Ever heard this before? “We think you’re building something great, but the economics don’t work for us.”
Every venture investor I know has given this feedback to a founder at least once. But what does it mean when a promising business isn’t “venture backable”?
Just like businesses have their own unit economics, venture firms have their own venture economics. There are plenty of companies that have the potential to become successful, profitable businesses. But, only a select few have the potential to be big enough to justify a venture investment.
When I first began as an angel investor in 2014, I sometimes made the mistake of thinking in these binary terms: I would ask myself, “Will this business succeed or fail?” I didn’t often do the proper diligence to calculate what the returns of a particular deal might generate in the event of a success.
To be a smart investor, you need to strike that balance — Even if you do 99% of things right, you need luck, timing, and market opportunity for your investment to be an outstanding success.
There’s an important difference between business success and venture success. What is your success measured by? As a founder, it can be any number of metrics related to revenue, profitability, and size. As an investor, success is measured only by returns.
The question that every investor needs to ask themselves: Will it be successful financially for the level of risk and illiquidity I am taking, or just successful commercially?
The question that every founder needs to ask themselves: Is my business venture backable?
The answer may surprise you.
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