Being a successful VC taught me more about running a mature business than it ever did about running a startup. Understanding the issues with VC-backed startups has allowed me to create a point of view about how to innovate and grow sustainably and profitably.
Over the years, it became clear to me that the venture capital model of company-building and formation has serious issues.
On its own, growth is not evidence that you are doing something good or worth doing. Growth can mean that you are doing something wrong — selling nickels for quarters — rather than building something sustainable.
The venture capital model of startups is incredibly inefficient. You invest in ten startups and expect one investment to make up for the losses you suffer on the others. Financially, this model works. One of my most successful investments returned 80x our initial investment; it multiplied the fund that the investment came from 3x. Yet these numbers don’t show the significant human costs. Those other nine companies represented hundreds of talented and smart people toiling away in a style designed not for sustainability or impact, but for investors’ pockets. Would society have received an 80x return on their efforts if our funds had been directed in a more sustainable fashion?
Despite this, mature businesses have long sought to mimic venture ecosystems. They build innovation labs, hold pitch days or invest in incubators and labs, taking the wrong lessons from successful VCs while missing out on the truly explosive opportunities under their noses.
VC has supported many breakthrough companies and products, like Google, Intel and Moderna. There is no denying the impact that these companies have made, especially if you look at them in isolation. But compare their successes to when incumbents identify new markets and opportunities.
It took Disney+ less than three years from launch to surpass Netflix’s number of subscribers. Disney+ reached 225M subscribers in three years, a task that took Netflix fifteen. Why was Disney+ able to do that?
Embedded capabilities. Disney had a massive library of relevant content and skills in leveraging that IP to create new content. In contrast, Netflix’s first original series wasn’t released until five years after their streaming platform was launched.
Embedded partnerships. A large part of Disney+’s growth story comes through international partners, like Hotstar in India. Disney+ was able to go global on day one.
While Tesla may have consumerized many aspects of the electric car, Ford is the company winning the game at scale:
Experience in regulated industries. Tesla is frequently subjected to fines and recalls relating to their self-driving experience. Meanwhile, Ford quietly rolled out BlueCruise, a hands-free driving system that has the safety features that Tesla lacks.
Ability to iterate. Tesla has a limited model set and has not released a new model in years. Ford is able to leverage its existing model base and update them to electric, as well as to release new models and create new categories. They leverage the benefits of investment and history. One example is the F150 Lighting, the first commercially available electric pickup truck.
The list goes on and on: the success of the Chase Sapphire card compared to the 100s of neobank offerings; J.P. Morgan succeeding where Silicon Valley Bank failed.
What if, instead of investing in hit-and-miss (and miss and miss and miss) startups, we deployed billions of VC dollars into large-scale projects by those with a history of delivery? After all, PARC (formerly Xerox PARC) has delivered more impactful innovations than all of Y Combinator.
I stopped being a VC because I care about making meaningful change — change at scale.
For me, helping four people to create an impact for 200 businesses was not enough. Leaders of mature businesses need to drop the insecurities and startup envy. These younger and smaller players are not more nimble — they just have fewer battle scars. As a leader, try this:
Take fewer risks. Your organization has embedded history, long-term customer relationships and proven execution abilities. You do not need to take risks on desirability or viability. You can do the right research and ask the right questions to achieve certainty.
Incentivize efficiency. In one of my favourite scenes in Apollo 13, the engineers have to use whatever is onboard the spacecraft to solve the problems of a failing air filter. Your teams should be doing the same thing to solve the challenge of growth. Buying new parts (investing and acquiring new companies) will not fix it.
Focus on growing the pie. Startups are focused on using their small size to disrupt your business and take your market share. How realistic is disruption for you when you are the mature player? Your focus should be on growing the overall market. This is accomplished by identifying new customers or new markets where you can create value.
If startup envy is top of mind, get in touch. We’d love to have a conversation.