What are the biggest weaknesses or blindspots within the traditional VC investment model?
A slightly non-obvious one is the need to invest in the types of companies that follow-on capital will want to invest in.
Even if any early-stage VC wants to be daring, or invest in a broken category, or an unproven category, or an overly crowded category … you have to be worried about who will write the next check.
It’s still just a risk, and:
- If the company can get to profitability on the current round of capital, this risk is mitigated. But this isn’t that common with venture-backed start-ups.
- If the fund is large enough to “carry” the company through the next rounds, the risk is mitigated as well. To some extent.
- And if the fund can bring in nontraditional sources of capital, or believes those will be attracted to the startup, that can mitigate the risk.
But smaller and mid-sized funds spend a lot of time thinking about who will write the next round check (Series B, C, D, etc.). If they don’t believe someone will, they get worried.