The most impressive thing the venture capital industry ever achieved was propagating the cultural meme that the only way to build a business is to raise venture capital. Over the course of the last two decades, the principle that VC funding is the only way to build a durable, ambitious business that matters has become accepted wisdom, to the point of being absolute fact.
This wasn’t the case a generation ago. Prior to that point, venture capital was a rather fringe proposition for a certain kind of technology company being built in a certain part of the world.
Undoubtedly, venture capital has been an incredible input to building many of the world’s most interesting companies. It has built high-velocity capital into the world economy, in a way that allows enormous ideas to be started, built, developed and shipped around the world in incredibly short amounts of time.
The less desirable outcome, however, is a generation of founders who believe this is the only way to go if they want success, and that a business not eligible for venture capital is a business not worth building.
This couldn’t be more wrong.
Not fit for VC
I was at Amsterdam Dance Event last week, as I am every year, and we sat in on a wonderful panel, “Who Funds The Future? Capital On Different Terms”, with Beta Lucca, William Morgan of Restless Egg and Bradley Orford-Hall of xRave Ventures. It’s great to hear young, smart, forward-thinking investors talking about capitalising interesting projects off the beaten track. But I also felt Bradley had something particularly important to say: not all businesses are fit for VC funding, especially in the creative industries.
And of course, he’s right. VC funding is used to fund businesses pursuing explosive, exponential growth, where J-curve graphs map businesses growing from a standing start to global dominance in just a few short years, and these days sometimes even months.
I’ve been on the journey myself as a creative founder. I believed, from the zeitgeist around me and the accepted cultural norms, that raising a certain kind of money was the only way for me to progress. In many ways I’m glad I did raise that financing, and in some ways it was the right fuel for the business. But it also put me onto a development track, and a set of expectations and external commitments for the company, that once made can’t be broken. They can drive ambition, focus and direction, for you as a founder and for the wider business. But they can also compromise optionality and the different paths the business might evolve along.
In addition to this, any business with talent at its core, like creative talent, is itself shaped like a VC fund: you’re investing in a number of different portfolio assets that may or may not take off. As one VC once told me, VCs won’t invest in VC-shaped businesses. They don’t like the business very much, even though they’re in it themselves.
What capital is for now
I think we’re living in a very, very interesting moment, where the areas of business building that you needed capital to pursue are collapsing in on themselves in an extraordinary way. I don’t think this is being appreciated or understood enough.
If you want to build a business that needs to buy vast quantities of GPUs (the chips used in artificial intelligence) or one that needs to consume enormous amounts of power, or needs significant infrastructure, then raising capital to fund the very large upfront purchases of hardware and infrastructure is an inevitability.
If, however, you need capital to hire engineering teams or growth teams, there is now a question whether a much leaner team of entrepreneurial founders and early employees can build the business with the same ambition and velocity, using AI as their accelerating resource rather than capital.
That opens up an interesting line of questioning. Is a new generation of founders going to be empowered to accelerate their businesses themselves, with these new technological levers, rather than being obliged to sell ownership to accelerate through capital? This has the opportunity to radically reshape what contemporary business building looks like.
Better than a seed round
There’s been a big meme in the last few years around seedstrapping. Seedstrapping is where you raise an initial seed round of maybe one, two or five million pounds, and then you never need to raise again. You only issue a small ownership slice of the company, and go on to build it without any additional financing. It has, I think, somewhat romantic connotations in the modern zeitgeist, because the founders issue relatively little equity and keep a large ownership position, even when the business reaches a comparable scale to a venture-backed company.
I think the next wave is an acknowledgement that the only thing better than raising only a seed round is raising no rounds at all, and keeping absolute ownership of the company.
It’s binary. The difference between raising money and not raising any money is night and day. As soon as you raise money, your commitment to external shareholders completely changes how you make decisions, how you communicate the company and the economic shape of what you return.
VC investors are motivated by an exit: a sale, a public listing or a merger of the company. That’s how they get their returns. Founders and employee shareholders, on the other hand, can benefit enormously from dividends and the other ways a company can repay its shareholders. Those don’t fit the return profile of venture capital funds, so once you’ve raised, you’re very strongly disincentivised from doing anything like that.
Keeping more of what you earn
We’re fascinated by these changes, and by helping companies develop the tools to use capital more efficiently, and in turn helping brilliant founders and creative people find ways to keep more of what they earn, by embracing new ways of working and new tools.
Equally, we’re watching in real time as VCs broaden their brands and practices to become media companies, strengthening their cultural relevance but also acting as a form of direct distribution for their portfolio companies, expanding their perceived value-add well beyond capital alone.
We’re looking towards a new era where artists, creatives and creative business-people have the opportunity to retain a vastly bigger share of what they own, and to address a historical mismatch between the main source of global startup capital and their business, all in one go.
We’re so glad and excited to be part of this story.
The only thing better than raising only a seed round is raising no rounds at all.
