Venture capital funding is growing at an incredible rate. The money pouring into early stage startups, my playground, has increased by billions of dollars per quarter just since 2020.
I see the perverse results of this cash flood every day. Here are a few, from just this week alone:
1) A company raising a seed round at a $125 million cap with no product in market.
2) An uncapped note. The ultimate schmuck investment vehicle…you don’t even know what you paid for your shares!
3) A restaurant raising venture capital.
Restaurants can’t scale like software businesses and are far less profitable. And food is not a winner take all market like many software products.
The standard VC playbook is losing money at first to dominate a market. Then, you make big profits later with your favorable unit economics.
That model doesn’t apply here.
3) A company raising a seed round at a $150 million valuation.
Some investors are now willing to invest in any business at any price. This may lead to more of the fourth thing I saw this week:
4) A company that had raised over $10 million in funding from blue chip VC’s recapitalized, completely wiping out prior investors.
Despite raising a boatload of funding, the company had never found product market fit and had very poor gross margins of about 25%. (A solid gross margin for a software business is more like 80%).
If we don’t want to lose our money like those unfortunate investors, we need some discipline. Here are my standards:
A) No $100 million seed rounds. Fred Wilson of Union Square Ventures proved this model cannot work.
B) No startups without a product in market unless it’s a very high profile founder. We’re taking sold her last company for $1 billion high profile.
C) No uncapped notes.
D) No low margin, old economy businesses masquerading as tech startups.
Who’s with me?
What are you seeing in the startup world? Let me know in the comments below.
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