The Funding Odyssey of a Groundbreaking Technology Venture
It is far more difficult and separates the great VCs from the rest
When founders begin seeking investment in a groundbreaking technology venture, it is crucial to understand the difference between the great VCs and the conventional VCs. With conventional VCs, it is actually more likely you will fail to get investment since you are building a venture that has both market risk and technology risk. Perhaps even worse, if you do get investment from a conventional VC, you will also have a much higher chance of failing to achieve your vision. I believe that Vinod Khosla was trying to articulate this issue when he said, “90% of VCs add no value, 70% add negative value.” Let me explain.
Here is the problem:
When you have a groundbreaking technology venture, you have the dual difficulty of advancing a frontier technology to the point of commercialization, as well as having a breakthrough product built upon that technology. The costs of building both the initial technology and product are high. In my experience, of all the technology ventures that I launched, not one had a product ready to launch - a so called Minimal Viable Product “MVP”. Not one. Unlike many software companies with products built on existing technology platforms, a “minimal viable product” that met our venture standards wouldn’t be possible. And we weren’t willing to lower our standards. We didn’t just want a “viable” product. We wanted our first product to be an overwhelming success. This type of venture needed millions of dollars, but our carefully considered strategy was to only apply approximately $500K to $1M of our own funds to our startups. After that, we wanted to share the risk and the opportunity with the great VCs.
And because we didn’t have a product, we also didn’t have “Product Market Fit” or “Traction” or any other demonstration of market performance that conventional VCs ask for. And yet many great successes emerged, including Siri, Intuitive Surgical, Nuance, Orchid Biocomputer, and more. How could this be?
The reason was because even though we didn’t have products to launch, we had outstanding teams, outstanding technology, outstanding value propositions, outstanding venture decks, and outstanding demonstrations. We had a clear and coherent story about the unmet market needs, the breakthrough solutions, the path to a large and exponentially growing market, the differentiation from competitors, the risks, and a credible plan for mitigating risk.
What we needed from VCs was the initial investment to build our first real product, their wisdom and experience, and their continued investment to scale the company to success. And only the great VCs would have the visionary thinking, insight, industry experience, patience and long-term perspective that is needed.
The list below illustrates many of the differences between Conventional VCs and the Great VCs.
Conventional VCs vs. The Great VCs
Conventional VCs are Investors / Great VCs are Venture Coaches
Conventional VCs seek proven founders in an existing market / Great VCs seek mission driven founders who are both entering a new market and have deep technology expertise
Conventional VCs seek proven technology / Great VCs seek breakthrough technology and radical innovation
Conventional VCs seek ventures in established markets / Great VCs seek ventures that create new markets, or entirely disrupt the existing markets
Conventional VCs seek traditional ventures / Great VCs seek ventures that often oppose conventional wisdom
Conventional VCs seek MVPs (Minimal Viable Products) / Great VCs seek ventures that often have not yet developed a first product
Conventional VCs seek ventures with PMF “Product-Market Fit” / Great VCs seek ventures that may require development of both market and technology, but show great promise
Conventional VCs seek ventures with a fast path to revenue / Great VCs seek ventures that might have a 90% risk of failure, but a 10% chance of “changing the world.”
Conventional VCs often have a fund that cannot provide major funding/ Great VCs have funds capable of providing major funding
Conventional VCs often seek ventures with demonstrated low risk / Great VCs seek ventures that may be high risk, but have a plan to mitigate risk and have outstanding reward. They are willing to do deep diligence.
Conventional VCs seek ventures that are not “heavy lifting” / Great VCs seek ventures that might require a great deal of support.
The great VCs help you develop your product roadmap as you “climb Mt. Everest”. They help you recruit a stellar team. They introduce you to potential customers. They introduce you to potential partners. They help you when your venture has all kinds of difficulties that you might never have conceived of.
Special thanks to Vinod Khosla for his help in this post. He is my archetype of a great VC. Beyond Vinod, I am deeply grateful to the other VCs who have shown me what it is like to work together with a great VC. They include David Liddle (USVP), Gary Morgenthaler (Morgenthaler), Mike Moritz (Sequoia), Kevin Efrusy (Accel), Vijay Pande (a16z), Shawn Carolan (Menlo), David Weiden (Khosla), Yogen Dalal (Mayfield), Gilman Louie (Americas Frontier Fund), Kevin Talbot (Relay), and many others.
Your Venture Coach,
Norman
This is so true. As founder of an early-stage DeepTech venture (AGI systems for safety-critical aerospace applications, based on my own IP) with a high cost of entry, your article very much reflects what I have seen since I started talking to VCs.
In my experience there are essentially four groups of VCs:
The first group, which were the majority of VCs I came across, are really only interested in run-of-the-mill SaaS or other services types of startups which have been bootstrapped to MVP (usually built quickly using someone else’s technology) and which already have some early revenue. Their exit strategy is limited to an IPO or M&A in a few years time. The upside for DeepTech founders with those investors is that they won’t waste your time as they’ll instantly tell you that they’re not interested in anything else than lift & shift type startups (“mole hills”, i.e. businesses which are eventually bought by someone else).
Then there are the FOMO VCs which invest in anything that’s currently seen as “hot”, and unless you’re happen to build inside one of the current bubbles they’ll unlikely to be interested so they, too, won’t waste a founder’s time (FOMO VCs are really only dangerous for their funds due to their propensity to happily invest in large-scale scams).
But the really dangerous types are what I call “the posers”, which are VCs who claim to invest into DeepTech/FrontierTech/DefTech but who clearly have no grasp of what it takes to develop a complex groundbreaking product for a highly regulated market like aerospace, or the costs and complexity of developing safety-critical software or the impact of the regulatory burden. A bit like the FOMO VCs, they want to invest in those sectors because they like the better than average returns, but their exit strategies are limited to IPO and M&As in the same way as for regular types of startups (they’re looking for lift & shift, not “monuments”). Those are the types that will waste the time of unprepared DeepTech founders, and if they happen to become your investor partner then not only will they be unable to help you solving any problems, they’ll also create unnecessary friction because they don’t understand the challenges your business goes through.
The great VCs are those described in the article. They understand the challenges of DeepTech/FrontierTech, the impact of regulation, and what it takes to build something groundbreaking. They also know that to achieve great things and build “monuments” one has to take great risks. But they are also rarer as hen’s teeth.
Great article, Norman! Thanks for sharing!
Illuminating as usual, Norman!