Sarah Dameron

employees of modern venture capital firm in break room

Welcome to The Ledger where we sum up the latest finance and accounting news and trends for you. On this week’s entry, we’re diving into the topic of venture capital and how to take your business from a startup to an established company. Read on to find out how venture capital shaped the modern world, how to avoid the VC burn-rate trap, the future of VC in 2022 and what venture capitalists look at when investing.

employees of modern venture capital firm in break room

How Venture Capital Is Shaping Today’s World

It’s no secret that venture capital has been the driving force behind the startup revolution over the past decade. As Bill Gurley, general partner at Benchmark, once said, “Venture capital is not even a home-run business… it’s a grand-slam business.” So how does the venture capital industry work its magic? Sebastian Mallaby, author of The Power Law: Venture Capital and the Art of Disruption, answers this question in his book. And it all comes down to this – the power of networks and the logic of the Pareto principle. But how do you build a successful industry on these two ideas?

  • You need to be a consummate valley insider

  • You need to have innovative zeal and patience

  • Know that you are in the liberation business

  • You must provide entrepreneurs management, not just money

  • Don’t hesitate to dismiss partners if their network age and ideas go out of fashion

To explore more on how venture capital is changing today’s economy, read the full article on bworldonline.com.

Avoiding the Dreaded Burn-Rate Trap

You’ve been there (or you’re currently experiencing it) – you join a startup that is being funded by a venture capitalist and they're anxiously awaiting for results. But you’ve burned through all that money hiring top talent. Now they’re suggesting you make cuts – something you want to avoid but know it’s inevitable. The truth is, letting employees go kills productivity and decreases company morale. So how are startups feeding into the growth-trap mentality? And how can they avoid this never-ending loop?

  • Hiring too fast. Once your company sees the money hit their bank account, they go on a hiring spree. Instead, you should hire one employee and then spend time making sure that employee is productive before hiring again.

  • Betting on skills and experience only. You’re hiring the best talent around (and maybe even poaching from competitors), but what happens when that doesn’t translate to the new role? Hire people based on what value they can add to your business, not just because they work for a rival company.

  • Hiring people who aren’t makers or sellers. Resources are a luxury in the early days – don’t spend your money on unnecessary hires. Once you’ve established your brand, then you can hire people who can focus on the organization itself.

  • Hiring talent who don’t work well together. A healthy company culture is key to a thriving business. However, when you hire people with different personalities, work styles, etc., you run into a few problems. Focus on taking the time to define, document and communicate your own methods and strategies before you ramp up on hiring.

To learn how to utilize the money you’ve been given wisely, head over to inc.com to read the full article.

The Future of Venture Capital

Venture capital has become a startup trend these past couple of years and this year will be no different. After watching both the private and public markets, a few experts at Prime Movers Lab have carefully predicted which direction they see venture capital headed in 2022:

  • Hanging on to the cash longer. As interest rates continue to increase, more companies who raised venture funding last year will cling to their money – especially during an uncertain economy.

  • Valuations are circling back around. If you thought deal-making would slow down, think again. The current inflation rate paired with a slow economic growth should bring valuations down from their all-time highs.

  • Battery manufacturing will be a show-stopper. With many electric vehicle companies going public last year, the battery manufacturing industry will dramatically increase in revenue.

  • Companies will rethink going public early. Startups will raise more money and stay private longer. 2022 is the year that early stage businesses will spend more time building partnerships before taking their company public.

  • Venture market will become more decentralized. Silicon Valley is the hub of startups. However, most startups no longer need to be located there in order to raise money. In fact, many businesses are relocating to states with more favorable business climates such as Arizona, Texas and Florida.

  • Bio and health startups will continue to gain momentum. Many startups are focused on improving health (thanks to the pandemic). Moreover, biotech and pharma funding escalated in 2021 and will continue to do so in 2022.

  • Consumers will hold the power. Consumers are looking to align their personal values with products and services they choose and companies they work for. As Sophie Purdom and Kim Zou from Climate Tech VC once said, “Carbon removals make for cheap recruitment marketing and retention.”

To dive deeper into where venture capital is headed this year, check out the full article on Forbes.com.

What Venture Capitalists Look at Before Investing

CB insights reported that 38 percent of failed startups did so because they ran out of cash or failed to raise capital. Consider this: most startup founders use their personal savings to invest in the company. As such, modern venture capital funding is crucial (if not a necessity) for startups to get the ball rolling. So what exactly do venture capitalists look for before making a deal?

  • The founder. They might ask themselves, “Are they likeable?”, “Are they reliable?”, “What is their track record?”

  • Market demand. Does your product or service solve a problem or fill a gap where there is an existing demand?

  • Business model. Is your business profitable and will it scale? VC’s don’t want to invest in a company that has a slow burn; rather, they want to fund a company that can grow quickly.

  • Traction. If your company has no revenue or customers, then you’re probably out of luck. Investors are making long-term bets that companies will scale and make them money.

  • Valuation and exit strategy. Investors don’t stick around for the long-haul. In fact, they look for companies that are about to take off. Sheryl Sandberg, COO at Facebook, said it best: “If you’re offered a seat on a rocket ship, don’t ask what seat! Just get on.”

To learn more about what modern venture capital firms are looking at when investing, read the full article on inc.com.

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