The current economy, with its dirt cheap money and term sheets that seem to rain from the heavens, is creating a breeding ground of summer entrepreneurs and sunshine VCs. This in turn is creating a shaky foundation devoid of experienced and battle-tested individuals who, when push comes to shove, may not have the fortitude to withstand less ideal circumstances.
This isn’t a conversation of whether we’re in a bubble or not. Suffice it to say that when you can read a new article about the bubble every single day from a reputable media source or venture capitalist, you can at least assume we’re not in a normal economic climate. But rather, this is a piece about the state of entrepreneurship and venture capital and how it will react when the turn comes, because it will come.
I Can’t Believe They Raised Money!
I’m not the “good business idea” police. And I’ve never claimed to be an authority on what makes a great company based solely on an outside-in look. But increasingly we’re seeing venture capital deals into companies that just shouldn’t be done.
Sometimes it’s the quality of the startup that has us scratching our heads. These are the deals that make people run to the comment sections and, in bewilderment, ask “did they do their due diligence?”
Other times, it’s the source of the money that leaves us puzzled. This happens when groups who have never shown an interest in venture capital suddenly jump into the game with a splashy multi-million dollar investment. Whether it’s banks, private investors, or other traditional investment engines (mutual funds, private equity, etc), these types of investments appear to be happening more and more.
So, should we be alarmed?
I grew my last company in the midst of the Great Recession. It wasn’t fun, money wasn’t available, and credit was tight. But I bootstrapped that thing to profitability and learned some invaluable lessons along the way. And I honestly believe that growing a company in hard times made me a better entrepreneur.
In fact, my current company is growing at a dizzying speed, but it seems easy in comparison to my last venture. Having to deal with problems left and right feels much easier when you have the phone ringing off the hook. I used to have to deal with those same problems when the phone wasn’t ringing. Now that was hard!
And when the economic tide turns, as it will, I’ll have a lot of experience to draw on to help pull us through the tough times ahead.
But what about the entrepreneurs who have never had to worry about their bottom line? All they know is “growth above all else.” They haven’t had to think of the possibility of layoffs if that series B doesn’t come in. And series A, B, and C are already starting to tighten up.
What happens to them when they aren’t able to raise or are forced into a *GASP* down round?
Too often I speak with entrepreneurs who talk more about their fundraising than they do about their companies. They would rather speak valuations than product. And they appear to base their success on their ability to raise debt and drum up term sheets. But I have a hard time sharing their enthusiasm. I’ve never congratulated someone on taking out a really big mortgage. That just doesn’t seem like something that should be celebrated.
I hope these entrepreneurs have developed enough intestinal fortitude to make it through the winter. But a very big part of me doesn’t think they will. In fact, the more I talk to funded cofounders, the more I’m certain we have an entire generation of summer entrepreneurs on our hands.
When the fighting becomes rough and the winter snows blow, they won’t have the backbones to do what needs to be done and sally forth. And this is how a market correction turns into a bubble popping.
Venture Capital is so Sexy, Right?
But let’s not limit this scrutiny to just the entrepreneurs. There is a large deal of blame that should fall on the shoulders of the sunshine VCs.
What is a sunshine VC? Well, you probably know one if you work in the tech industry. They are the newly minted venture capitalists who have just raised their first fund or are maybe working on their second. They don’t have any track record to use as reference and are always bragging about their paper gains. They’re the VCs that jump into a round without doing any due diligence but are instead driven by their FOMO. They’re the VCs that only lead rounds for obscure or undesirable companies. But most telling, they’re the ones who went out and bought a truckload of Perrier so they could ask their visitors if they wanted sparkling or still water because, damn it, Sequoia does that!
These VCs will disappear just as quickly, if not quicker, than the summer entrepreneurs. They are happy to live the VC lifestyle on their 2 percent management fee and are more than eager to jump into a hot round. But who in their portfolio will survive a market correction? Which of their cash-hungry companies could change course and become profitable instead of chasing a series C?
Most of the answers to these questions will be disheartening. And perhaps the VC world is ready for a culling. But it won’t be without pain and it will have a noticeable impact on the startup ecosystem.
Is it too late?
If this article struck a nerve and made you feel a bit defensive, maybe you should take that as a sign. But take heart. It’s never too late to turn a company or a portfolio around.
There’s a quote by Denis Waitley that advises, “Expect the best, plan for the worst, and prepare to be surprised.” This should be tattooed on the forearm of every venture funded entrepreneur. It should be their mantra. They should build their entire company on the idea that the next round of funding isn’t coming. Because at some point, it won’t be.
Mike Templeman is the CEO of Foxtail Marketing, a digital-content marketing firm specializing in B2B lead generation and lead optimization. He is passionate about tech, marketing, and startups. When not tapping away at his keyboard, he can be found spending time with his kids.