The last year has been a golden age for U.S. venture capital. According to data from PitchBook and the National Venture Capital Association, VCs invested a staggering $156.2 billion into U.S. startups in 2020, averaging out to about $428 million per day, all year long.
Given these massive numbers (in the middle of a global pandemic no less) it might seem like venture capital investment is a required part of the startup experience. It’s so easy to get right now that every company should be lining up for it, right?
Not exactly. No matter how popular VC investment might be, that doesn’t mean it is right for every company, or that every company is right for VC. This was true long before 2020, and it will be true long after.
Pierre Gaubil, the co-founder of three companies and general partner with a VC fund that has invested in 54 startups, recently wrote about this in a way that really resonated with me based on some conversations I’ve been having over the last few months. Take a look at his post, it’s worth a read.
Truth is the VC model is a game of probabilities. For the VC investment thesis to succeed, the overall fund needs to return at least 3x return within 10 years in order to meet their investors’ expectations and continue to be able to raise funds. Knowing that only 15% of startups yield any return at all, that means the VC fund will do everything it can to pick the winners that fall within that 15%.
That also means that VCs put a lot of weight on factors like the entrepreneurial track record of the executive team, the company’s ability to identify an attractive market, the company’s ability to define and execute on an innovative product, and the flexibility of the company and product to pivot quickly as market conditions change.
In other words, VCs are going to fund your run-of-the-mill first-time founder with a revolutionary idea, not sometime tried and true.
Alternative funding models exist for a reason
All that said, the traditional VC model does what it does, and it does it very well (see 2020’s results above). But that doesn’t mean that alternative funding options and business models that fit outside of traditional VC aren’t worth exploring. For the vast majority of businesses, they are a far better fit.
Consider the Minimalist Entrepreneur model, which I’m a big fan of. In my experience, the best business models aren’t complex or overly complicated, they’re simple. The kind of thing you can explain in 10 seconds in a way that just about anyone can understand, even if they aren’t in your industry. Make something, then sell it. Or develop a skill and sell access to it. It really doesn’t need to be more than that.
Like the wise Fred Rogers said: “You can’t really love someone else unless you really love yourself first.” Similarly, and more specific to startup life, you can’t really sell a product to a broader market unless your core audience loves your MVP first. You might find that the market for your product might be huge – in that case, maybe the VC route is the way to go. Just know that savvy investors consider the phrase “we have a billion-dollar total addressable market” to be a total cliche.
Or might discover that you have a small but enthusiastic niche market that is big enough to sustain a thriving business, although it may never yield a 10x return. VCs probably won’t be interested, but that doesn’t mean it isn’t worth building. In this case, you’ll need to consider your funding options for growing your business.
IP implications of funding
A strong team, an attractive market, an innovative product, and a protectable competitive advantage can help you attract investors, whether they’re VCs, innovation grants, government contracts, or bank loans. That’s a given when raising money.
But a strong IP strategy can help with the innovative product and protectable competitive advantage part too, making it easier to attract investment of any sort when the time is right. Even if your company isn’t a fit for venture capital, your IP is a big part of what your investors are supporting when they bet on your startup. By taking care early on to protect and nurture it, you are setting yourself up for long-term success and investment, whatever form that takes.
At Patents Integrated, we aren’t patent attorneys. We’re not business consultants. We’re so much more than that. We’re patent agents who pull from multiple disciplines to help innovators create successful IP strategies that will serve them for years to come.
If you’re ready to turn your invention into a reality, we’re here to make it possible. Click here to get started.
