16) Capital Cadence

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Introductory Remarks

Dear Vambracers —

In last week’s post, Talk, I used a Bob Moses song to illustrate the importance of and difficulties associated with actually going out and talking to customers. This seemingly obvious piece of the entrepreneurial journey has been top-of-mind for me lately especially since I’ve made the conscious decision to explicitly not build anything meaningful until I literally have people that say they will give me money.

This attitudinal modification has compelled me to pursue more of a consulting-based model in the near-term until I find what the real thing might be. And this all starts with literally just calling people.

[As an aside, I’m going to be on vacation for the first two weeks of September, so there won’t be a post next week, September 7th, and then there most likely will be a post on September 14th—but I can’t hard-commit to that at this point. Also go Steelers.]

Capital Cadence

In today’s post, I’d like to discuss my evolving mindset around capital formation for the near-term future of this journey. I also probably want to more generally explore the shifting role of venture capital over time and how I think things will continue to change in a world of abundant intelligence and lower capital-related barriers to business entry.

What is venture capital

Venture capital encompasses speculative investments in private companies at the earliest stages of their journeys. Since venture capital is financing companies when it’s unclear if the company will ultimately be successful, it’s highly speculative. I love venture capital so much, and I feel honored to have been in a position to support founders over the past 3.5 years—but I also think it’s just such a specific financing mechanism for a very specific type of company on a very specific trajectory. People also overlook the obvious fact that venture capital really is a loan—the expectation is that it will be repaid (and the hope is that it will be repaid many times over). The other obvious truth is that the vast vast majority of companies fail. It’s just a tough math equation, from a fund construction perspective—not impossible, but difficult.

Venture capital has become sexy

From the founder’s point-of-view, I think venture capital can be attractive and alluring for the wrong reasons. As startups, entrepreneurship, and technology have become more culturally resonant (s/o Uber, Theranos, WeWork, etc.), I think more people have entered the space for the wrong reasons. I think venture capital has become the ends when really it should be the means for high-growth companies that literally need capital to meet costs associated with accelerating demand.

There is a huge disconnect here, because there are founders building non-venture-backable businesses who become frustrated with the venture-industrial complex for not even giving them a chance—when trying to appeal to the venture-industrial complex almost by definition is off-putting to the venture-industrial complex—and so I just think there’s a sort of subtle tension to the allocation of early-stage capital across the country (and the world) that polarizes some. And, again, I think this is rooted in venture capital’s entry into the popular cultural zeitgeist over the past 2.5 decades or so.

Venture capital is not for the faint of heart

I mentioned this earlier, but venture capital really is a loan. The moment you receive capital from a venture firm, you’re placed on a treadmill that makes you run faster and faster until you either give up or monetize. There’s theoretically a spectrum of outcomes but really from the VC’s perspective it’s effectively binary (i.e., success or failure). So I think there are a lot of people chasing venture for venture’s sake, without really understanding the implicit and explicit financial and social contract associated with the capital. And all of this is okay. I’m not criticizing it—and I was and am an active participant in it. But I just think it’s important to enter into any fundraising process with open eyes.

When does venture capital make sense

I personally think that venture capital has in many ways incorrectly become the goal oftentimes for early-stage pre-PMF founders, and I think that’s due in large part to the glamorization of the industry and the startup world in general. But I do believe that founders who pursue venture for venture sake are somewhat missing the point. I also think that VCs really are actually pretty good about funding demand, and so traction really is the most important thing. Venture capital really should be a necessary piece of some bigger growth engine and not like what you use to try to find product-market fit (although that is the case with many early-stage and angel financings today). So, I think venture makes sense if you either are experiencing strong traction for some product or service and have ambitions of pursuing a billion dollar company and really need to ramp up sales and marketing / customer acquisition. But once you take it, you’re committed to that 7-10 year sprint and growth chase.

So what is my plan?

In my case, since venture is so deeply engrained in my professional existence, I think I fell into the same old trap of trying to pursue venture just to say I raised venture capital. I think also there are social signals associated with raising venture that kind of validate my pursuit of building something—and so from that perspective I think it would’ve provided me and my loved ones with some like comfort around being on the right track or something professionally. But I’ve recently started to push back on my own sort of need for external tethers of identity, and I’ve started to really question my pursuit of venture capital at this point in the journey, and I’ve pretty intentionally elected to put any fundraising activities on pause for now.

I want to take some time to just explore the markets around me and rediscover all that there is outside of the startup bubble that I’ve (happily) lived in for most of my professional career. I’m still formalizing where I really want to take things in the coming weeks as I pursue conversations with local businesses in Chicago and just see where I can be helpful and what’s on their mind—and then I’ll expand from there. I do want to find the thing at some point, and I have no clue what that will be—where I can pretty much build custom software to solve a pain point that I’ve been addressing with more of a services model. So, to force myself to just put myself out there and to have those conversations and do the work I am pursuing a services model in the near-term and then will go from there.

And I’m intentionally not pursuing venture for the indefinite future until I have built something or have sufficient demand to feel like venture is warranted. Or I might just end up never raising venture and try to build a business the “old fashioned way” and see if we can grow from there. Really anything is on the table and it feels liberating in a way because I’m letting myself experiment, and explore, and learn—and then I’ll be nimble and agile in moving towards opportunities when they present themselves.

Looking Forward

Like I mentioned at the beginning, I’m going to take next week off as a sort of delayed Labor Day holiday and to spend time with family—and then we’ll likely pick things back up September 14th. I’m excited with the new capital-related direction of the endeavor and can’t wait to see where things go.

Thanks for reading and I hope you have a wonderful Labor Day!

Sincerely,

Luke