Why you shouldn't chase unicorns; 3 Big VC Myths; and how to keep control of your startup

Pablo 0:00 So I was going through some of the reviews that we&#39;ve gone for the show and I thought I would call out some of the, the latest ones. So we have from, from the us , from Mr. J Bones , he says Five stars. And uh, he says, outstanding resource for founders. I stumbled upon this podcast as if by divine guidance, Pablo&#39;s clearly passionate about helping founders. Every episode offers something helpful and inspirational. If you&#39;re a new founder, aiming to be one or if you&#39;re an existing one, challenged to find hand in glove fit between your offering and the market. This podcast is a must. Thank you Mr. J . Bones . We have albo in from Denmark who says, concise and to the point. Great show five stars. And that&#39;s a concise end to the point review. I like that. Thank you. And then from Spain, we have v scarred five stars. Great content. He says, helpful. My professional life, inspirational and my personal. I also like the varying lengths, the shorter ones feel easier while the longer ones go deeper. Thank you to everybody that submitted a review. I love the feedback and frankly, this is, I mean this is why I do it. It&#39;s, I do it because to help myself and also to help other founders. So it&#39;s great to see this. Please keep them coming. Um, and really this is like, this is the trade, right? Like I&#39;m putting out this free content. Uh, there&#39;s no ads on it and so I just ask that you leave a review, not just to help me, but also to just help the show move up the ranks so more founders can see it. Welcome to the Product Market Fit Show, brought to you by Mistral , a seat stage firm based in Canada. I&#39;m Pablo, I&#39;m a founder turn vc. My goal is to help early stage founders like you find product market fit. So I was reading Review of VC funding in 2023 Pablo 1:37 the CB Insights report on kind of venture capital in in 2023 in all of last year, I thought I&#39;d do a bit of an episode on, you know, what it really takes to build a great company, specifically as it re relates to like fundraising and just reaching unicorn status and all that kind of stuff because, well , it&#39;s kind of dire out there. <laugh> , I&#39;m not gonna lie, if you just reading through some of the headlines here , uh, venture funding in 2023 was the lowest since 2017. That&#39;s in terms of the amount raised, $250 billion, which was the lowest since 2017. If you look at the actual deal volume, so how many deals were done last year? It was at , at a 10 year low in US History. 10 years. Uh, late stages even worse, right? So late stage deal size falling more than 50%. There&#39;s the fewest number of IPOs since 2013. So again, a 10 year low, the fewest number of unicorns in the last seven years. Anyways, it&#39;s not , uh, <laugh> , it&#39;s not a pretty picture when it comes to fundraising. Early stages a bit less affected , but obviously all that stuff kind of trickles down and , uh, late stage, you know, got hammered last year a hundred percent. In fact, if you look at the average deal size, it went from 22.9 million to call it 23 million in 2021 down to 12.5 million last year . So that&#39;s cut by almost half, which is pretty spectacular. Frankly. A lot of that has less to do with how dire the situation is today and just how crazy the situation was a couple of years ago. There&#39;s a mix of both, right? So like the reality is it&#39;s just not the best time to fundraise. Last year was certainly not the best time to fundraise, you know, could certainly change this year. Um, but, but we&#39;re not there yet. And then on top of that, the last two, three years, like if you look at 2021 for sure, and part of 2022, maybe the second half of 2020 as well, they were just incredible times to fundraise and frankly led to a lot of, a lot of insanity. And that&#39;s really what I wanted to touch on here because I think, you know, obviously I&#39;m a VC and , and I think the VC like asset class, the VC industry has a purpose, right? It serves a purpose and can help create some pretty big companies, but it&#39;s also led to some like unicorn myths, right? I think that these , these myths that just get propagated through the system, they were probably a peak belief in those myths back in 2021 or so. And it led to a lot of things that uh, are frankly regrettable from both sides. Like I&#39;m not just talking about founders, obviously for VCs as well. Too much money in the system is actually is not a good thing. And you know, even if I think about My Own Story of Chasing Unicorn Status Pablo 4:00 like my own story, right? My own history, I just remember there&#39;s just so much hype around building a unicorn, right? Like building a billion dollar startup. And when I started Gym tra back in 2014, like that was the only thing I cared about was just getting super big. And it leads to a lot of frankly like poor thinking. I think that you , you know, sure every founder wants , wants their company to be as big as possible, I would say generally speaking and that&#39;s totally fine. But making it a goal to reach unicorn status just leads to a lot of poor thinking. I&#39;ll give you an example. Like I remember when we were building Gym Track , you know, just, you know, for recap, like the idea for Gym Track was, it was a system for gyms. So it was hardware that would go inside of a gym that would let members automatically track their workouts. One of the things that kind of came out of it as, as we worked through the pitch deck and the business plan and so on, the , the model, the financial model was in like kind of version one. Like if you just think about offering workout tracking, it&#39;s actually really hard. Even though the idea seemed big in kind of when you talk about it, it was actually hard to create a multi-billion dollar company because just from a revenue perspective, right? So if we thought about how much it could really charge each member and how many members would convert, or if you thought about charging the gym, like there&#39;s, the gym industry as a whole is actually not that big. And so if you&#39;re charging a few hundred dollars a month to each gym, it&#39;s hard to get into the multi hundreds of millions of dollars of top line revenue. And it&#39;s hard to charge gyms thousands of dollars &#39;cause they just don&#39;t have that much margin. So we were kind of had this catch 22 where, you know, we&#39;re pitching this massive transformative play that would require all this venture funding. And yet the opportunity, if you actually think about it, kind of back of the back in the napkin calculations was just not that big. And we spent a lot of time, and this is kinda what I&#39;m saying, like because we were so determined to build kind of bigger or bust , right? Like swing through the fences, you have to build a massive unicorn. We started to really pay a lot of attention to quote unquote problems like this. And I say that because really in its infancy, like when you&#39;re going from zero to one, the thing you should be worried about is just like how do you deliver real value? How do you get customers to buy what you&#39;re, what you&#39;re selling? You shouldn&#39;t really be all that worried about how can this become a multi-billion dollar company. It&#39;s just so far away you have no idea how you&#39;re gonna go from here to there. But that was the thing that paid, that was so kind of forefront in our minds. And, and I actually specifically remember the day, like it was so important that that memory is ingrained in my head where I was just about to go in , uh, to , to actually this Indian restaurant with my family. And as I was driving, I was thinking a lot about this problem. And when I got there, I had the idea and I remember I called Lee , I called my co-founder and I said, I&#39;ve solved it. Like I figured out how we can create a multi-billion dollar company out of Gymtrack <laugh> . And he was like, how ? And so the idea was, well we can offer virtual personal training. Sure, people would only pay like a few dollars a month for workout tracking and gyms would only pay a few hundred dollars a month for the system. But if you all of a sudden use this tracking ability to offer virtual personal training, well guess what? People are paying a few hundred dollars an hour for virtual personal training. And so sure they&#39;re not gonna pay that much for, for something that&#39;s virtual. But imagine if you, you know, had kind of like either it was AI assisted or maybe you just track the workouts and then a personal trainer work review or workouts like once a week, instead of having to be there with you while you&#39;re doing them, maybe you could charge whatever, like tens of dollars per hour, right? And make way more per member or whatever when you do the math on it. Yeah, okay, now we&#39;ve got a billion dollar opportunity. I tell that story because it&#39;s, it&#39;s not about virtual personal training or gym track or whatever, it&#39;s really just about think about how much energy, especially energy was devoted into things that were nonsensical. Because at the end of the day, like yeah, sure, that&#39;s a cool idea, but who cares who caress? You have to, you have to actually go from step zero to step one, to step two to step three. And at some point, sure that might matter, but it doesn&#39;t really matter how you&#39;re gonna get that unicorn status if you haven&#39;t even figured out how to deliver real value. And this is the sort of thing that&#39;s endemic with, with startups that are so focused on becoming a unicorn. I see this every day . I actually even had this sort of thinking coming into like when I started being a vc, you know, because again, like VC is a game of outliers, right? And for me, I really had these ideas that like as a startup, if you wanna be big, you gotta raise as much money as possible. You want, you need to like grow at all costs, anything else is just not gonna move the needle. You gotta swim through the fences, et cetera, et cetera, et cetera. I realize now that like while billion dollar startups get all the hype for 99% of founders, it&#39;s just the wrong goal. You&#39;re better off focusing on building a sustainable business with consistent growth for two big reasons. Number one, it&#39;s the sort of goal that&#39;s actually going to lead you to make the right choices, the right decisions, and to spend energy on the right things in the moment. And the second reason is that it actually probably is just as likely to get you to unicorn status than if you were thinking about unicorn status as like your top of mind. In other words, like if you just focus on building a sustainable business that consistently grows, you are more likely to build a great company, a unicorn company than if all you&#39;re thinking about is how to build a unicorn. Let&#39;s walk through like three myths that I&#39;ve just heard over and over and over in uh, the venture world. 1st Myth: Big Rounds = Big company and Small Rounds = Small Company Pablo 9:20 The first one is raising big rounds makes your company big and raising small rounds makes your company small, right? And maybe you haven&#39;t heard it like that, but think about it, company raises a massive round, all of a sudden the whole press is talking about it. It&#39;s the thing that you know, everybody in the venture ecosystem&#39;s talking about. And it seems like if you just raise a really big round, well your odds of becoming massive just increased, right? Just because you raised that round. I think we saw the last two years that , well frankly, that&#39;s just simply not true. There&#39;s many, many cases of companies that didn&#39;t go through that. And actually if you drill down into it, the probably the most proven way of building a great company is sustainable, consistent growth. You look at Nike, you look at Microsoft, you look at Shopify, these were businesses that what they actually did was they doubled and they doubled and they doubled and they just kept doubling. In the meantime, they were running businesses with extremely profitable unit economics. And that&#39;s just the key to success. So just because you can raise a big round doesn&#39;t mean you&#39;re gonna be big. Just because you can&#39;t, doesn&#39;t mean you&#39;re gonna be small. There&#39;s some markets where that may not be true. So there&#39;s exceptions to every single rule . There&#39;s exceptions, right? So if you look at the delivery market, right, Uber&#39;s much bigger than Lyft and part of it is because Uber was able to raise a lot more money. So if it&#39;s a hyper competitive environment, raising money really can be an edge. In other cases, like if you look at deep tech , so like OpenAI, OpenAI needed to hire the best researchers in the world and so they needed to raise serious capital. So yes, there&#39;s obviously exceptions to the rule, but for most types of businesses, most of the time you&#39;re much better off focusing on how to build a sustainable business with consistent growth than you are worrying about how to have a really massive story and get outsized funding. 2nd Myth: The Faster You Raise The Better Pablo 11:07 The second thing I I heard many times, like over the last few years is the faster you raise the better. In other words, the companies that are raising round after round every 12 to 18 months are the ones that are more likely to succeed. It&#39;s like this concept of raising velocity. Just to be clear, like I&#39;m a vc, I invest in companies, there&#39;s nothing wrong with fundraising. You should definitely fundraise if and when you have a clear idea of how to use this capital to grow faster in a profitable, sustainable way. But if you&#39;re putting yourself in a position as a founder where you have to raise every 12 to 18 months, here&#39;s what was happening In many of these cases, companies would raise money, it would take that money, they would radically dial up their expenses, radically blow up their teams. Yes, they would also get some growth out of it, but the underlying economics of the businesses were just not that great. And so you put yourself in a position where every 12 to 18 months, it&#39;s not just that you want to raise , it&#39;s that you have to raise you 100% depend on VCs. The problem with that is that you lose control because you&#39;re just in a vulnerable position. You put yourself in a weak position, you&#39;re much better off. Again, focusing, and I go back to the same thing, right? Like you gotta focus on sustainable and consistent growth. It&#39;s really not about how much you raise, how fast you raise also doesn&#39;t really matter. What matters is what&#39;s happening to revenue over time and what does the underlying business look like? So forget about the founders who&#39;ve raised all this money because you know, I get, I know they get depress every single time . A funding round is just a great time for Tech Crunch or whoever to write an article about it. The reality is that while the ones who raise money always look like rock stars from the outside, you have no idea what&#39;s actually happening inside. And in many cases, and I&#39;ve seen it firsthand, those founders are just simply losing control and all else sql , if I was a founder, I&#39;d rather have more control. And then the last thing, which like is kind of uncool to talk about in in the ventral world, but it&#39;s, it&#39;s just like, think about the downside for a second, right? I mean, again, as a vc, like we have portfolios. So downside protection for us is almost built in because we have diversification. So when some fail, others win. And that&#39;s how we protect our downside. But as a founder, you have one company, so you do have to think about your downside. And the reality is that some businesses will cap out at a million in revenue, some will cap it out 10 million in revenue, some will cap out at a hundred million dollars plus. But you don&#39;t actually know what kind of business you have until you start getting close to hitting that ceiling. Like at the beginning you&#39;re just trying to deliver some value, then you&#39;re trying to get to a million in revenue. Once you&#39;re at one, you&#39;re trying to get to 10, you don&#39;t know if you&#39;re gonna get to 10, you don&#39;t know how fast you&#39;re gonna get to 10. You can look at market analyses and all these sort of things, but generally speaking you just really won&#39;t know for sure until you&#39;re close to getting there. And if you focus so much on building a unicorn and you&#39;ve built this huge story up and you&#39;ve raised money against that story, then by the time that you realize that you might have a ceiling, it&#39;s way too late. And I&#39;ve seen so many companies, especially in the last few years that raised more money than they&#39;re worth. And so now the founders find themselves in a position where they sold their company, which has revenue, which has growth, which has a real product that they could sell it to be clear like it&#39;s got real value, but if they sold it, they would get less money than they raised. 100% of the money that would come in from that exit would go to the investors and the founders will get left with zero. Meanwhile, if you focus on building a sustainable company with consistent growth, you always have this flexibility, you always have more options because if you find yourself with a business where you own about half of it, it&#39;s doing 5 million in top line revenue, but only growing like 20, 30%, just say worst case . And you realize, you know what? There&#39;s a ceiling here, you can sell that business, whether it&#39;s for one x, two x or four x revenue, you can get something outta that business. And if you&#39;ve only raised a bit of money, money or no money at all, you&#39;ll make millions. And so just because you raise more money doesn&#39;t mean you make more money. That&#39;s 3rd Myth: Founders that raise more money make more money Pablo 14:59 vc. Myth number three, we always associate the idea that the founders will have raised the biggest rounds, must be the ones that are best off. And that&#39;s just not true. In many cases, the founders who&#39;ve bootstrapped their way to success, who&#39;ve stayed lean are the ones that are actually better off. And just to be clear, like again, I&#39;m not saying you need to bootstrap. I&#39;m just not saying you need to go and raise massive rounds. There&#39;s all this space in the middle, you can bootstrap, you can raise small amounts of funding. There&#39;s some companies that raise that one round and then gone on to just grow from there to i po or exit. You can raise multiple rounds, but my point is just rightsize the amount that you raise to the opportunity that&#39;s right in front of you to the capacity that you have to adequately deploy that capital and put yourself in a position of strength throughout that where you&#39;re not depending on VCs, you&#39;d much rather be depending on customers, depending on the market because that way you&#39;ll at least keep control. You&#39;ll at least keep your options. Just last week I spoke with Ilia , the founder of Van Hack , and he built exactly what I&#39;m talking about. Like he built a business that is sustainable, that&#39;s growing consistently. He did it bootstrap and now he&#39;s doing millions of dollars in revenue. Uh, he actually started by offering to edit people&#39;s resumes for $40 <laugh> , that was his , his kind of first thing he would help. Uh, specifically he knew people in Brazil and so he helped him kind of edit his resumes for a Canadian audience for $40 a pop. And he turned that into a $500 a year subscription to a school that helped developers from abroad learn enough English to work in Canada and the us . And then he turned that as he grew that community, he ended up turning it into a tech enabled recruiting platform where instead of making $500 per year per student, he was making 15% of somebody&#39;s first year salary when he helped the company hire that person. And so for a developer that makes maybe a hundred k who would make $15,000 all in one time, and that&#39;s what he grew in . And now he&#39;s helped over 2000 people immigrate from abroad to Canada and the US and literally like change our lives. I know that firsthand because my parents are immigrants and when you immigrate to a new country, you literally start a whole new life. It actually changes your life . So he has helped over 2000 people change their lives. To be clear, he actually wanted to fundraise. Like in the early days he went through Techstars Accelerator, he tried to pitch to VCs, he just couldn&#39;t make it work. And so he kind of got forced into this more sustainable, consistent growth path. But if you actually look at the outcome of it, now he has a business that&#39;s helped change thousands of lives, that makes millions of dollars and that he fully controls and to add to it. Now, he did go out and he raised a few million dollars and so he has the capital to continue to grow, but he has basically every option available. He can just keep growing this business and as long as there&#39;s demand, he&#39;ll just continue to grow year after year, he could at any given point decide that he wants to exit and try to sell this business for some multiple of revenue. And because his ownership is so big, he&#39;ll do extremely well or he still has the path open that if at some point he sees some huge opportunity, he could raise even more capital and go after that. But like every single opportunity has stayed open to him. And the reason is because he has built a sustainable business with consistent growth. That&#39;s the biggest thing that building a sustainable business with consistent growth gives you is it gives you optionality. There&#39;s just so many options at your disposal as a founder, you basically can&#39;t lose. 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