The VC Myth: Why Most Startups Shouldn't Chase Venture Funding
A Guide to Alternative Paths for Building a Successful Deep Tech Business
Dive into this week's insights:
From Idea to Funding: 4 Business Models and Their Ideal Partners
“I pitched to 200 VCs and nobody invested. Most didn’t respond, and the few who did never came back after a 15-minute intro call,” he complained to me during a coaching session.
Often, when I speak with entrepreneurs these days, the first thing they ask for is: “Can you introduce us toVCs?”
It's usually the first question, [followed by] a demand for a list of investors and warm introductions. Since it's just a little work, they'd like it for free. Sometimes they suggest a success fee, but only if an investor pays in a minimum of 10 million within the next 3 months.
How do I respond? “Tell me more about your business idea.”
Frankly, many don’t want to discuss the business aspect of their idea; after all, the idea itself is generally great.
The only caveat: Venture capital is a very specific niche investment style that looks for one single key metric – the promise of a multiple of at least 600x. This means the invested capital is returned 600 times over.
Putting it bluntly: 1 million in, 600 million back.
Don’t believe this is possible? Here are some observable examples from public markets:
Since most private shares were valued below IPO valuation (a blunt simplification), I assume private investors made significantly more than those investing after the IPO.
I've observed four valid business models for novel ideas, and the all cater to different funding audiences. And only one to Venture Capitalists.
#1: Basic Research - The University or Research Organisation Model.
New ideas are great. Exploring them moves society forward. But where is the right place for the freedom to expand knowledge without the pressure of immediate financial returns? Universities and research organizations.
Their products are studies and publications in the world's leading scientific journals. Patents might be filed as a result, a byproduct of their core work.
Society, through governments, corporations, and institutions, typically contributes donations to fuel this research and educate the next generation of knowledge creators. Direct financial return isn't the goal.
However, when someone uncovers a truly unexplored area of human knowledge, a university is the ideal place for basic research. Those with a proven track record, like Nobel laureates, will likely find funding to pursue further research through governments, institutions, and corporations.
When do I recommend this model?
Whenever I encounter someone passionate about a field but without a clear plan for commercialization, I recommend exploring university enrollment to deepen their subject knowledge. For those who already hold degrees, an academic career path might be the perfect fit.
#2: The Non-For-Profit-Entity
I assume that 1 in a hundred ideas originating in academia have the potential to become products and services – useful tools that improve lives.
Think of Genentech and its revolutionary rDNA insulin, or Impossible Foods working to create sustainable food alternatives.
These are stellar examples of lasting, profitable companies born from fundamental research.
However, not all ideas need to become profitable businesses.
Many people are driven by the desire to translate scientific advancements into products that benefit society.
Dietrich Mateschitz founded Wings for Life to support solutions for spinal cord injuries.
Bill and Melinda Gates established their foundation to back impactful ideas – whether they have a potential business model or not – as long as they improve lives regardless of social status, ethnicity, or gender.
One such initiative is AI Equity: ensuring access to AI for all.
When do I recommend approaching such foundations or public funding agencies?
Whenever I encounter a team passionate about improving society but lacking a clear path to a sustainable, profitable market, I recommend exploring foundations. This is ideal for those with ideas that hold the potential to make a difference, even without a traditional business model in sight.
#3: The scientific equivalent to a “Brick and Mortar Business”
Many excellent teams develop valuable solutions that can benefit SMEs and large corporations. Events like Bio #Europe or Bio International showcase fantastic, cash-flowing businesses.
One of my podcast guests, Philipp Baaske, built such a business:
NanoTemper
From a small Bavarian town, it's become a global success. You can watch the podcast interview here: Link to Youtube
What makes this idea unique?
Their quick time-to-market and unique solutions find paying customers easily. It's like a neighborhood shop with regulars, ensuring a steady income stream for growth.
NanoTemper's biophysics tools help researchers explore uncharted territories (a subtle Star Trek reference – you'll understand after watching the podcast).
When do I recommend going straight to the market?
If finding customers is relatively straightforward, why navigate the complexities of universities, foundations, or venture funds?
Test the market directly to validate demand and generate revenue.
That's the NanoTemper approach, as I understand it.
This doesn't mean "brick-and-mortar businesses" can never attract investors – they do, but from investors seeking solid, profitable, growing models with reliable management.
Warren Buffett is a prime example.
These businesses might also develop something internally that evolves into a 600x opportunity, making it suitable for:
#4: The Venture Capital Investment Case
When I started in M&A after graduation, investment was all about the Warren Buffett value approach:
Find solid, cash-flowing businesses in growing, fragmented markets with reliable management. Acquire them, consolidate, dominate the space, and streamline for efficiency – essentially, create a monopoly and drive down costs.
Venture investing in deep tech is nothing like that.
It's about betting on companies that haven't yet captured a market. But these companies are developing technologies so groundbreaking they could create entirely new markets or disrupt and rendering entire existing industries redundant.
When I joined my first venture, a Novartis spin-out, things were even wilder.
These companies burn cash with little to no recurring revenue… for now.
Think back to success stories like Genentech, Alphabet's Google, or SpaceX.
When they succeed, the returns are massive, often 10x or more on the invested capital.
When do I recommend pitching to VCs?
Perkins Law sums it up perfectly:
“Market risk is inversely proportional to technical risk because if you solve a difficult technical problem, you will face minimal competition. Thanks to the high barrier to entry."
Deep tech VCs love teams tackling massive technical challenges.
Once solved, patents could create a 20-year monopoly (potentially longer with extensions).
Their strategy is to fund technology development, prove its viability, and then license it or sell the whole company.
Drug development biotechs fit this mold perfectly.
Think CRISPR Therapeutics, with their gene editing patents at the core. It's the same story as Genentech or Gilead:
"We licensed groundbreaking technology, know how to turn it into products, and have rock-solid patents. We're ready to license this to industry partners and generate billions over the next decade."
This kind of narrative is what makes VCs take a closer look.
Why is this relevant?
Social media in 2024 makes it seem like the norm is to have an idea, launch a company, and immediately pitch VCs, regardless of the underlying business model.
This cookie-cutter approach wastes resources and energy.
Often, teams haven't defined their goals or ambitions.
Some serial entrepreneurs on platforms like LinkedIn openly state they just want to "get rich in 18 months."
While ambition is good, that alone doesn't make a venture case.
You need a team, disruptive technology, and a clear path to those massive returns.
My recommendation is to start with understanding your purpose and resources:
What are you passionate about?
What team can you build?
What market excites you?
Then, ask the key question:
"Who are the right partners to help me achieve this?"
Naturally, there will be trial and error, but targeting the right audience with a compelling story and the ability to execute is essential.
It's the same principle as any sales effort:
understand your target audience's needs and tailor your solution accordingly.
When pitching VCs, remember their core need, often overlooked by founders:
they must make money for their LPs. They need the right teams and ideas to achieve this, or they risk failure.
Do you struggle with defining your business model and finding your target audience?
Subscribe to my newsletter and join my Friday founder's debrief. Discuss your challenges with peers and learn from the successes and failures of others in similar situations.
Upcoming Conversations and Events:
Admiral William McRaven, a retired four-star admiral renowned for his leadership, will keynote the 2024 BIO International Convention in San Diego on June 5th. McRaven will discuss the intersection of national security and biotechnology innovation with BIO CEO John Crowley. His distinguished career includes overseeing the capture of Saddam Hussein and the raid on Osama bin Laden's compound. Registration for the convention, a premier biotech industry event, is now open.
May 14, 2024 - 05:00 pm CET - Jeremy Herve, Paris Saclay Development Authority
May 16, 2024 - 11:00 am CET - Luis Pareras, Invivo Partners, Author of: Fast Forward Thinking: 40 Rules for Entrepreneurs and Investors in Medical, Science, and Biotech
May 21, 2024 - 04:00 pm CET - Rich Master, Chief Marketing and Public Affairs Officer, Biotechnology Innovation Organisation
May 23, 2024 - 11:00 am CET - Jordi Ferrer Rendé, Ship2BVentures
May 28, 2024 - 12:00 pm CET - Lady Suzanne Heywood of Whitehall, COO Exor - Book Review “Wavewalker”
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Podcast Episodes and Clips
From Science Fiction to Microgravity: Nanotemper's Journey to the International Space Station
MM 5: Rich Masters - Investing in Biotech: Risks, Rewards, and Realities
We are moving towards Bio International in June in San Diego. Here is a clip from last year’s bio:
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My Book Pick of the Week
Deep Tech Visionaries, This Book is For You!
The author will be on one of my next shows.
If you're a deep tech entrepreneur, founder, or investor navigating the healthcare and biotech landscape, you need "Fast Forward Thinking: 40 Rules for Entrepreneurs and Investors in Medicine, Science, and Biotech" by Luis Pareras, MD, PhD.
With 25 years of industry expertise, Dr. Pareras provides a roadmap for predicting future trends, pinpointing high-potential projects, and effectively managing companies at the cutting edge of innovation.
What You'll Gain:
Practical Guidance: 40 actionable rules to inform your decision-making.
Essential Insights: Chapters cover key topics like deal flow, valuation, pitching, negotiation, and board management.
The Art of Trendspotting: Learn to stay ahead in the fast-paced science and bio sectors.
Get your copy today to gain an invaluable edge in the competitive deep tech world!
Best Quote from this week
Seeking dynamic speakers in these areas. Know any experts? We'd love recommendations!
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Send a mail to cs@cslifescienceinvest.com
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