"Your role is to take risks as a VC"

The saying "your role is to take risks" is a common refrain that we hear from early stage founders. While it captures the essence of our activity—getting involved early in a startup's journey to de-risk various factors such as the market, team, product, and internationalization—this oversimplified view does not do justice to the complexity of our approach. Risk-taking in venture capital is far from unrestrained; it is carefully rationalized and varies according to the development stage of the startup.

“We have a product market fit with 5 early paying users”. Investing in a startup immediately after it attains product/market fit can be risky. At this early stage, the understanding of why customers are buying the product is still shallow, and initial enthusiasm from a few customers doesn't guarantee long-term growth post-investment. This risk is especially acute when the founder's local network might influence the early adoption, potentially masking the true reasons behind the early success. Factors such as the geographical setting, the local culture, and the industry sector play crucial roles in the sustained acceptance and success of the product. For example, in Sub-Saharan Africa, the swift adoption of new financial solutions may give a misleading impression of a startup's progress, often resulting in high churn rates and low ongoing engagement after the investment is made.

“We have 100 customers and an MRR of $40K”. As startups progress beyond the early stages of development, the nature of risks in venture capital investment evolves. First, when a startup enters the growth phase, it faces the challenge of scaling its operations efficiently. Investors must assess whether the company has the operational capability and infrastructure to handle rapid growth. This involves evaluating the scalability of the business model, the robustness of supply chains, and the ability to recruit and manage an expanding workforce.

Second, as startups look to expand into new markets or geographies, investors must consider the risks associated with these ventures. This includes understanding local market dynamics, regulatory challenges, and competitive landscape. The ability of the startup to adapt its product or service to fit new market demands is a critical risk factor.

Third, at this stage, ensuring financial sustainability becomes critical. Investors need to scrutinize the startup’s cash flow management, profitability potential, and the effectiveness of its monetization strategies. The risk of running into financial difficulties increases if the company fails to manage its growth expenditures wisely. Too often, at this stage, startups rely on simplistic solutions like Excel, which may suffice for service businesses with few operations but becomes problematic for those with complex operations or manufacturing processes.

Last, a robust corporate structure is crucial for supporting future growth without compromising governance. An often underestimated aspect by founders is the management of the cap table. Excessive early dilution can deter investors from committing to the long haul, aware of the long and challenging journey ahead.

“We have secured 500 customers and $2M of ARR, we just need a small bridge for a series A in the next 9 months”. This situation, while seemingly robust, carries its own set of risks. Despite the impressive customer base and ARR, the need for a bridge round indicates potential gaps in cash flow or unforeseen challenges that could affect the startup's trajectory. Relying on short-term financing to achieve long-term goals can introduce instability, especially if the anticipated Series A funding round faces delays or fails to materialize at the expected valuation. Moreover, the existing metrics, though strong, do not guarantee a smooth transition to more substantial funding rounds. Market conditions, competitive dynamics, and the startup's ability to maintain its growth rate and customer engagement will be critical in ensuring that this bridge leads to a successful Series A round, rather than becoming a stopgap solution for deeper financial or operational issues.

In conclusion, while the saying "your role is to take risks" may resonate with the ethos of venture capital, it oversimplifies the nuanced and multifaceted approach required in our field. From the early excitement of discovering product-market fit with a handful of users to the complexities of scaling operations, expanding into new markets, and securing later-stage financing, each phase of a startup's journey presents unique challenges. Investors must navigate these with a careful balance of risk-taking and strategic foresight, focusing not just on the potential for high returns, but also on building sustainable, value-creating partnerships with their portfolio companies. As startups evolve, so too must the strategies of investors, adapting to the changing landscapes and ensuring that both founders and financiers are aligned in their goals for growth, resilience, and long-term success.